The old age of entitlement

By Leith van Onselen

The Grattan Institute has released a new report entitled “Age of entitlement: age-based tax breaks”, which finds that the Commonwealth Government could save about $1 billion a year by winding back three tax breaks for older Australians that are unduly generous and have no sensible policy rationale.

The report documents how seniors pay less tax and get a higher rebate on private health insurance than do younger workers on the same income.

They do so through generous policy changes implemented over the last 20 years, namely: the Seniors and Pensioners Tax Offset (SAPTO); a higher Medicare levy income threshold; and higher private health insurance rebates that are available only to older Australians.

Below are the key extracts from this report:

…large tax breaks for seniors are a relatively new invention that were not provided to the previous generation of seniors… Policy choices benefiting seniors coincided with the rise in the proportion of voters aged 55 and over, who are retired or planning for it. These included more generous age-base tax breaks from 2000, big tax cuts for superannuation in 2006 and large increases to the pension in 2009, as well as large increases in health spending per older person.

Over the last decade the net transfer to each 65-and-over household increased by almost $10,000 per household, while the changes for other age groups were not material (Figure 1.2). Between 2004 and 2010 net transfers to older households increased by about $22 billion a year, or about half the Commonwealth government’s budget deficits of recent years…

More is being taken from the piggy bank than anyone is contributing. The scale of the transfer between generations must be wound back.

Younger households have not benefited as much from government budgets, yet they will pay substantially higher future taxes to repay 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…

Age-based tax breaks overwhelmingly favour senior households and are a major cause of the increased net transfers to them. Senior households pay less income tax in real terms today than did households of the same age 20 years ago, even though both their workforce participation rates and their incomes have jumped…

The introduction of tax offsets for seniors and the decision to make super withdrawals tax-free for over 60s has also increased the number of income “taxed nots” aged over 65 (Figure 1.4).

In 1995, before special tax offsets were introduced for senior Australians, about 27 percent of seniors paid income tax. After the introduction of the Low Income Aged Persons Rebate in 1996 and then the Senior Australians Tax Offset (a precursor to SAPTO) in 2000, only 15 per cent of seniors paid income tax.

In 2007, the abolition of taxes on superannuation withdrawals further reduced the proportion of seniors paying income tax.

The effects of these changes were compounded by large general income tax cuts in the mid-2000s and by the global financial crisis. As a result just 13 per cent of seniors paid personal income tax in 2009-10. The proportion of seniors paying income tax rose to 16 per cent in 2013-14 as financial markets recovered, and bracket creep increased the number of people of all ages paying tax…

The increase of budgetary transfers – more benefits and lower taxes – to senior households might have been justified if those households had been facing increased financial pressures. But in fact, these transfers came just as older households were capturing an increased share of the nation’s resources.

Over the ten years to 2013-14, average household wealth grew by 32 percent. Older households captured most of this growth while younger households’ wealth stagnated…

This report focuses on reforms to three age-based tax breaks:

1. the Seniors and Pensioners Tax Offset (SAPTO);

2. the higher Medicare levy thresholds for older Australians; and

3. the more generous Private Health Insurance rebate available to seniors.

These tax breaks should be wound back. The budget cannot afford them, they exacerbate unsustainable transfers between younger and older taxpayers, and they are poorly designed for either supporting the most vulnerable or for increasing older age workforce participation…

SAPTO is a tax offset that reduces the personal income tax paid by senior Australians… Tax offsets such as SAPTO increase how much income a person can earn before they pay any tax. A senior can have income of $32,279 before paying any tax, almost 60 per cent higher than the income at which a working Australian starts to pay income tax ($20,542) (Figure 2.1)…

As senior Australians have a higher effective tax-free threshold, they can also earn more than working-age Australians before they must pay any Medicare levy. The levy is only payable if the taxable income of a senior is more than $33,738, compared to $21,335 for a working age Australian (or $46,966 for a senior couple combined compared to $36,001 for a working-age couple combined)…

Age-based tax breaks hurt the Commonwealth budget. They make already unsustainable transfers between generations worse, and they are unfair to younger households. They are not a fair reward for a lifetime of paying tax because these benefits were not available to previous seniors, and seniors today receive much more from government services than in the past. In their current form they serve no plausible policy purpose: they are poorly targeted, and do little to increase either retirement incomes, seniors’ workforce participation, or savings…

Recommendation 1: Wind back SAPTO so that it is available only to pensioners, and so that those who do not qualify for a full Age Pension pay some income tax…

Recommendation 2: Impose the Medicare levy on seniors at the level where they are liable to pay some income tax under Recommendation 1…

Recommendation 3: Provide a Private Health Insurance rebate at the same rate for Australians irrespective of age.

Full report available here.