Bills Digest No. 173   1997-98 Social Security and Veterans' Affairs Legislation Amendment (Pension Bonus Scheme) Bill 1998


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

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

  1. http://www.liberal.org.au/ARCHIVES/SS/sspolicy.htm

  2. Budget Measures 1997-98, Budget Paper No. 2, p. 116.

Contact Officer and Copyright Details

Peter Yeend
6 April 1998
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1998

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1998.



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