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CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage
History
Date
Introduced: 26 March 1998
House: House of Representatives
Portfolio: Social Security
Commencement: Royal Assent
Purpose
This Bill provides for a 'Bonus Scheme' for
suitable claimants for the age pension under the Social
Security Act 1991 and suitable claimants for the service
pension, or the partner service pension or the income support
supplement under the Veteran's Entitlements Act 1986, who
elect to defer the payment of their pension.
Background
The Pension Bonus Scheme (the Scheme) proposed
by the Bill gives effect to an election commitment to introduce
'Pension Bonus Plan'. The Scheme forms a part of the Government's
commitment expressed in the Budget to encourage self reliance.
The Government's election commitment in relation
to the 'Pension Bonus Plan' was as follows:
A Coalition Government will allow people of
pension age to defer taking up their pension entitlement in return
for receiving an increased pension at a later date.
Under our Pension Bonus Plan a person may defer
their pension for up to five years. For each year that a person
defers their pension he or she will receive a bonus of 8 per cent
on top of their pension.
To take advantage of the Plan a person would be
required to satisfy the eligibility criteria for the age pension.
In the case of a couple, both would need to meet the basic
eligibility requirement.
Applicants will need to be entitled to the
pension at the time they apply for a deferral and annual reviews
will take place to check on continuing eligibility.
Given the Coalition's commitment to abolishing
compulsory age retirement, it is appropriate that there is an
incentive to encourage people to continue working. The Coalition
Pension Bonus Plan will provide people with the flexibility to
continue working and then receive a higher annual pension when they
retire.(1)
The Government, in the 1997-98 Budget, announced
additional details about the Scheme. The following was stated in
relation to the Scheme:
Under the measure a bonus will be provided to
all those who continue to work while they defer take-up of the Age
or Service Pension. Accrual of entitlement to the bonus can only
begin after the date of commencement of the scheme, 1 July 1998,
and after the date on which a person qualifies for the pension on
age and residency grounds. The earliest date for bonus payment will
be 1 July 1999.
The bonus is a lump sum paid at the time of
receipt of the pension. It increases for each full year of deferral
for work, up to a maximum of five years. Work is defined as paid
employment for at least 25 hours per week.
The amount of bonus will be equivalent to 9.4
per cent of Age or Service Pension entitlement (excluding add-ons
such as Rent Assistance) at the time of take-up, for each year of
deferral, multiplied by the number of years deferred. The actual
amount paid will hence vary according to the amount of pension to
which the person is entitled, and the number of years for which the
pension is deferred.
For those deferring for five years, the lump sum
bonus will, for example, be equivalent to 47 per cent of annual
pension entitlement at the time of take-up multiplied by 5. A
person eligible to receive $300 per fortnight after five years
deferral would, for instance, receive a bonus of around $18
300.
It is estimated that around 22 000 people who
are eligible for the bonus will defer their receipt of Age or
Service Pension in 1998-99, and that the average length of deferral
will be three years.(2)
Class of persons eligible for the Scheme
The proposed Scheme, when announced in the
1997-98 Budget, referred to eligibility being targeted to persons
working for at least 25 hours a week.
The Bill as presented, will allow access to the
Scheme to persons who are doing a minimum amount of work, ie. the
person, or their partner, is working on average for at least 20
hours a week over 48 weeks of the year. This therefore, excludes
persons who may wish to access the Scheme whose main income and
means of support is other than work, eg. investments,
superannuation, overseas pensions, as a silent partner in a
business.
Attachment to the workforce
Persons currently working and receiving either
an age pension, a service pension, a partners service pension or
income support supplement payments will not be able to access the
Scheme. The legislation as presented only allows for new claimants
who claim and are approved before their pension payments would
otherwise commence. Thus the Scheme has a labour market
encouragement focus, being a scheme targeted at those who already
have a substantive attachment to the workforce upon reaching
retirement age, and intend to continue to undertake substantial
work.
Retired persons aged less than 75
The Scheme as presented will not be available
for retired people aged 75 or more. While there is not much detail
explaining the reason for this rule, perhaps the government does
not want to send a signal that persons are encouraged or expected
to work until they expire.
Savings for government
The estimates savings associated with the Scheme
as presented in the 1997-98 Budget are $21.4 million in 1998-99,
$42.4 million in 1999-2000 and $42.0 million in 2000-01.
Estimates of savings for the Scheme are limited
by the lack of detailed and accurate information about the working
population of retirement age. The Department of Social Security
(DSS) does not collect or record for age pension claimants any
information about earned income foregone or able to be accessed
after retirement age. Neither are details recorded about the number
of hours worked for current age or service pension recipients. The
only information known is the amount of earned income received and
the source of the income (eg. wages/salaries, self-employment),
after payment commences which is collected for the purposes of the
income test and for setting the rate of payment.
Therefore, there is no information about the
potential for persons of retirement age to engage in employment
activities, or the financial capacity to defer the pension.
Likewise, there is little to no information
about employment participation decisions given the current impact
of the income test on the rate of pension, or the weight attached
to accessing the pension, and the associated pensioner concession
card (PCC), relative to employment participation and earning
capacity.
The estimates have used information from the
Australian Bureau of Statistics surveys presenting data on working
hours patterns and earned income levels for people of retired. The
other data available is the incidence of age and service pensioners
with earned income and the average rates of such earnings.
The proposed Scheme has the potential to provide
some benefits to government and these include:
-
- reduced cost in supplying concessions attached to the PCC
during the deferment period. The average cost per pensioner when
last costed was between $300 and $1800 a year;
-
- increased tax revenue from the sustained employment activity;
and
-
- reduced government outlays by not having to provide the
pensioner tax rebate to those who elect to defer.
These savings will be somewhat offset by the
increased cost of administering the Scheme. Compared to the
administrative costs associated with the normal processing of an
age or service pension claim, payment and review, the extra costs
for assessing and administering the Scheme are significant.
Numbers who can potentially access the Scheme
Currently, about 30 per cent of age pension
claimants delay the lodgement of their claim, ie. do not claim
immediately upon reaching the qualifying age. For age pension the
minimum qualifying ages are for males 65 and for females 61. For
service pension the ages are 60 for males and 56 for females. There
are a variety of reasons for delayed claims with some of the more
common reasons being:
-
- electing to work beyond retirement age;
-
- not having the requisite 10 years residency in Australia;
and
-
- changes in financial circumstances, eg. partner ceases work,
maturity and expenditure of investments.
Only those who can afford to defer will be able
to access the Scheme.
This means those who would otherwise be entitled
to the maximum rate of pension, or a substantive rate of pension
due to having a small amount of income, will probably not be able
to elect to defer taking the pension.
Costing models can be developed to broadly
identify at what level of income a claimant would financially
benefit from deferring, but the data can only be obtained from the
current environment that is different to that which would apply
after the Scheme is introduced. The data about income is important
but data about living costs and financial commitments of the
retired aged is of equal importance, eg. housing, health/medical.
More subjective considerations such as the value placed on work,
attachment to work and the status it provides, feeling of
contributing to the community and society, financial and other
pressures may also be significant.
Decisions by claimants about the Scheme will
centre on the following elements:
-
- potential to be active in the labour market upon reaching
retirement age;
-
- financial capacity to defer;
-
- the loss of access to concessions and fringe benefits;
-
- the size of the potential bonus; and
-
- the attraction of the tax free nature of the bonus.
Treatment of monies in superannuation and approved deposit
funds
While the Schedule 3, proposes
to exempt the Scheme bonus payment as taxable income, no mention
has been made in the Proposed Bill to allow any extension of the
treatment of monies in superannuation and approved deposit funds
type products.
Currently, the Income Tax Assessment Act
1997, requires that monies invested in superannuation and
approved deposit funds must be realised, cashed out, where the
holder reaches age 65, and is not gainfully employed on a full-time
basis. Gainful employment is defined as 30 hours a week or more. To
access the proposed Scheme, the work test requires work for 20
hours a week or more. Consequently, the Scheme as proposed provides
an incentive for persons attaining retirement age to sustain
employment, but there is no complimentary provision under the
Income Tax Assessment Act 1997, to cater for the treatment
of the superannuation and approved deposit fund investments of
potential Scheme participants. The exception will be for those
working in excess of 30 hours a week, but many in this group may
not otherwise have a pension entitlement (and thereby qualify for
the Scheme), due to the level of their earnings.
The deferment choices may be limited if there is
not some form of extension of the tax concession arrangements that
apply to these superannuation arrangements past age 65.
Main
Provisions
The Bill is organised to enact the contents of
three schedules.
Schedule 1 provides amendments
to the Social Security Act 1991.
Schedule 2 provides amendments
to the Veterans' Entitlements Act 1986.
Schedule 3 provides amendments
to the Income Tax Assessment Act 1997.
Clause 2 of the Bill provides
that the amending Act will commence from the date of Royal
Assent.
Schedule 1-Amendment of the
Social Security Act 1991
Schedule I presents amendments
to the Social Security Act 1991 to provide for the
application of the pension bonus scheme.
Pension Bonus amounts are not an asset
Item 2 provides for the
exemption of the pension bonus amount as an asset, for the purposes
of the assets test, during the period of the deferment and on
payment at the end of the deferment period. In exempting the bonus
amount as an asset, this provides one of the incentives for age
pension claimants to elect to access the Scheme.
Minimum requirements to qualify for a pension bonus under the
Scheme
The proposed Part 2.2A sets out
the minimum requirement for qualification for the bonus Scheme.
These are:
-
- the person must claim for the Scheme;
-
- the person must meet the Scheme requirements for at least one
period, with one period being designated as being the minimum of
one year;
-
- the person must satisfy the work activity test for at least one
year;
-
- the work activity test requirements are 960 hours work in a
year; and
-
- the amount of the bonus depends on the annual rate of age
pension and the number of qualifying Scheme periods.
There are probably several reasons for setting a
minimum period of one year to qualify for the Scheme. Firstly, it
targets the Scheme to those with sustained workforce participation
and secondly it ensures the substantial extra administrative costs
of assessment and monitoring are not wasted on cases where the
employment activity is short-term.
The proposed Section 92C adds
further detail about qualification for the Scheme, ensuring it is
targeted to persons who have not previously received an age or
service pension or a bonus under another scheme..
The proposed Section 92H
generally provides a 26 week window in which a person can register
as a member of the Scheme, being 13 weeks before and 13 weeks after
reaching retirement age. This largely precludes persons who have
continued employment activity well past retirement age, eg. age 61
or 62, in the case of a female age pension applicant. This may be
due to other features of the proposed Scheme, which has a maximum
period of 5 years and excludes people aged 75 or more, thereby
targeting the Scheme to younger aged retirees.
The proposed section 92U sets
out the work test requirements. As discussed in the Background,
persons currently working and receiving age or service pension
payments will not be able to access the Scheme.
The legislation as presented only allows for new
claimants who claim are approved before their pension payments
would otherwise commence. Thus the Scheme has a labour market
encouragement focus, being a scheme targeted at those who already
have a substantive attachment to the workforce upon reaching
retirements age, and intend to continue to undertake substantial
work..
Measuring and monitoring hours worked may
present some interesting administrative issues. For wage and salary
earners, measurement will probably be simple, by obtaining records
from the employer. For others like primary producers and others
engaged in self-employment, eg. consultants working from home,
reliable and verifiable identification of hours worked will be
problematic.
Proposed Subdivision
93C refers to requirements to keep work activity
records.
Proposed Section
93M sets out the rules for the lodgement of a claim for
the Scheme and contains some flexibility for bonus periods past the
age of 75.
Proposed Division
11 allows for some continuance of the Scheme during
periods where pension payment would otherwise be precluded, eg. a
compensation preclusion period, a disposal of asset without
adequate financial remuneration preclusion period.
Schedule 2 - Amendment of the Veterans' Entitlements
Act 1986
Schedule 2 is intended and
written to amend the Veterans' Entitlements Act 1986 in
the same manner as Schedule 1 amends the Social Security Act
1991, to provide a mirror Scheme for persons otherwise
qualified for the service pension, or the partner service pension
or the income support supplement (ISS).
The service pension is paid at the same rate,
with the same income and assets tests and with the same fringe
benefits as the age pension, the only difference being the minimum
age qualification requirements. Likewise, the same applies for the
partner service pension being the mirror to the age wife
pension.
For the age pension a male needs to attain the
age of 65, a female currently needs to be aged 61. For service
pension the qualification ages are 60 for males and as of 1 July
1998, 56 for females.
Veterans' war widows pension (WWP) is paid to
the surviving partner of a veteran where the deceased veteran's
circumstances meets one of the following criteria:
-
- the veterans' death was war or defence caused;
-
- the veteran was receiving special rate pension, or extreme
disablement adjustment payment or was a double amputee; or
-
- the veteran was an Australian prisoner of war.
The WWP is not subject to any income or assets
test and in tax free. In addition to the WWP, a war widow/er may
also receive income support supplement (ISS). The ISS was
introduced in 1995, largely replacing the social security age
pension paid to WWP recipients. ISS is taxable and is subject to
the income and asset tests. Therefore, the legislation as proposed
will make the Scheme available to WWP recipients otherwise entitled
to ISS, as they are of retirement age.
Schedule 3 - Amendment of the Income Tax Assessment
Act 1997
Proposed Schedule 3, proposes
to exempt the Scheme bonus payment as taxable income, thereby
providing one of the most significant attractions to retired
persons to access the Scheme.
Currently, the Income Tax Assessment Act
1997, requires that monies invested in superannuation and
approved deposit funds must be realised (ie. cashed out), where the
holder reaches age 65, and is not gainfully employed on a full-time
basis. Full-time gainful employment is defined as 30 hours a week
or more. To access the proposed Scheme, the work test requires work
for 20 hours a week or more.
Consequently, while the Scheme as proposed
provides an incentive for persons attaining retirement age to
sustain employment, there is no complimentary provision under the
Income Tax Assessment Act 1997, to cater for the treatment
of the superannuation and approved deposit fund investments. The
exception will be for those working 30 hours a week or more, but
many in this group may not otherwise have a pension entitlement
(and thereby qualify for the Scheme), due to the level of their
earnings.
The deferment choices may be limited if there is
not some form of extension of the tax concession arrangements that
apply to these superannuation arrangements past age 65.
Concluding Comments
The Scheme as proposed by the Bill gives effect
to an election commitment to introduce 'Pension Bonus Plan'.
The Scheme is targeted at those who already have
a substantive attachment to the workforce upon reaching retirement
age, and intend to continue to undertake substantial work.
The Scheme forms a part of the Government's
commitment expressed in the Budget to encourage self reliance.
Only those who can afford to defer will be able
to access the Scheme. This means those who would otherwise be
entitled to the maximum rate of pension, or a substantive rate of
pension due to having a small amount of income, will probably not
be able to elect to defer taking the pension.
The proposed Scheme has the potential to provide
some benefits to government and these include:
-
- reduced cost in supplying concessions attached to the PCC
during the deferment period. The average cost per pensioner when
last costed was between $300 and $1800 a year;
-
- increased tax revenue from the sustained employment activity;
and
-
- reduced government outlays in terms of not having to provide
the pensioner tax rebate to those who elect to defer.
Decisions about accessing the Scheme by persons
of retirement age will centre on the following elements:
-
- potential to be active in the labour market upon reaching
retirement age;
-
- financial capacity to defer;
-
- the loss of access to concessions and fringe benefits;
-
- the size of the potential bonus; and
-
- the attraction of the tax free nature of the bonus.
Endnotes
-
- http://www.liberal.org.au/ARCHIVES/SS/sspolicy.htm
- Budget Measures 1997-98, Budget Paper No. 2, p.
116.
Peter Yeend
6 April 1998
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 1998
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