The release of the 2023 Intergenerational Report confirms what most people already know – that Australia is ageing rapidly.

The report, which forecasts what the country could look like in 40 years, believes the number of people aged 65 and over is projected to more than double, while the number 85 and over is going to more than triple.

Health, aged care, NDIS, defence and interest payments on debt will account for 50% of Commonwealth spending in 40 years’ time. These sectors currently account for one-third of total spend, but by 2062-63, expenditure on these five categories was expected to rise by about $140 billion or 5.6% of GDP.

Does it have to be this way?

Given the pressure this increase will place on the Federal Budget, the report paves the way for the Federal Government to make changes to the Age Pension income test to enable seniors to work and retain more of their salary.

Currently if a single pensioner is able to earn $75,000 by working in addition to their $25,000 pension, they would have a taxable income of $100,000 and pay $25,000 in tax. Therefore, the single pensioner has paid for their pension by working and would have only $7,500 in additional superannuation to fund their retirement.

If income earned from being employed was exempt from the income test for pensioners with limited savings or assets, that could then see more job vacancies filled.

Equally, the pensioners being paid a salary would pay additional income tax – increasing the tax base.

How the Age Pension is currently calculated 

Currently, the Age Pension is reduced by 50 cents for every dollar of income per fortnight over $204 for single pensioners ($5,304 a year) and $360 for couples ($9,360 a year).

A single pensioner with an income of $1,000 per fortnight would be limited under the income test to the single rate pension of $1,064 less ($1,000 minus $204 times 50% = $1,064 minus $398 = $666.

It’s perhaps not a surprise than that consumer peak body National Seniors is calling for a reduction in the income test taper rate from 50 cents to 32.5 cents in the dollar, in the belief it will remove the disincentive for pensioners to work or increase their working hours.

In New Zealand, the Age Pension is already exempt from the income test if seniors continue to work. They are only taxed on their salary.

Could it work here?