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An opt-in, universal pension can fix several super problems

Allowing all retirees to opt-in to receive a non-means-tested age pension, which would trigger application of a different tax schedule for wealthier retirees (let’s call it the retiree tax schedule (RTS)) could solve several current problems with our existing super system without breaking the government budget.

Some super problems

What problems could it solve?

First, there is an enormous waste of resources in the financial planning industry aimed at enabling individuals to structure their financial affairs so as to access the means-tested age pension.

Second, managing a means-tested pension system involves considerable government resources and burdens individuals with excessive ‘red-tape’ and administration.

Third, superannuation tax concessions in retirement create an unlevel playing field favouring superannuation funds, and reducing external competitive forces, in the market for the management of retiree wealth.

Fourth, the Howard Government’s introduction of a zero tax rate for superannuation earnings in retirement was a major policy mistake which is politically infeasible to reverse – unless combined with some offset such as the opt-in universal pension to make it palatable to voters.

The mechanics of an opt-in universal pension

How would such a system work?

At retirement (or later if the option has not yet been exercised), individuals would be able to elect to receive the non-means-tested pension (which is set at the same level as the means-tested pension). However, in doing so, the retiree agrees to be subject to a different tax schedule (the RTS) which has two main features:

  1. superannuation account earnings would be included in the retiree’s taxable income and subject to personal income tax at the rate specified in the RTS.
  2. the RTS would be no different to the normal tax schedule up to some income level, such as that which enables a retiree to currently receive (say) a 25% part-pension. Above that income level the RTS would involve a higher marginal tax rate than the normal tax schedule, designed to offset the additional income to be received by wealthier retirees from the universal pension.

For those currently on full or significant part-pensions, opting into the universal pension can leave their after-tax position no worse off, and avoids the costs of tax-driven financial advice and the hurdles of means-testing. For the wealthier, the decision to opt-in requires some analysis, but no more than could be readily available from web-based calculators.

The information required would include:

  • superannuation balances and their expected annual return
  • other financial assets outside of super and expected earnings therefrom
  • other (part-time employment) income, and
  • the RTS and normal tax schedules.

A simple example

A simple example (obviously ignoring many complications, such as uncertainty of returns) may be useful.

Take a retiree with $500,000 in super which generates a pre-tax return of $30,000 p.a. (untaxed). The retiree has $400,000 in other assets generating a pre-tax return of $25,000. Under the current system (with super earnings tax-exempt), no pension is received and tax of $1,292 is levied (at 19% marginal rate on income over $18,200). After-tax income is thus $30,000 + $23,708 = $53,708.

Under the opt-in alternative, the full $55,000 of earnings (inside and outside super) plus the universal pension amount of $25,000 (approximately) would be taxable, giving taxable income of $80,000. To leave the retiree equally well-off from opting in, the RTS would involve levying $26,292 of tax on that income to leave $53,708 after tax. The current (non-RTS) tax schedule would levy $16,467 on that income, indicating that the RTS needs to be set above the normal tax schedule to leave such an individual indifferent.

The exact specification of the RTS would reflect government objectives regarding budgetary considerations and possibly weaning retirees off the super-subsidy teat.

Once set and fixed for all time at specified margins above the normal tax schedule, retirees could make a decision to opt-in or not depending on their individual circumstances.

Political feasibility

Could it be sold politically? Yes, individuals are given a choice to stay with the status quo or opt into an alternative system, rather than simply having a tax-break taken away from them.

Would it be difficult to implement? No.

Would it be difficult for retirees to understand and make sensible decisions? Not with the aid of web-based calculators.

Would the super industry and financial advice industry support it? No, because it goes against their self-interest, even though it has social merits.

What are the scheme’s social merits?

Less resources spent on financial advice aimed at maximising pension income.

Less public sector resources spent on means-testing (and less hassles for individuals subject to means testing) and other activities associated with implementing a means-based pension scheme.

A level playing field for the management of post-retirement wealth by removing the tax concession only applied to superannuation earnings in retirement. Unless super funds can provide higher pre-tax returns (or design better retirement products) than other funds, they will be subject to loss of funds under management via the competitive process.

A politically-feasible method of watering down the zero-tax subsidisation of retirement earnings which primarily benefits the wealthier members of society, and which would also reduce the tax incentive for not running down superannuation balances in retirement due to bequest motives.

It would be a major policy change and invoke howls of protest from vested interests in the financial sector. But one well worth considering.


Kevin Davis is Emeritus Professor of Finance at The University of Melbourne. Kevin’s free e-text reference book 'Bank and Financial Institution Management in Australia' is available on his website. Latest update is December 2021. Kevin was also a member of the Financial Systems Inquiry ('The Murray Report') in 2014. 


March 23, 2022

Amazing stuff Ken Davis ! You are convinced of your own intellectual prowess and the righteousness of your cause !
However , it's completely absurd , UNFAIR and absolutely unnecessary and insane to those "wealthier members of society" that HAVE ALWAYS PAID FOR EVERYTHING , that you can "dream up a system" that will forever prevent them from actually RETIRING in a care-free way ! You devise a ridiculously complicated opt-in / opt-out system THAT SUITS NO-ONE AT ALL and also creates a lot of worry and work for the "target group" who may or may not benefit at all ! It solves nothing and it creates NO WEALTH !
You KNOW the position of the taxpayers : The TOP 10 to 15% of INCOME EARNERS pay basically ALL THE TAX.
The Bottom 60% of INCOME EARNERS receive more in "government assistance" [ in its many and varied guises allowances etc ] than they ever pay in TAX , so thank goodness for the TOP TAX PAYERS , that make the whole system function ! Some ATO Statistics illustrate MY POINT !
What is the biggest source of revenue for the Australian government? Individuals income tax. .......39% of ALL TAX !
How much tax does the Australian government collect each year?
In 2018-2019 ...$228.4 billion AND in 2019 -2020 ..... $229.7 billion !!!
ATO says : "The top 1 percent (taxpayers with AGI of $546,434 and above) earned 20.1 percent of total AGI in 2019 and paid 38.8 percent of all federal income taxes.
In 2019, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined...".
COMPANY TAX at 19% and GST at 12% are minor contributors by comparison to INDIVIDUAL TAX PAYERS at 39% !
State and Local Taxes contribute 19% and all the other Federal taxes another 11%.

"A politically-feasible method of watering down the zero-tax subsidisation of retirement earnings which primarily benefits the wealthier members of society, and which would also reduce the tax incentive for not running down superannuation balances in retirement due to bequest motives."................The BIT which really irritates me is the implication that the retirement earnings are somehow unfair or undeserved with the snide remark "which primarily benefits the wealthier members of society" !!!! Why should it not benefit them ? They paid for themselves and virtually everyone else's retirement as well !
Why can't YOU , and your ilk , leave successful elderly people in peace so they can enjoy their remaining last few years ?
.......................Haven't they DONE ENOUGH ALREADY ?
And YES PETE ! March 17, 2022
"I have an even simpler plan. Give the universal pension unconditionally to everybody."
A universal pension PAID TO ALL SENIORS would help ensure NO AGED POVERTY occurs in Australia !
How about a FAIR GO for ALL Australian AGED PENSIONERS !
There are MORE disability pensioners than aged pensioners AND NOBODY ATTACKS THEM or DISPUTES their entitlement !
Regards , Trevor.

March 19, 2022

A much simpler solution to the problem of the cost of the age pension would be to drastically reduce the assets test thresholds from their ridiculously low current levels. It boggles the mind that we are paying $5,000 plus per year to a couple who own their own home (which is a decent chance of being worth over a million dollars) and have $800k in super/investments plus a couple of cheap cars and some basic home contents.

Plucking some figures out of the air, make the lower limit for couples $200k and the top limit $400k and have them spend down some of their retirement savings on themselves rather than having the taxpayer fund it.

March 19, 2022

"lower limit for couples $200k and the top limit $400k":

That makes reduction of assessable assets much more compelling:
= (26 * 1488.80) / (400000 - 200000)
= 19.3544% y.

March 20, 2022

Or people might just decide that rather than buying a much bigger house which requires a lot more cleaning and maintenance they will instead spend some of the money they have saved over the last 40 years or so of their lives, like everyone who doesn't receive much/any age pension already does.

March 20, 2022

"spend some of the money they have saved over the last 40 years":

More likely when reducing assessable assets does not result in increased income - due to abolition of Age Pension Assets Test. And when reducing assessable income does not result in increased income - due to the abolition of the Age Pension Income Test.

Jon Kalkman
March 18, 2022

The concern about “the zero-tax subsidisation of retirement earnings which primarily benefits the wealthier members of society”, is misplaced. The Transfer Balance Cap (TBC) in 2017 severely limited these benefits. The TBC forced the transfer of excess money to accumulation funds which are also concessional taxed.

The Retirement Income Review found 11,000 people with more than $5 million in super and the AFR reported (Jul 16, 2021), “Twenty-seven of Australia’s biggest self-managed super funds held more than $100 million each in concessionally taxed savings in the 2019 financial year, including one mega-SMSF that has hoarded $544 million.” Prior to 2017 this money would have been held in zero-taxed pension funds. No wonder it is frequently assumed that the bulk of super’s tax concessions still flow to zero-tax pension funds.

The average SMSF size in 2020 according to the ATO was $1.3million - an average of all SMSFs including those just beginning along with those with very large super balances. But the median figure was only $733,000. That is, 50% of funds are smaller than this. A retired couple with a median SMSF would still be eligible for a part age pension. They would not be considered wealthy.

These large super funds are quite legal. They followed the rules, which before 2007 allowed unlimited non-concessional contributions, but they distort the whole debate about super tax concessions and the so-called subsidies to the wealthy.

Eventually these funds will disappear because death is a cashed-out event, but until then, these accumulation funds without mandatory withdrawals, continue to grow along with their growing tax concessions. These very large, concessionally taxed accumulation funds are clearly not required for a comfortable retirement but they make excellent estate planning vehicles. There have been recent suggestions to limit the total amount that any person can have in super, to $5 million, but neither political party has any appetite for another fight over superannuation.

March 19, 2022

"neither political party has any appetite for another fight over superannuation"

And praise the lord for that... although logically it'd be a pretty easy "sell".

As someone who's just left the employment of a large superannuation company, I won't miss the media reportage adding to the distortions of which you speak. The overall general media coverage of superannuation is appalling - no room for nuance or understanding. It used to do my head in...

Agree with everything you just said.

March 17, 2022

A universal pension or the universal basic wage?
Is anybody out there listening or reading about Klaus Schwab from the WEF.
"you will own nothing and be happy " you will rent everything
They are planning for complete social control and digital currency. Goodbye to your privacy.
Your Serfdom is coming.Will you comply.
This is the answer that they propose to solve the massive world debt and what they have spent on COVID.

March 19, 2022

Rog, this is why we need Bitcoin!

Gavin Rogers
March 17, 2022

For some interesting reading on the history of the Age Pension in Australia, see this recent research paper from the Parliamentary Library. .

And, as a financial adviser assisting retirees to maximise their potential entitlements for the last 27 years, I have long advocated that a contributory-style pension scheme would be preferable to the current mean-tested Age Pension quagmire.

March 17, 2022

"a contributory-style pension scheme would be preferable":

That would leave some with little or no income - whether or not their fault. Hence Age Pension or other welfare ensuring a minimum income.

The means test taper rate results in an 7.8% / y government guaranteed return incentive to reduce assessable assets.

"Universal" pension eliminates that perverse incentive.

Dave Roberts
March 17, 2022

I believe that up until 1950 the govt collected a proportion of tax into a retirement bucket which was used for the universal pension. The Menzies Coalition govt cancelled that and put the money into Consolidated Revenue. All the problems with the financing of Aged Pensions starts there.

Former Treasury policy maker
March 18, 2022

No Dave, it doesn't. It's always better for taxes to go into consolidated revenue and the government to be accountable for how much they spend on various programs.
It's a myth that revenue from specific taxes can efficiently fund specific programs. This is usually because the revenue stream is more volatile than the spending. Often it's because it doesn't raise enough revenue - the Medicare levy being the classic example. ( The levy funds very little of what's spent on Medicare rebates.) And sometimes it's because the tax raises more revenue than is needed for the program, creating an issue if its hypothecated to that spending.
The current situation with fuel excise supposedly going to roads spending is another example. Those arguing against a cut in the excise because it would reduce roads spending are simply wrong. The link is merely a political selling point for the excise being there in the first place. As it happens, the excise raises about the same as is spent on land transport projects, but the spending could continue if the excise revenue wasn't there.
The overall budget decision about total tax and total spending is the key issue - with funding for specific programs best based upon economicand social needs, not linked to particular revenue sources.

Patrick Kissane
March 17, 2022

Australia had an aged pension which was not means-tested until 1983 or thereabouts. The Uk has a non-means tested State pension. It has been my experience that most European countries have State age pensions which are not means-tested.

Max Lewis
March 16, 2022

Dear oh Dear !
Perhaps a mandatory Thesis on both the financial success and benefits of enduring relationships enjoyed by Retirees and their Financial Advisers, actual practical knowledge of the superannuation environment and the dangers of 'cloistered" views in relation thereto, should become the 'sine qua non' of future studies in Schools of Finance in tertiary institutions.

David Williams
March 16, 2022

This great discussion is another reminder of why we need a National Longevity Strategy. This would oversee the simplification of superannuation and other well-intentioned ivory towers that prevent a genuinely holistic approach for people seeking to simply make the best of the rest of their life. As John points out, the cumulative cost savings should help defray the burgeoning costs of our current approach to increasing community longevity. Aged care alone is just the tip of the iceberg.

March 16, 2022

A simpler system might be to announce that in 20 years time, the aged pension will be abolished for new entrants, as by then compulsory superannuation will have had 50 years to do its job of eliminating the need for the aged pension. Every worker would have had it their entire working life. That would provide a powerful incentive for workers now under 47 (67-20) to maximise contributions for at least 20 years, at the likely expense of fewer overseas holidays. It might even reduce house prices by discouraging higher mortgages at the margin. It would also enable a reduction of thousands of asset and income checking Centrelink staff, who each represent an unproductive fully burdened cost around $125k p.a.

Geoff R
March 16, 2022

>A simpler system might be to announce that in 20 years time, the aged pension will be abolished for new entrants

While in theory this may sound good, it would not work for people who (for whatever reason) do not work or are on low wages.

Perhaps a fairer system would be (as Pete said further down the page) "Give the universal pension unconditionally to everybody." That gets rid of all the red tape and shuffling of assets while preventing a large number of people being left to live in poverty. Combine that with a higher superannuation guarantee rate of say 18% or 20% to force people to save "at the likely expense of fewer overseas holidays" and we should be good to go.

March 17, 2022

Choose not to work? Don't expect an aged pension. Can't work? Get the DSP. Low wages? At minimum wage around $25/hr ($50k p.a.), a worker will accumulate over $200k in the next 20 years, even at current 10% SGC levels, given 3% pay rises and typical super fund returns of 8%. That's only half a working lifetime, so call it $400k at age 67. With a partner doing likewise, there may be no aged pension for that couple with $800k+ in super, given they likely have other assets. Their 8% tax free return on super in retirement may exceed the aged pension and low income workers have shorter life expectancy than average. "Unprecedented" Inheritances from Boomers will disqualify even many non-workers in 20 years. Hence, the current system will deny aged pensions for most new retirees within 20 years.

Jon Kalkman
March 16, 2022

Perhaps ii is not surprising that there is confusion over how taxes are applied to super because we need to distinguish between the tax paid by a super fund, (and that depends on whether the fund is in accumulation mode or pension mode) and the tax paid by members when they withdraw money from the fund.

Since 1992, when Treasurer Keating passed legislation to make super compulsory, income in accumulation funds have been taxed at 15% and super funds paying a pension have been zero taxed. There has been no change to these arrangements in 30 years, by any government..

Until 2001, members of the fund were subject to tax when they made withdrawals from the fund in retirement. However, the tax only applied to the proportion (not the amount) of the fund - and thus the withdrawal - made up of concessional contributions. That tax was then subject to a 15% tax rebate to compensate for the 15% tax paid earlier in accumulation. These tax arrangements still remain in place for those who access their super prior to age 60 and also to death benefits.

As I explained here:

members of small funds paid little or no tax because of the rebate and members of large funds paid little to no tax because of the high proportion of non-concessional contributions in these funds. That is why Treasurer Costello's decision to waive this tax was politically easy but not very painful fiscally. For that reason there has been no inclination by any government to reintroduce these taxes.

Therefore, to say that "the Howard Government’s introduction of a zero tax rate for superannuation earnings in retirement was a major policy mistake" muddies the waters because it conflates the tax paid by the fund with the tax paid or not paid by the member on withdrawals.

The reason why retirement income from super is tax free and the reason why making contributions to super during one's working life is really worthwhile, is because the pension fund earning that income is tax-free. The taxes on withdrawals made very little difference, as Costello discovered.

Geoff R
March 16, 2022

thanks Jon for your clarification/correction.

> For that reason there has been no inclination by any government to reintroduce these taxes.

My suspicion/fear however is that the history on this may well be forgotten and future governments facing a trillion dollars of debt and an increasing interest bill will view Super as an easy target to squeeze. Basically they will not be able to keep their grubby mits off the 3.5 billion in Super assets, forgetting that it is not actually their money.

March 19, 2022

You mean 3.5 trillion not billion

March 16, 2022

The point of the Howard/Costello change was to wean people off the government pension and encourage more self reliance on super. Those who could achieve that had a better retirement income and cost the government less.
There are two current impediments to this.
The first is that the Government Seniors Concession card is very attractive financially - making it economically rational to structure ones finances to obtain it. The “return” in tax free tax benefits is astronomical on small changes to the asset base.
Making the concession card available to all over a certain age would eliminate that incentive. The cost would be partially offset by those who would not bother with the system to try to get the pension as well.

The second problem at the moment is that too many are prevented by restrictions on contribution from being able to be independent, so it is economically rational to arrange their financial affairs to get at least part of the pension. The problem of competing demands on household budgets at different stages of life (leaving less available for superannuation top ups) has not been solved by the parsimonious carry forward of a few years only. Making a lifetime carry forward allows for people to manage their affairs according to their individual circumstances not some theoretical average.

March 16, 2022

I have an even simpler plan. Give the universal pension unconditionally to everybody. Imagine how much the government would then save. Further, there are many hard working Australians who have spent decades planning for retirement based on current laws and they should also benefit financially from any changes. This proposal seems to be just another left wing academic exercise to take money from the savers and redistribute it to others. These plans are derisive and I doubt that there would be much political support for it.

March 17, 2022

"Give the universal pension unconditionally to everybody.":

"Universal" for Age Pension aged - a universal pension of an amount more than living costs would be highly inflationary.

The end of the Age Pension Asset Test Taper.

Then all the retired's funds could be invested broadly rather than stuffed into or retained in otherwise unwarranted home improvement. Improved use of capital and housing.

March 16, 2022

"the Howard Government’s introduction of a zero tax rate for superannuation earnings in retirement was a major policy mistake which is politically infeasible to reverse – unless combined with some offset such as the opt-in universal pension to make it palatable to voters." Yes, you are right, the Howard/Costello zero tax rate was purely politically motivated (for the newspaper headlines) and cost the budget very little. Prior to this the Keating approach was logical and simple, you paid 15% contributions tax when money went into super, and you got this back as a rebate when you started to draw down your super. Simple and logical Current tax rates on ordinary income are zero for the first $18k, and 19% from $18k to $45k. So in practice, if the Keating scales still applied (as they do to under 55 years of age), there would be very little tax payable for income up to about $60k (or up to $120k for a couple) - conservatively assuming not non-concessional components in their super accounts (which would result in more tax free income). In order for a couple to draw down $120k (assuming drawdown rate of 4%), they would need about $3m in super - how many couples do you know that have that amount of super??? So, if it could be explained, a reversal of the Howard/Costello overly generous tax treatment of super could be achieved, and in doing so, also elimination of the maximum pension transfer limit. Significantly reducing the complexity of the superannuation pension system. We are in this mess because of Howard/Costello making a vote catching headline. The simplest solution to the problem is to reverse the mistake

March 16, 2022

only small thing is earnings on pension funds have been exempt from tax from prior to July 1988. this was to eliminate double taxation on the earnings as they formed part of the pension payment which was fully taxable in the person's hands. This continued under the Keating changes in 1988 with the introduction of the pension 15% tax offset to compensate for the tax on contributions. The Howard error in changes in 2007 was not to start taxing pension fund earnings at that time when they made the pension payments totally exempt


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