Reform the tax rules so willing older Australians can return to work

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Across the country, there are hundreds of thousands of older Australians who hold a genuine desire to return to the workforce, primarily in a part-time capacity, yet are prevented from doing so by onerous and unfair pension and taxation rules.

For too many older Australians who want to put their lifetime of skills to work, the effort makes little sense when they face losing almost 70 cents in the dollar of what they earn in taxes and lost entitlements. The system does not work for them, and the same is true for veterans and students.

Under the current pension rules, the combined earnings and pension payments of an age pensioner are subject to income taxation. This means that age pensioners and veterans are subject to a tax rate of 69 per cent should they earn more than the tax-free threshold of $18,200. As a consequence, only 3 per cent of pensioners in Australia work, compared to 25 per cent in New Zealand.

The Institute of Public Affairs (IPA) has called on the federal government to once and for all reform taxation arrangements, ensuring those seniors and veterans wishing to return to the workforce are not financially penalised for making a contribution.

Today, Australia faces an unprecedented, economy-wide worker shortage. According to the most recent data available from the Australian Bureau of Statistics, there are 438,500 reported job vacancies across Australia, and one quarter of businesses reported at least one job vacancy they could not fill.

The number of vacancies is today almost double what it was pre the COVID-19 pandemic.

Accommodation and food services is the industry most affected: since February 2020, job vacancies in accommodation and food services have increased by nearly 300 per cent, and four out of ten accommodation and food services businesses report job vacancies.

In November 2022, the federal government made minor amendments to the Social Services and Other Legislation Amendment (Workforce incentive) Act 2022. The amendments saw the threshold at which the pension begins to be reduced temporarily increased. Until the amendments lapse on 31 December 2023, an age pensioner and veteran can now earn $226 per week before their pension entitlements begin to be reduced by 50 cents for every dollar they earn.

Although a step in the right direction, we need to do the job properly. This was made clear by the fact that in the period following the amendments coming into force, job vacancy levels decreased by just 1.5 per cent.

The IPA has repeatedly called on Canberra to remove all tax and red tape barriers to pensioners and veterans working. This means pensioners would no longer lose pension payments when they earn income from work, while still being required to pay income tax like all other workers.

It’s time for our leaders to listen to older Australians.

We know this will have an impact on Australia’s worker shortage. A recent survey by National Seniors revealed that 20 per cent of all Australian pensioners would consider re-joining the workforce if exorbitant tax barriers were removed. This is equivalent to more than 515,000 potential workers, far greater than the current worker shortage.

Our leaders have the tools to tackle Australia’s unprecedented worker shortage via simple and effective reforms to allow our pensioners, veterans, students and welfare recipients to get into work.

IPA analysis shows that the current job vacancy crisis is costing Australians $32 billion in foregone wages, and the federal government $7 billion in foregone income tax revenue. Removing these financial impediments is a no regrets policy, as government welfare payments will decline over the long term, while tax receipts will increase.

It is unfair that Australia’s most experienced generation is being locked out of the labour market due to excessive tax and red tape barriers, particularly when so many wish to rejoin the workforce.

Australian pensioners should be able to work as they choose, without losing their pension or welfare payments, while paying tax on earned income like all other Australians.

Saxon Davidson is a Research Fellow at the Institute of Public Affairs


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