Our pension system rewards the rich but punishes the poor

3 months ago 19

Opinion

November 25, 2025 — 10.22am

We’ve seen so many government blunders over the years that most of us have become numb to them. Another headline, another policy misfire – and we barely shrug.

But occasionally a decision emerges so baffling, so detached from common sense, that it forces you to sit up and pay attention. What follows is, undoubtedly, one of the most damaging and counterproductive policies affecting older Australians: a system that actively discourages pensioners from working by slugging them with punitive income tests.

Our pension system is not built to help retirees who need it most.

Australia is desperately short of workers and encouraging pensioners to work could help fill workforce gaps. Just as important are the benefits for retirees themselves. A happy retirement depends heavily on having a sense of purpose and social connection. Working when you’re older provides both, plus some extra income.

The real problem is revealed when you look at how the rules treat two very different hypothetical retirees. Take the Bradleys, a wealthy couple with $800,000 in super and receiving a part pension. If they wished to make some extra money from working, they would be able to earn an extra $47,724 a year with no effect on their pension.

Contrast this with Jenny, who is a single pensioner with no assets. If she tried to supplement her income through work, she would lose 60 per cent of her combined salary and pension.

The disparity arises from the interplay between the assets test and the income test. For pension eligibility, people are tested under both systems, and whichever results in the lowest pension applies.

Exempting employment income may reduce pension savings on paper. But the economic and social benefits far outweigh the cost.

The cutoff point for a homeowner couple’s asset test is $1,074,000 – for a single it’s $714,500. It’s generally around the $500,000 mark that a pensioner moves from being income-tested to assets-tested – but the tests are badly out of alignment.

Back to the Bradleys. They are both aged 67 and live in a $3 million home, which is exempt from Centrelink assessment, with $800,000 in super and $50,000 in other assets such as furniture and vehicles.

They are assessed under the assets test and receive a fortnightly pension of $671.50 combined, or $17,459 a year. They also get the concession card and benefits. This, along with the $80,000 a year they draw tax-free from super, gives them a comfortable lifestyle.

Now suppose they wanted to earn extra income. At their level of assets, they can earn a total of $67,600 a year without losing any pension. For income test purposes, their super is given a deemed income of $764 a fortnight, or $19,876 a year.

After subtracting that, they can still earn $47,724 a year without reducing their pension. If they earn that income jointly, perhaps from consulting, their entire income – super, pension and work – will be tax-free.

Now think about Jenny. She has had a tough life and the $100,000 she received from super when she retired at age 60 was quickly eroded trying to build a new life. She’s now 67 and has no assets except a few dollars in the bank.

Rent is a struggle, but she finds a place for $400 a week – the government contributes $108 a week in rent assistance, so her net accommodation cost is $292 a week. She qualifies for the full single pension of $30,654 – a total income of $36,254 a year including rent assistance.

Jenny is resilient and thinks about looking for a job paying $45,000 a year. This is where her problems start. Because she is income-tested, once her income reaches $218 a fortnight she will lose 50 cents of every dollar earned.

Poorer pensioners must not be punished for trying to make ends meet.

She qualifies for the Work Bonus of $300 per fortnight, the equivalent of $7800 a year, which can be saved in the work bonus income bank. Depending on complex rules, she may also get the one-off $4000 bonus credit. Combined, this could allow her to earn an extra $11,400 during her first year’s work before her work income reduces her pension.

If Jenny does return to work, the $45,000 she earns will be assessed by Centrelink as $33,200, after deduction of the work bonus – $1277 a fortnight – so her pension will be cut by $530 a fortnight to $649 a fortnight ($16,874 a year). In her second year working, when the work bonus boost is exhausted, the numbers get worse: her pension will drop to $572 a fortnight.

And there’s more. A salary of $45,000 plus age pension of $16,874 is assessable income, on which Jenny will pay tax of $10,516 a year. The total cost of returning to work, including loss of pension and tax, is $26,216 – an effective marginal tax rate of 60 per cent on the salary she is trying to earn.

Think about it — a wealthy couple can earn nearly $48,000 a year with no effect on their pension or income tax, yet some of the poorest Australians who need to work just to survive are hit with effective marginal rates of around 60 per cent. It’s ludicrous.

National Seniors Australia (NSA) has argued for many years that employment income should be exempt from the age pension income test. This would simplify the system and encourage older people to remain in the workforce if they need or want to.

NSA regularly hears from older workers – nurses, teachers, carers – who are asked to stay on past pension age but decline because the numbers simply don’t stack up. These are not wealthy retirees; they are people with limited savings who must work to fund a dignified retirement.

In addition to boosting pensioners’ incomes, NSA argues it would also boost sectors suffering crippling workforce shortages, particularly health and aged care, where experience and maturity are desperately needed.

Yes, exempting employment income may reduce pension savings on paper. But the economic and social benefits – including easing workforce shortages in health and aged care – far outweigh the cost.

It’s time to end a policy that punishes the poorest for trying to help themselves – and replace it with one that rewards effort, contribution and dignity.

Noel Whittaker is author of Retirement Made Simple and other books on personal finance. Questions to: [email protected]

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.