Effective marginal tax rates driving seniors out of the workforce

Seniors receiving an age pension are shying away from being active in the workforce after being faced with exorbitant effective marginal tax rates.

Recent research from super fund HESTA has revealed that older Australians on an age pension often face effective marginal tax rates of 60 per cent to 80 per cent – driving them away from contributing to the workforce.

For those of an older demographic wanting to work, HESTA commissioned a report to assess how employment income affected age pension eligibility and take-home pay.

Based on the findings, it was revealed that while Australians in the top income bracket were often considered to pay the highest tax rates, age pensioners were actually hit with higher effective rates due to the income test taper rate.

Therefore, under Australia’s tax system, a part pensioner’s age pension benefit was reduced by 50¢ for every dollar earned above the income-free threshold.

HESTA’s modelling revealed that a single pensioner who increased their annual employment income from $25,000 to $30,000 could pay an effective tax rate of 77 per cent on that extra income, and as their employment income increased by $5,000, their take-home income rose by just $1,150.

Debby Blakey, HESTA CEO, said the research emphasised the need to provide more flexibility for retirement-age Australians wanting to work.

“We recognise the retirement experience of each Australian is unique, and flexibility is important to support both financial and mental wellbeing. That’s why we’re concerned by the significant disincentives within the current system for older Australians who wish to remain active in the workforce,” she said.

“For our members, who are largely in the health and community services sector, working in retirement has a multitude of benefits for them and the community. Part-time or casual work in retirement helps people retain a sense of purpose and fulfilment, while addressing critical workforce demands and boosting the broader economy.”

Blakey said the research was significant and impacted a large proportion of seniors, as around 70 per cent of HESTA members were currently employed in the health and community services sector – Australia’s second-largest industry and one facing significant staffing challenges.

In addition to this, more than 80,000 members of the super fund were age-eligible for the pension and over 30,000 of these members remained active in the workforce.

Blakey said this demonstrated the significant contribution older Australians continued to make, not only in supporting the health and community services sector but also in strengthening financial resilience and independence.

“We continue to hear stories from members on the pension who would like to work more but are put off by the extremely effective marginal tax rates,” she said.

“By removing barriers, we can unlock greater opportunities for individuals in retirement, while delivering significant benefits to society as a whole.”

From the research, the super fund has outlined measures it called for to support a fairer system, such as indexing the work bonus payments thresholds to average weekly ordinary time earnings and a review and simplification of the age pension tax offset rules.