The Australians getting hit with up to 122 per cent tax

3 days ago 9

Older Australians can earn less for working more in a perverse quirk of the tax system, incentivising pensioners to withdraw from the workforce at a time the nation is grappling with extreme skills shortages.

A report by financial consulting firm Retirement Essentials shows Australians on the age pension are often hit with effective marginal tax rates of between 60 and 80 per cent – and in some cases as high as 122 per cent – far beyond the tax rate of those in the highest income bracket.

HESTA chief executive Debby Blakey says many pensioners are keen to work but are put off by high effective marginal tax rates.

An effective marginal tax rate is the share of an extra dollar of income lost to either income tax or a drop in government transfer payments, such as the age pension.

Commissioned by industry super fund HESTA, the report shows working aged pensioners earning $55,000 actually take home more money than those earning $60,000, due to the staged reduction in aged pension payments.

The report shows aged pensioners – assumed to have about $300,000 in their super – keep less than a third of the income they earn between the $15,000 and $20,000 mark.

A single pensioner pays an effective marginal tax rate of 78 per cent when increasing their employment income from $30,000 to $35,000. That is because their additional income is taxed, but also reduces their age pension from $18,875 to $16,375, meaning they effectively take home just $1100 of the extra $5000 in employment income they’ve earned.

For a pensioner whose income rises from $55,000 to $60,000, their effective marginal tax rate is 118 per cent. That is, they end up with less take-home pay, largely because of the sudden drop-off in the age pension from $6375 to $0.

For a couple where only one partner works, the effective tax rate can be as high as 122 per cent if their employment income rises from $85,000 to $90,000.

HESTA chief executive Debby Blakey says this is a significant disincentive for workforce participation among pensioners, many of whom are eager to work at least part-time and as Australia continues to face staff shortages in critical areas such as health.

“Retirement is changing, but the system hasn’t aligned well with that,” she said. “Many of our retirees are keen to work, not just for financial reasons, but for connection or their mental well-being. Part-time or casual work in retirement helps people retain a sense of purpose and fulfilment, while addressing critical workforce demand and boosting the broader economy.”

Of HESTA’s 80,000 members currently age-eligible for the pension, about 30,000 remain active in the workforce, with many in the health and community services sector.

With up to one in four Australians set to be retired by 2050, and skills shortages in areas such as health and aged care, Blakey says now is the time to make sure tax settings do not pose a barrier to those wanting to work.

“Age pensioners can continue to make significant contributions to the workforce,” she said. “But there’s no incentive for them to increase their work.”

In December 2022, the government introduced changes to the Work Bonus scheme, which allows pensioners to earn more income from working before it affects their payment, raising the amount from $7800 a year to $11,800.

But Blakey said the work bonus scheme needed to be tied to wage growth. “We continue to hear stories from members on the pension who would like to work more but are put off by the extreme effective marginal tax rates,” she says.

Council on the Ageing Australia chief executive Patricia Sparrow said the tax system also needs to be simplified.

“The current system is complex, and it’s clear that sometimes older people don’t take up [employment] opportunities because it is confusing, and they’re worried about the impacts,” she said. “Many older people need to supplement the pension to meet their living costs, with a growing number of older Australians carrying mortgage debt. Others want to work because they enjoy it and like contributing to the community.”

A spokesperson for Social Services Minister Tanya Plibersek said the government, in addition to the Work Bonus scheme, had raised the pension by nearly $5000 since being elected in 2022.

“Labor knows that age pensioners want the option to work from time to time – to stay connected to their community and to boost their income,” they said. “Since coming to government, we have made sure that pensioners who choose to work can now keep more of their pension than when we were elected.”

Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.