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