A new report highlights a paradox at the heart of Australia’s tax system. Older Australians receiving the age pension can find themselves financially penalised for working additional hours, due to complex interactions between income tax and pension reductions.
At a time when the country is struggling to fill vital jobs, especially in healthcare and aged care, this system may be pushing experienced workers out. According to a report by Retirement Essentials, commissioned by the industry super fund HESTA, the current tax and welfare design imposes harsh penalties on modest earners in retirement.
Pension Cuts, Tax Thresholds and Diminishing Returns
According to Retirement Essentials, age pensioners earning between $15,000 and $20,000 may lose more than two-thirds of that extra income due to both taxation and reductions in pension payments. The report reveals effective marginal tax rates (EMTRs) for some pensioners ranging from 60% to 80%, and in specific scenarios, climbing to as much as 122%.
For instance, a single retiree increasing their employment income from $30,000 to $35,000 sees their pension drop from $18,875 to $16,375, while also paying more tax—leaving them with only $1,100 of the extra $5,000 earned.
In another case, a rise from $55,000 to $60,000 leads to a total loss of pension support, effectively reducing take-home income despite higher gross earnings. Couples face similar distortions; when only one partner works and their income increases from $85,000 to $90,000, the EMTR reaches the staggering 122% mark.
This punitive structure creates a clear disincentive for older Australians who wish to remain in part-time or casual employment. HESTA CEO Debby Blakey remarked that while retirees are increasingly keen to work, “there’s no incentive for them to increase their work,” particularly when doing so reduces their overall income.
Workforce Participation Versus Systemic Disincentives
The disconnection between modern retirement behaviour and legacy tax policy is becoming more apparent. With roughly 30,000 out of 80,000 HESTA pension-eligible members still working, and many in critical sectors like health and aged care, the economic implications are significant.
Despite government efforts such as increasing the Work Bonus scheme threshold from $7,800 to $11,800 in December 2022, calls for broader reform persist. Blakey advocates for aligning the scheme with wage growth, arguing that the system must support, not discourage, seniors who choose to work.
Patricia Sparrow, CEO of Council on the Ageing Australia, said the system’s complexity deters many older Australians from taking up job opportunities. “They’re worried about the impacts,” she said, pointing to the rising number of retirees with mortgage debt or cost-of-living pressures.
A spokesperson for Social Services Minister Tanya Plibersek responded that pension payments have increased by nearly $5,000 since 2022, and that reforms have allowed pensioners to keep more of their benefits when they choose to work. Still, structural issues remain.
