A slashed tax rate of 10pc for working Australians beyond age 65 would encourage older-age employment and help defuse the Baby Boomer ‘time-bomb’, says Morningstar's Peter Warnes.

Warnes is among several commentators who have criticised Treasurer Josh Frydenberg's suggestions that Australians must work for longer to ease the burden on younger generations.

In a speech last week, Frydenberg said the ageing population was pressuring Australia's health, aged care and pension systems, and that policies needed to respond to this challenge.

Warnes vehemently rejects Frydenberg's assertion that older Australians should be expected to work longer, particularly given the structure of the current tax system.

"They've already paid tax for 45 years, if you want them to work longer and are concerned about the aging population time-bomb - which is going to rip the budget apart - if you don’t want them on the teat … the government will pay one way or the other," Warnes says.

Warnes suggests a better support for the economy would be to incentivise workers over age 65 who are on pay-as-you-earn wages and salaries up to $200,000 by offering a tax rate of 10 per cent.

"You'll either be writing a cheque for the pension, or you keep them in the workplace longer but give a 10 per cent tax rate for workers over 65."

"And that's only for workers on PAYE salaries and you exclude politicians and other bureaucrats."

Warnes’s comments following the release last week of the Retirement Income Review's consultation paper in which falling rates of home ownership and a carrot-and-stick approach to encourage older Australians to work longer are among the hot-button topics.

As the government ponders how to deal with the "ticking time-bomb" of Australia's ageing population, the review has stoked public discussion on Australia's retirement income system.

Discussion points are organised under the broader umbrella of the so-called three pillars:

  • Aged Pension
  • Superannuation
  • Voluntary savings

Among those who will make submissions to the review is the Alliance for a Fairer Retirement System, a large group of senior Australians, shareholders, self-funded retirees and several special interest associations including the Australian Shareholders Association, National Seniors Australia and the SMSF Association.

A need to incentivise workers who can save for an independent retirement, and avoiding disincentives which create conflicts, is a key topic for the Alliance.

The Alliance's earlier submission to the Retirement Income Review's terms of reference in July this year also calls for incentives to encourage people to work beyond the pension age.
Alliance spokesman Ian Henschke, who is also chief advocate of National Seniors Australia, says he is encouraged by some of the broader themes that have been flagged in the consultation paper. These include sustainability, fairness and certainty about what the retirement income system will look like in future.

Housing is elephant in the room

But Henschke emphasises the need for the review to focus on issues surrounding home ownership, given it has an intrinsic connection to many other parts of the discussion.

"We're encouraging people to be self-reliant, but one of the problems we're seeing that's not being addressed is the problem of home ownership. That's the giant elephant in the room," Henschke says.

The topic is addressed only in a single paragraph in the Retirement Income Review consultation paper.

Henschke points to research from the Grattan Institute that suggests the rate of home ownership will fall to 57 per cent by 2056, from around 75 per cent today.

"The system's been predicated on a high rate of home ownership,” he says. “Our society built the pension based on the fact most people would either own their own home or be in some other form of socialised housing."

"But that 20 per cent of people that don't own their own homes are those in pension poverty. The retirement income review needs to be looking at this falling rate of home ownership."

Including the home as part of the means test for Aged Pension eligibility is crucial point of contention - and one that stirs emotional debate whenever it's raised. While such considerations are not part of the Retirement Income Review, the broader theme of fairness and equity of the retirement income system is.

The consultation paper states that "the retirement income system is not intended to boost private savings … or to assist with wealth accumulation in order to provide for inheritances."

"This is reflected in policy settings such as the restricted access to superannuation before preservation age, minimum drawdown rules for superannuation and the means testing of the Age Pension."

Super must be fair, sustainable

SMSF Association chief executive John Maroney agrees that issues surrounding the fairness of the system must be addressed.

"We say yes there should be ability for couples to share super, so you could end up with equal balances for both partners and for couples, rather than going through complicated processes of changing the name assets are held in," Maroney says.

"We've even heard of some extreme examples where some people may find it easier to get divorced in order to divide up super assets and minimise tax."

He also points to people with broken work patterns as another area that needs more attention in considerations about the adequacy of retirement income. In addition to people who may have left the workforce to have children and raise families, this also includes immigrants who might have entered Australia in their 30s and 40s.

"There are quite a few questions with some interesting perspectives on how the system is working now and how it could work better," Maroney says.

He expects the first half of 2020 to be a busy time for Treasury. Submissions to the Retirement Income Review close in early February. After this, officials from Treasury and other government departments will parse the huge volume of data, conduct modelling and create projections about how this system could work.

The final report that stems from this work will likely tie in with the Intergenerational Report, which is due in March 2020.