Pension and income tax reform proposal

From the web page at http://apsl.com.au/ ;

APSL calls for immediate increases for all pensioners

By natasha | September 9, 2008

It has been many years since there has been a full review undertaken of the Australian Pension System and as a result of that failure it has become apparent that the Australian Pension System, in terms of its base rate and the marginal tax rate that applies to all pensions has become totally inadequate for pensioners to maintain an adequate community lifestyle.

The Australian Pensioners’ and Superannuants’ League Qld Inc at the Pension Review have called for:



From http://news.smh.com.au/national/two-million-elderly-aussies-on-pension-20080811-3t4j.html ;

“Two million elderly Aussies on pension

Almost 80 per cent of Australians aged 65 and over are on the pension, mostly with very little other source of income, a federal government review has found.

The government's Pension Review background paper, released on Monday, found more than two million older Australians receive a full or part aged pension or related payment.

The paper also found Australian pensioners to be worse off than their counterparts in other western industrialised countries, with a pension rate below the OECD average.

“The single pension rate, at $273 a week, is only 60 per cent of the combined couple rate of $456 a week.

This makes Australia's single pensioners worse off than their counterparts in other OECD countries, where the average single pension is 63 per cent of the couple rate.

National Seniors Australia chief executive Michael O'Neil said single pensioners should be paid two thirds, or 66 per cent, of the combined couples rate.



From http://www.nzherald.co.nz/nz/news/print.cfm?c_id=1&objectid=10512001&pnum=0 ;

“Pensioners will be better off in New Zealand than in Australia from October this year, if you ignore the exchange rate.

The elderly are among the biggest winners from yesterday's Budget, with a package of measures including:

* A $23 a week rise in the after-tax married pension to 51 per cent of the before-tax average wage, compared with 39 per cent in Australia.

* Free public transport at off-peak hours, compared with only discounted fares in Australia.

* A jump in the subsidy for hearing aids, which audiologists describe as the biggest increase in decades.

* A promised rebate on power bills to take effect when electricity enters the proposed emissions trading scheme.

* A long-promised increase in allowances for grandparents raising grandchildren (see separate story).

Grey Power vice-president Bob Buchanan said older New Zealanders would be "very pleased" with the package.

"With petrol and food increases, people on fixed incomes that are relying on New Zealand superannuation are feeling the pinch, and any aid they can get to this group of people Grey Power is right behind."

He said buses were almost empty at off-peak times, and it made sense to let superannuitants ride in them.

The net married pension, paid universally to everyone from age 65, was raised from 65 per cent to 66 per cent of the net average wage after the last election as part of a deal with New Zealand First.

It will go up again, from $439.80 to $462.74 a week, or 51 per cent of the gross average wage, on October 1 to keep pace with the increase in the net average wage resulting from the Budget tax cuts.

In Australia, the pension is means-tested and income-tested, and the maximum married pension is A$456.80 ($560.32), or just 39 per cent of the before-tax average wage.

The new subsidies for off-peak public transport, hearing aids and power bills will be limited to people aged 65 and over with "SuperGold Cards" - a new discount card that was also an NZ First initiative.

The scheme was criticised when it was launched last August because it failed to include significant discounts for either public transport or power, which attract discounted fares and a A$500 ($612) annual utility allowance in Australia.

But NZ First leader Winston Peters has effectively trumped even the Australian scheme by negotiating an $18 million a year payment to public transport providers to fund completely free, off-peak travel for superannuitants.



From http://wotnews.com.au/like/average_weekly_wage_rises_to_1110/1726099/

“The average weekly wage in Australia is now $1,110.20, after growing by a solid 4.7 per cent in the year to November.. Thu Feb 2008 10:02 (9 months ago)”

From http://wotnews.com.au/like/average_weekly_wage_now_1131/2351998/ ;

“The average weekly wage in Australia is now $1,131.. Thu Aug 2008 01:08 (3 months ago)”

From http://wotnews.com.au/like/average_weekly_wage_now_1147/2697531/ ;

“The average weekly wage in Australia is now $1,147.20, after growing by 4.7 per cent in the year to August.. Thu Nov 2008 10:11 (5 days, 14 hours ago)”



From http://www.treasury.govt.nz/publications/research-policy/wp/2004/04-22/05.htm ;

“New Zealand has a two-tier system of retirement income provision. The first tier is provided by NZ Superannuation. This is a universal public pension, funded on a pay-as-you-go basis from general taxation. There has been some form of NZ Superannuation since 1938 (and an age pension dating from 1898) and the electorate is committed to maintaining this form of public pension.[8] The second tier consists of voluntary private provision by individuals to enhance their standard of living in retirement. Some of the wealth observed by the Household Saving Survey is likely to have been accumulated by households to provide this second tier of retirement income, although the role of private provision generally in New Zealand has been rather limited.

The key feature of NZ Superannuation is that it is paid to everyone aged over 65 who meets a residency requirement,[9] at a standard amount that is unrelated to previous earnings. There is no income or asset test to determine eligibility. Recipients are also eligible for other forms of means-tested income support (including accommodation allowances), on the same basis as people of any age. Over 93 percent of people over age 65 receive NZ Superannuation. Because of this (almost) universal eligibility, O’Connell (2004) considers NZ Superannuation to be an example of a “Citizen’s Pension” – a basic amount payable to all citizens.

The level of NZ Superannuation benefits is reviewed each year, but legislation mandates that it has to be kept between 32.5 and 36.25 percent of the net average wage. This is usually described by ‘65 at 65’, that is, at age 65 a married (or cohabiting) couple will receive at least 65 percent (two times 32.5 percent) of the net average wage. The married person rate is the base rate for NZ Superannuation, and the rates for single pensioners living alone and single pensioners sharing accommodation are set higher to reflect the extra costs of maintaining either single-person or shared, non-cohabiting households. In 2003, the rate for a single person sharing accommodation was equivalent to 40 percent of the average weekly wage, while for those living alone it was equivalent to 44 percent (MSD, 2003).

[8]In a 1997 referendum, 92 percent of voters (with a turnout of 80 percent in a postal ballot) voted against replacing NZ Superannuation with a compulsory private savings system.

[9]A person must have lived in New Zealand for ten years since age 20, five of which must be since age 50.



From http://www.ipss.go.jp/publication/e/R_S_P/No.10_P107.pdf , which compares the pension systems in Australia, the Netherlands, and Switzerland, from the part relating to the Netherlands;

This blurring of the tax and contributory system remains an important unresolved question in Dutch social policy, although legislation to change the tax system is high on the political agenda. This especially affected the position of married women. If a woman was working, the tax was based on the higher family income; if she was not doing any outside paid labor, she did not pay any contributions and was covered by her husband’s contributions. Therefore, it was the husband who received the pension, since the wife did not earn a pension in her own right. This later became a political issue, and the rules were changed to recognize wives as individuals rather than spouses. The size of the pension would be equal for everyone but take account of household structure. A single person gets 70% of the base amount, which was eventually set at the net minimum wage level. A couple originally got 100%, to take account of economies of scale in household size, but after the rule change each couple received 50% of the base amount.”

I assume that the last part of the last sentence in that paragraph, should instead read

but after the rule change each member of a couple received 50% of the base amount.



From http://www.acoss.org.au/upload/publications/papers/info 347_taxation.pdf (I note that the document is dated 2003, but it is a useful starting point for the material below);

1. Confusion between marginal and average tax rates

First, some people confuse average and marginal income tax rates, believing that the marginal tax rate applies to all of their income. Others understand the distinction but wrongly focus their attention of marginal tax rates when the average rate is the true measure of the extent of taxation.


The marginal tax rate only tells us how much we paid on the next dollar earned. The average or overall rate of tax is a better indicator of how much tax we pay, and in progressive income tax systems this is always lower than the marginal rate of tax. The table below compares marginal and average tax rates applying to different income levels. It shows, for example, that a person on $60,000 paid a marginal tax rate of 42% on their last dollar earned, but an average tax rate of just 26% on all of his or her income.


Table 1 Marginal vs average tax rates


Annual taxable income

Marginal tax rate

(tax rate on the last dollar earned)

Average tax rate

(tax rate on all income)

$6,000

0

0

$20,000

17%

12%

$50,000

30%

23%

$60,000

42%

26%

$100,000

47%

34%



Note: Does not include Medicare Levy or any deductions or tax offsets”



From http://www.stuff.co.nz/print/4762726a28477.html , a news story about the formation of the new NZ government;

“National has agreed to support a bill through its first reading on income splitting, although not beyond that.

Income splitting is a United Future policy and involves a single income family being able to split its income between spouses so less tax is paid.



Now, from all of the above information;

  1. From the information from the APSL, the single pension weekly rate of $273, is apparently 25% of the average weekly wage, so, the average weekly wage would appear to be $1092.

  2. If the single pension rate is increased to 30% of the average weekly wage, using that amount, that would take the single pension weekly rate to $327.60, an increase of $54.60 per week.

  3. As finance is the primary source of disharmony between married couples, a single pension should be paid to each partner in a marriage, where the partner would qualify in the person's own right, for the pension, with the pension not being means-tested; either on the value of assets, or on the value of income, as it is similarly not means-tested in NZ. That would also give each partner, recognition as a person, in the person's own right.

  4. The single pension rate should apply to all adult social welfare beneficiaries, be the recipient, an unemployed person, an invalid pensioner, an aged pensioner, or whatever else makes the person eligible for full income support.

  5. As is provided in NZ, to aged pensioners, so also, in Australia, should free public transport be provided to social welfare recipients (here included, instead of just pensioners, as in NZ), during off-peak times, to make better use of public transport, and to reduce expenses for social welfare beneficiaries.

  6. Income should be taxed at a single tax rate, with the tax-free threshold being the single pension rate, and the tax rate being 37%, which includes the equivalent of a 2% public health tax component, increased from the current medicare levy rate of 1.25%, to provide for more adequate funding of public health. This would give an annual tax-free threshold (using the average weekly wage rate of 1092) of $17035.20.

  7. The pension rate and thence the tax-free threshold, should be reassessed before and for the start of each new financial year, so as to be implemented from the start of each new financial year.

  8. Income splitting for married couples, should be implemented for assessment of income tax, so that, for a married couple, the total income of the couple, is averaged over the two people, for income tax assessment, and, in the context of the single, flat tax rate, that would mean simply, double the tax-free threshold. Where an employee has a dependent spouse, the employee makes that declaration on the tax declaration on the commencement of employment, and then, at the start of each tax year.


Using the above table of Marginal vs Average Tax rates, and, incorporating the proposed single flat tax rate, of 37%, with an annual tax-free threshold of $17035.20, gives


Annual taxable income

Bracketed Marginal tax rate

(tax rate on the last dollar earned)

Average tax rate for bracketed tax

(tax rate on all income)

Average tax rate for flat tax rate

(tax rate on all income)

$6,000

0

0

0

$20,000

17%

12%

5%

$50,000

30%

23%

24%

$60,000

42%

26%

26%

$100,000

47%

34%

31%




Now, the Flat Average Tax Rate includes the higher public health levy, so as to provide more public health provision, including, for example, an annual fully publicly funded medical examination, which should result in less personal expenditure on public health, and, also, with the income splitting, as proposed, married couples would be better off, as, apart from having more disposable income, their marriages should be more stable and harmonious, due to less financial problems. And, this should, by way of greater disposable incomes, boost the economy.


And, this proposal should, apart from anything else, strengthen marriages within Australia, due to married couples having more disposable income, and, due to spouses being finally recognised by the federal government, as people in their own right.


It must be noted, that the current average weekly income is now, at November 2008, from the above information, $1147.20, per week, so the above proposed pension rates and income tax figures, need to be adjusted for that.


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This web page was last updated on 19 November 2008.