End to 'age of entitlement' for seniors' finances?
14 December 2016
Based on the report ‘Age of entitlement: age-based tax breaks' from the Grattan Institute, authored by John Daley, Brendan Coates, and William Young, the Commonwealth Government can save about $1 Billion every year by winding back three tax perks for Australian seniors that do not have sensible policy rationale.
The report cited that seniors pay less tax and get a higher rebate on private health insurance than younger workers on the same income receive as a result of the Seniors and Pensioners Tax Offset (SAPTO), a higher Medicare levy income threshold, and higher Private Health Insurance rebate that are available only to Australian seniors.
Mr. Daley, Grattan CEO, said that “some people think that the tax breaks are a fair reward for paying tax while under 65”.
In the report, it is shown that fewer people are paying income tax, and the number of “taxed-nots” is increasing. This is partly due to tax breaks based on age and the report says “Despite their rising incomes and workforce participation rates, the proportion of over 65s paying tax has halved in the past 20 years”.
Below is a chart found in the report showing that in 1995 27% of people 65 above paid some income tax, which since then has reduced to 14%.
On top of these tax breaks, Australian seniors also receive a better deal when they are paying taxes.
For example, over 65’s on $35,000 pay only $1,129, which is far lower than the $3,447 tax for Australians of working age. For seniors earning $40,000, it is $3,654 compared to $4,947 tax, and for $45,000 it is $6,107 compared to $6,747 for workers.
In an interview, Mr. Daley said that the older generation is “putting less into the tin than previous generations and is now taking a lot more out”. Mr. Daley pointed out that between 2004 and 2010 net budget payments to seniors increased by about $22 billion per year.
The Grattan report also noted that the younger generations have not benefited as much from government budgets, but they will have to pay more future taxes to fill out accumulated deficits. “Each year of deficit between 2010 and 2016 has increased the tax burden on younger households by about $10,000 over their lifetime”. It also reports seniors have more, while working-age taxpayers wealth has stagnated. Over the past decade, the average household wealth increased by 32% mostly among older households, while working-age households have had a very minimal increase.
Even during the global financial crisis, households of over 65s became 47% wealthier. By contrast, younger households are not wealthier than the equivalent households 10 years before.
Three Tax Measures to Wind Back
The Grattan Institute is strongly recommending winding back three tax measures to balance the budget and aims to save $1 billion every year. These measures are:
1. Seniors and Pensioners Tax Offset (SAPTO)
2. Higher Medicare levy income threshold available for seniors
3. Higher private health insurance rebates only available to older Australians
Mr Daley suggests that SAPTO should be exclusively for pensioners, while seniors with enough private income should pay some income tax.
Based on the research conducted by Grattan, these proposed changes will have little effect on the 40% of seniors who are receiving full Age Pension, but will mainly affect those seniors who are more wealthy.
Meanwhile, the government has been warned of backlash if the tax breaks for seniors will be scrapped.
Ian Yates, chief executive of the Council of the Ageing said that the move will spark a voter backlash.
"Look, Australia's full aged pension is one of the tightest, targeted, most modest in any similar country in the OECD. Living on the aged pension is difficult so the fact that we are talking about people who have a little bit more than that does not mean that they are living in luxury: it means that they are getting by, and if you were to take a $1000 or $2000 a year from them that would have a significant impact on their life."
Mr. Yates says that retirees are living modest lives and they are already suffering from recent government belt-tightening.
"And these tax breaks are not going to save the kind of money that we could look at if we were to close quite a few other tax loopholes that substantially benefit people on hundreds of thousands of dollars a year. I think that there would be a significant reaction if the Government was to adopt the recommendations of the Grattan Institute."
Heartland Can Help
Seniors who are already concerned about making ends meet are likely to become more so if the government decides to wind back these tax breaks. They may experience cash flow difficulties, and have insufficient funds for needs such as aged care, medication, and daily living expenses.
Those who are likely be affected by any changes in the tax measures can seek a reverse mortgage loan from Heartland that can provide seniors with:
● The ability to have funds advanced by lump sum, regularly over five or ten years, or set aside to drawdown when required (or a combination).
● The ability to access equity in your residential property, turning illiquid assets into cash or income.
● A highly competitive variable interest rate and low set up fees.
A Heartland Reverse Mortgage is available to homeowners aged 60 and over, with no maximum loan amount and competitive criteria. For a 75 year old, they could be eligible up to 30% of the property value.
Find out more
If you have any questions please feel free to request an information pack or contact our friendly team on 1300 889 338 or [email protected] We are here to help you.