SOCIAL SECURITY AND VETERANS' AFFAIRS LEGISLATION AMENDMENT (PENSION BONUS SCHEME) BILL 1998
MAY 1998
© Commonwealth of Australia 1998
ISSN 1440-2572 |
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Senate Standing Committees on Community Affairs
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Canberra ACT 2600
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MEMBERSHIP OF THE COMMITTEE
Members
| Senator Sue Knowles, Chairman |
LP, Western Australia |
| Senator Andrew Bartlett, Deputy Chair |
AD, Queensland |
| Senator Kay Denman |
ALP, Tasmania |
| Senator Alan Eggleston |
LP, Western Australia |
| Senator Michael Forshaw |
ALP, New South Wales |
| Senator Ross Lightfoot (from 15 May 1998) |
LP, Western Australia |
Former Members during the inquiry
| Senator Karen Synon (until 29 April 1998) |
LP, Victoria |
| Senator Kay Patterson (from 30 April 1998 to 14 May
1998) |
LP, Victoria |
Participating Members
| Senator Eric Abetz |
LP, Tasmania |
| Senator Bob Brown |
Greens, Tasmania |
| Senator the Hon Bob Collins |
ALP, Northern Territory |
| Senator Mal Colston |
Ind, Queensland |
| Senator Barney Cooney |
ALP, Victoria |
| Senator the Hon Rosemary Crowley |
ALP, South Australia |
| Senator Chris Evans |
ALP, Western Australia |
| Senator the Hon John Faulkner |
ALP, New South Wales |
| Senator Brenda Gibbs |
ALP, Queensland |
| Senator Brian Harradine |
Ind, Tasmania |
| Senator Sue Mackay |
ALP, Tasmania |
| Senator Dee Margetts |
GWA, Western Australia |
| Senator Shayne Murphy |
ALP, Tasmania |
| Senator Belinda Neal |
ALP, New South Wales |
| Senator Kay Patterson |
LP, Victoria |
| Senator the Hon Margaret Reynolds |
ALP, Queensland |
| Senator Sue West |
ALP, New South Wales |
| Senator John Woodley |
AD, Queensland |
REPORT - SOCIAL SECURITY AND VETERANS' AFFAIRS LEGISLATION AMENDMENT (PENSION BONUS SCHEME) BILL 1998.
THE INQUIRY
1.1 The Social Security and Veterans' Affairs Legislation Amendment (Pension
Bonus Scheme) Bill 1998 was introduced into the House of Representatives
on 26 March 1998 and into the Senate on 13 May 1998. On 1 April
1998, the Senate, on the recommendation of the Selection of Bills Committee
(Report No. 4 of 1998), referred the provisions of the Bill to the
Committee for report by 13 May 1998. The reporting date was subsequently
extended to 27 May 1998.
1.2 The Committee considered the Bill at a public hearing on 15 May 1998.
Details of the public hearing are referred to in Appendix 2. The Committee
received three submissions relating to the Bill and these are listed at
Appendix 1.
2. THE BILL
2.1 The Social Security and Veterans' Affairs Legislation Amendment (Pension
Bonus Scheme) Bill 1998 provides for the introduction of a pension bonus
scheme for retirement age persons. The Scheme gives effect to an election
commitment to introduce a `Pension Bonus Plan' and also forms part of
a commitment expressed in the Budget to encourage self-reliance.
2.2 Under the Scheme, a person who qualifies for an age pension (or corresponding
payment from the Department of Veterans' Affairs (DVA)) but defers claiming
that payment may be entitled to receive a tax-free lump-sum bonus payment,
provided that the person passes the work test (that is, the person or
the partner works at least an average of 20 hours per week over 48 weeks
of the year – equivalent to 960 hours per year – or the pro
rata equivalent for a part year). This therefore, excludes persons who
may wish to access the Scheme whose main income and means of support is
other than work, for example, investments, superannuation, overseas pensions,
or as a silent partner in a business. A person must also register as a
member of the Scheme with Centrelink or DVA within 13 weeks of first qualifying
for the age (or equivalent DVA) pension. [1]
2.3 A person can accrue a bonus of between one and five years from the
time they first qualify for the age pension (or equivalent Veterans Affairs
payment) until they reach 75 years of age. The amount of pension bonus
payable is calculated by multiplying the annual basic rate of age pension
payable to the person at grant by the bonus percentage (9.4 per cent for
each year). This amount is then multiplied by the number of years worked
(up to a maximum of 5 years). People who have accrued the minimum of a
one year bonus under the Scheme may claim the bonus when they choose to
retire from the workforce. [2]
2.4 The objectives of the Pension Bonus Scheme are to:
- increase labour market participation of retirement age persons;
- allow people who defer their pension to increase their retirement
savings during the deferment period; and
- restrain growth in pension outlays. [3]
2.5 The Scheme also recognises the contribution made by people who remain
in employment and defer their age pension by providing a reward for this
behaviour. The Scheme has a strong labour market focus, being targeted
at those who already have a substantive attachment to the workforce upon
reaching retirement age, and intend to continue to undertake substantial
work. [4]
2.6 The Minister in the Second Reading Speech stated that:
This scheme…is designed to provide an incentive for older Australians
to remain in the workforce. The scheme is voluntary and each person can
choose to enter the scheme based on their particular circumstances and
preferences. By choosing to work longer, people can add to their individual
savings for retirement. [5]
3. ISSUES
Numbers affected and financial implications
3.1 The Australian Council of Social Service (ACOSS) and the Australian
Pensioners' and Superannuants' Federation (APSF) sought clarification
of the likely take-up and financial impact of the proposed Scheme. [6] The Departments of Social Security (DSS) and Veterans'
Affairs stated that the Scheme will encourage 18 per cent of new pension
claimants (who at the time of claiming are in the workforce) to continue
working and earn a bonus rather than stop working and claim the pension.
DSS/DVA estimate that 34 000 people will participate in the Scheme
in the first four years of its operations. [7]
3.2 Data provided by DSS and DVA indicate that the Scheme will entail
a net cost of $4.97 million in 1997-98 and net savings of $18.4 million
in 1998-99, $43.7 million in 1999 -00 and $44.7 million in 2000-01.
The Scheme is expected to be cost neutral in the longer term (over 22
years). [8]
Potential beneficiaries under the Scheme
3.3 ACOSS and APSF claimed that there is potential for higher income
earners to make `windfall gains' from the Scheme by running down their
assets or income in order to qualify for the pension at the end of the
bonus accrual period. [9] ACOSS acknowledged,
however, that `it is not certain that many people would do this'. [10]
3.4 DSS and DVA noted, however, that the Scheme provides that a bonus
payment can only be made to a person who is able to claim and receive
an age (or equivalent DVA) pension within 13 weeks of their retirement
or within 13 weeks of failing to meet the work test requirements for a
year. The 13 week limits were included to minimise the capacity of people
to disperse or reduce their retirement savings following the cessation
or reduction in work. In addition, the Scheme features a gifting preclusion.
This has the effect of preventing people who gift more than $10 000
in a year from accruing a pension bonus for five years from the date the
gifting took place. [11]
3.5 ACOSS and APSF claimed that there should be a means test at registration
for the Scheme and during the accrual of the bonus to prevent high income
earners claiming a bonus. [12] DSS and DVA stated, however, that there is no
means test at registration because the `existing means testing arrangements
would provide significant anomalies and inequities if they were used for
people who had retirement savings but have not yet structured their investments
for retirement'. [13]
Possible displacement effects
3.6 DSS and DVA advised the Committee that the model used to estimate
the changes to pension outlays as a result of the introduction of the
Scheme uses a 30 per cent displacement to labour market payments. The
displacement factor relates to 30 per cent of single people, and a corresponding
ratio for couples who choose to defer the age pension because of the existence
of the Scheme. The displacement rate is made up of two factors, namely
the proportion of those finding work/staying in work who displace other
workers and the proportion of those displaced going onto income support.
[14] DSS stated that the displacement ratio adopted
is a `reasonable robust figure'. [15]
3.7 DSS and DVA suggested that it is difficult to determine the extent
that young people would be displaced from employment as a result of the
introduction of the Scheme. DSS/DVA stated that some displacement may
occur in some sectors such as the retail industry, but any displacement
in the self employed and small business sectors would likely to be significantly
less. Overall, the Departments argued that the labour market displacement
effect on young people would be `modest'. [16]
3.8 APSF also argued that overseas research on labour force participation
rates of older workers shows no evidence to suggest that `keeping older
people in employment takes jobs away from younger people'. [17]
Advice for participants in the Scheme
3.9 The Committee believes that adequate and timely advice needs to be
made available to people utilising the Scheme. DSS and DVA advised the
Committee that both Departments have developed administrative processes
to assist people in making an informed choice regarding participation
in the Scheme. [18] DSS stated that `we recognise that this will
be an important decision for older people. For this reason, we will ensure
there is ample advice available to them so they understand the full implications
of the scheme before they decide to register.' [19] APSF noted that an extensive publicity and education
campaign will be required to assist people in assessing whether participating
in the Scheme will be in their best interests. [20]
3.10 DSS and DVA stated that people approaching Centrelink to register
for the bonus will be referred to a Financial Information Service (FIS)
officer and provided with information about the Scheme and its application
in their individual circumstances. Additional FIS resources have been
provided as part of this initiative. Registered members of the Scheme
will also receive an annual mailout from Centrelink to provide additional
information (such as whether they should consider claiming pension rather
than continuing in deferment) and reminding them of the rules governing
the scheme. In addition, Centrelink will be working very closely with
the financial community to ensure they have sufficient information and
understanding of the Scheme so as to correctly advise their clients for
retirement planning purposes. [21]
4. RECOMMENDATION
4.1 The Committee reports to the Senate that it has considered the Social
Security and Veterans' Affairs Legislation Amendment (Pension Bonus Scheme)
Bill 1998 and recommends that the Bill proceed.
Senator Sue Knowles
Chairman
May 1998
Additional Comment by Senator Forshaw and Senator Denman
AUSTRALIAN LABOR PARTY
SOCIAL SECURITY AND VETERANS' AFFAIRS LEGISLATION AMENDMENT
(PENSION BONUS SCHEME) BILL 1998
A number of significant issues were raised in relation to this Bill during
the public hearing on 15 May 1998. Some of these issues are still of concern
and raise doubts about the value of the scheme.
Perhaps the most significant concern involves the numbers of people who
are likely to benefit from the scheme who would have continued in the
workforce beyond pension age regardless. These people stand to receive
a windfall gain for doing what they would have done in any event. According
to the joint Departmental submission it is estimated that 60,090 prospective
social security pensioners will register for the scheme in 1998-1999 and
that 52,938 or some 88% of these people would have continued working regardless
of the scheme. It is further estimated that of the additional 18,869 prospective
social security recipients likely to register for the scheme in 1999-2000,
13,403 or over 70% would have deferred retiring in any event. Of the 20,361
expected to defer retirement in 2000-2001, 12,900 or 63% would probably
have deferred regardless of the scheme (Submission No.3, Table 2).
It was submitted by the Departments that the savings generated by those
who changed their behaviour would offset the costs of those who received
a bonus for doing what they would have done in any event (Submission No.3,
page 5). The truth of this submission would have to depend upon its underlying
assumptions, for example the length of time people are likely to defer
retirement as a result of the scheme and hence the percentage of their
pension entitlement they might expect to receive as a bonus. It still
appears that the cost implications of the scheme are far from clear.
A further concern involves the likely effects of the scheme upon younger
workers. It has been assumed that 30% of those who defer retiring because
of the scheme will displace younger workers. In their joint submission
the Departments concede that there is no hard evidence to support this
assumption (Submission No.3, page 7). If the assumption is correct it
is an important factor to be taken into account in assessing the scheme.
The fact that it is a mere assumption and that the true displacement implications
are unknown is also a matter of concern.
In summary, both the direct and indirect costs of the scheme appear uncertain.
It is something of an experiment, the results of which are unlikely to
become apparent for quite some time to come.
With these reservations, the Labor Opposition does not oppose passage
of the Bill.
Senator Michael Forshaw Senator Kay Denman
(ALP, New South Wales) (ALP, Tasmania)
APPENDIX 1
Submissions received by the committee
| 1 |
Australian Council of Social Service |
| 2 |
Australian Pensioners' & Superannuants' Federation |
| 3 |
Departments of Social Security and Veterans' Affairs |
APPENDIX 2
Public hearing
A public hearing was held on the Bill on 15 May 1998 in Senate Committee
Room 2S1.
Committee Members in attendance
Senator Sue Knowles (Chairman)
Senator Kay Denman
Senator Alan Eggleston
Senator Michael Forshaw
Senator John Woodley
Witnesses
Australian Pensioners' & Superannuants' Federation via
teleconference
Mr Gerard Thomas, Policy Officer
Ms Sarah Fogg, Executive Officer
Department of Social Security
Ms Kerry Flanagan, Executive Director
Mr Evan Mann, Assistant Secretary, Retirement Programs Branch
Ms Judy Cook, A/g Director, Retirement Monitoring and Evaluation Section,
Retirement Programs Branch
Mr Stuart Long, Legal Services Branch
Department of Veterans Affairs
Mr Bob Hay, Branch Head, Income Support
Mr Trevor Hughes, Director, Business Administration
FOOTNOTES
[1] Explanatory Memorandum, pp.i, 5-10.
[2] Explanatory Memorandum, p.i; Submission
No.3, pp.2-3.
[3] Submission No.3, p.3.
[4] Submission No.3, pp.1-2.
[5] Minister's Second Reading Speech
[6] Submission No.1, pp.1-2; Submission No.2,
p.2.
[7] Data based on DSS/DVA figures as agreed
with the Department of Finance and Administration. See Submission No.3,
p.5.
[8] Committee Hansard, 15.5.98, p.37.
For further details of expected take-up and the financial impact of the
Scheme see Submission No.3, p.5; and financial impact statement in the
Explanatory Memorandum.
[9] Committee Hansard, 15.5.98, p.33;
Submission No.1, p.2; Submission No.2, p.2.
[10] Submission No.1, p.2.
[11] Submission No.3, p.6; Committee Hansard,
15.5.98, p.35.
[12] Committee Hansard, 15.5.98, pp.33-34;
Submission No.1, p.2; Submission No.2, p.2.
[13] Submission No.3, p.6.
[14] Submission No.3, p.8.
[15] Committee Hansard, 15.5.98, p.38.
[16] Submission No.3, p.9. See also Submission
No.1, p.3; Committee Hansard, 15.5.98, p.38.
[17] Submission No.2, p.6.
[18] Submission No.3, p.7.
[19] Committee Hansard, 15.5.98, p.36.
[20] Submission No.1, p.5.
[21] Submission No.3, p.7.