The federal government could shrink its budget deficit by a billion dollars a year by cracking down on unduly generous tax breaks for over 65s, says the Grattan Institute.
Its new report, Age of Entitlement: Age-based Tax Breaks, shows the proportion of over 65s who pay income tax in Australia has halved in the past 20 years.
It says three age-based tax breaks for seniors have contributed to the large reduction in their income tax and ought to be wound back.
The report says its proposed changes would have little effect on the 40% of seniors who receive a full age pension. They would most affect seniors who are wealthy enough to receive no pension or just a part-pension, it says.
The three tax breaks are: the seniors and pensioners tax offset (Sapto), a higher Medicare levy income threshold, and higher private health insurance rebates available only to older Australians.
Sapto is a tax offset that reduces the personal income tax paid by senior Australians. Its maximum value in 2016-17 is $2,230 for a single person or $1,602 for each member of a couple, the report says. It is available to people who have reached the current pension age of 65, whether or not they qualify for the age pension.
The Grattan Institute says it should be wound back so that it is available only to pensioners.
The institute also says the Medicare levy income threshold ought to be reduced for seniors so that only pensioners with income under $27,000 (for singles) or $42,000 (for couples) pay no Medicare levy. At the moment, seniors earning up to $33,738 (singles) or $46,966 (couples) pay no Medicare levy.
The Grattan Institute says pensioners earning more than these thresholds should pay Medicare levy at the current rate of 10 cents for every additional $1 earned until equal to 2% of taxable income.
These changes would reduce the maximum value of the higher Medicare levy threshold from $675 to $540 for singles and from$470 to $420 for each member of a couple.
The Grattan Institute also says higher private health insurance rebate rates for seniors should be reduced to the same levels as apply to younger workers with similar incomes.
It says winding back Sapto and the Medicare levy income threshold would save about $700m a year.
Reducing the private health insurance rebate so that seniors got the same rebate as younger Australians would save about $250m a year.
John Daley, the director of the Grattan Institute, said the three tax breaks were difficult to justify.
“Some argue that the tax breaks are a fair reward for paying tax while under 65,” he said.
“But in fact, large tax breaks for seniors are a relatively new invention not provided to previous generations. The current generation of seniors receives much more than its predecessors from government spending, particularly on health.
“Age-based tax breaks are badly designed to achieve valid policy purposes, such as increasing workforce participation or preserving adequate retirement incomes for poorer Australians.
“They might have been affordable when they were introduced over the past 20 years but the country can no longer afford the bill,” he said.
The report shows how numerous policy changes over the last 20 years have led to a situation where older Australians are paying far less income tax than their predecessors.
It says in 1995, before special tax offsets were introduced for senior Australians, roughly 27% 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% 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% of seniors paid personal income tax in 2009-10, the report says.
Then the proportion of seniors paying income tax rose slightly to 16% 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,” the report says.
“But in fact, these transfers came just as older households were capturing an increased share of the nation’s resources.
“Over the 10 years to 2013-14, average household wealth grew by 32%. Older households captured most of this growth while younger households’ wealth stagnated.
“Despite the global financial crisis, households aged between 65 and 74 years today are $400,000 (or 47%) wealthier in real terms than households of that age 10 years ago.
“By contrast, households aged 25 to 34 years are no more wealthy than the equivalent households a decade before.”
