Older Australians receiving the Age Pension are grappling with effective marginal tax rates (EMTR) that soar to staggering levels, potentially discouraging them from returning to the workforce.
New research by HESTA highlights the sharp contrast between the tax burdens faced by pensioners and those in higher income brackets, revealing that some retirees are taxed more heavily than top earners. With significant implications for both individuals and the wider economy, these tax structures are becoming a serious concern for older Australians seeking financial independence.
According to a report commissioned by HESTA and conducted by Retirement Essentials, the Income Test taper rate – which reduces Age Pension benefits by 50 cents for every dollar earned above a threshold – creates a harsh disincentive for older individuals wishing to increase their income through employment.
This means that older Australians can face effective marginal tax rates as high as 80%, with some extreme cases surpassing 100%. For those on the Age Pension, the financial rewards for working more hours or earning additional income may not be worth the effort.
The High Costs of Returning to Work
In practical terms, this means that a single pensioner who boosts their annual employment income by $5,000 may see their take-home income increase by just $1,150, a mere 23% of their additional earnings. This results from a combination of lost pension benefits and income tax obligations. For couples, the situation remains similarly unfavourable, with both partners working pushing their combined effective marginal tax rate to 64%, once their income hits $40,000.
These steep tax rates are especially damaging to those in sectors such as Health and Community Services (HACS), where many employees are older workers, particularly women, who have had breaks in their careers due to family commitments. With many workers in these fields already facing lower lifetime earnings due to part-time work or other career disruptions, the financial penalty imposed by these taxes can make it difficult for them to make up lost savings or extend their careers.
A Call for Reform to Support Workforce Participation
HESTA’s CEO Debby Blakey expressed concern over the detrimental effects these tax rates have on older Australians, emphasising that they dissuade many pensioners from contributing more to the workforce.
As the second-largest sector in Australia, HACS is already facing significant staffing shortages. Allowing older Australians to work more without losing crucial pension benefits could address these workforce challenges, while helping retirees build a more secure financial future.
HESTA is advocating for reforms such as indexing the Work Bonus thresholds to Average Weekly Ordinary Time Earnings (AWOTE), to ensure that older workers can retain more of their pension while earning extra income. Additionally, simplifying the Age Pension Tax Offset rules could make it easier for retirees to understand and navigate their tax obligations, providing greater clarity and incentives to remain in the workforce.
