Federal budget 2015: retirement incomes - what's in store?

29 April 2015 | How will the government deal with pensions and super tax concessions in this year's federal budget?

Aged pensions and super tax concessions

Last year, the federal government announced a cut to the indexation rate of pensions, a move which would have linked pension increases to the CPI rather than wage growth which is currently the case. This measure, had it passed the Senate, would have started in 2017 and stayed in place until the budget returned to surplus.

This move would have raised about $450 million over five years. But it would also have reduced pension payments by $80 a week over the next 10 years, says the Australian Council of Social Services (ACOSS). For those who rely on the pension to get by, ACOSS says such cuts wouldn't be possible to absorb.

According to the ASFA Retirement Standard, a single retiree needs to own their home outright and have an income of $42,604 per year in order to have a comfortable lifestyle.

The single pension rate is currently $22,365 per year, or 52% of the amount needed deemed to live a comfortable life.

Social services minister Scott Morrison has said he's open to stepping away from this plan provided there is an alternative that could curb the growing costs of providing the pension.

  • Pensions are the second biggest expense for the federal budget, with spending reaching around $42bn in 2014/15 and accounting for 9% of total federal government expenditure.

So what are the alternatives?

Some of the alternatives put forward to cut costs or increase revenue include:

Tightening the assets test for the aged pension

Perhaps the most promising proposal is ACOSS' plan to tighten the assets test for the aged pension, a measure which Morrison says he is seriously considering. Earlier this year, Morrison ruled out including the family home in the assets test for the pension, however ACOSS' proposal points to assets other than the family home.

This measure is designed to better target pension payments to those with the greatest need. While linking indexation with the CPI would hit all pensioners, this measure would mean many wealthier retirees would no longer be eligible for the part pension.

  • Currently, a retired couple who own their own home with additional assets to the value of $1.1 million can still receive the part pension. While the residual pension payment may only be a few dollars a week, they are still entitled to pensioner concessions and supplements.

ACOSS is proposing that the assets test-free threshold (the amount of assets you can have before the tapering kicks in) for home owners eligible for the part pension be reduced to $100,000 for singles and $150,000 for couples. 

In addition the taper rate for both home owners and non-home owners would be increased from $1.50 per $1000 of additional assets to $2. This would have the effect of reducing eligibility for the part pension for a home-owning couple from $1.1m to $794,250.

Back in 2007, the Liberal government reduced the taper rate from $3 to $1.50 which made thousands more retirees eligible for the part-rate pension. So a change to the taper rate would mean undoing its own policy.

  • These measures would save the government $1.35bn in 2015/16 and $1.45bn in 2016/17.

Abolishing the seniors' supplement

ACOSS has also proposed getting rid of the seniors' supplement to save an additional $240 million.

  • Currently older people disqualified from the aged pension due to the assets test but who are eligible for a senior's health card can receive the supplement of $894.40 each year.

To be eligible for the health card, your income needs to be under $51,500 for a single or $103,000 for couples.

This measure was proposed in last year's budget but hasn't managed to make its way through the Senate.

Changes to superannuation tax concessions

Superannuation tax breaks currently cost the government $40bn a year in foregone tax revenue, which is nearly as much as the government spends on the aged pension.

As it stands, tax concessions associated with superannuation are most beneficial for well-off Australians because of the difference in the amount of tax they can save with super contributions compared with their normal tax bracket. For example, someone earning $250,000 currently receives a 30% concession on contributions, while someone earning $35,000 only receives a 4% concession.

  • Currently, compulsory employer contributions and anything you contribute up to $30,000 (or $35,000 if you're over 50) are only taxed at 15%. Under the high-income super charge, superannuation contributions for those earning over $300,000 are taxed at 30%.
  • Once the money is in your fund, additional earnings from that money are taxed at 15% until you reach pension age at which point the earnings become tax-free.

The Financial Systems Inquiry found superannuation tax concessions were not well targeted and that the majority of tax concessions go to the top 20% of income earners. While the argument for superannuation tax concessions is to help drive retirement savings, the inquiry found the tax concessions are unlikely to reduce expenditure on the aged pension in the future.

However, the government has ruled out any changes to superannuation tax concessions in this term of government.

Labor, however, has proposed changes to the superannuation system that it says would save around $14bn over the next 10 years. The proposal would see superannuation earnings over $75,000 lose their tax-free status. Assuming a consistent return of 5%, this would affect some 60,000 people who have accounts with more than $1.5 million in them. Earnings over $75,000 would be subject to the concessional tax rate of 15%.

Labor has also proposed a reduction to the income threshold for the high-income super charge from $300,000 to $250,000, a change which would require around 110,000 people to pay 30% on contributions to their super fund.

ACOSS has also proposed taxing all earnings on super after pension age at the concessional rate of 15%. It would be implemented in three increments of 5%, starting in 2016 when it is estimated to save $300 million.

Leave a comment

Display comments