Adopting New Zealand’s Flexible Tax Model For Retirees Will Help Solve Australia’s Acute Worker Shortage Crisis

Written by:
6 May 2024
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In this article, Saxon Davidson contextualises and disseminates the findings of the IPA’s research into Australia’s worker shortage crisis and how that affects Australia’s economic freedom and prosperity.

All media posted onto the IPA website are directly related to the promotion and dissemination of IPA research.


A comfortable retirement should be an easily attainable goal for all Australians, and making this possible ought to be a key priority of any government.

What comfort means for some people is vastly different from what it means for others, and it should be up to individuals to shape their own retirement. For policymakers, new data released last week paints a clearer picture of what Australians want for their retirement.

A recent survey of 2,247 Australians, including 430 retirees, published by Colonial First State, revealed that Australians want more flexible retirement choices, with eight out of ten wanting greater ability to access their retirement funds if they need to.

Strikingly, less than a third of Australians want to stop working once they pass retirement age.

The results highlight a growing disconnect between the desires of Australians and several key government policies regarding access to superannuation.

They also reveal how a punishing regime of red tape and taxes is thwarting the aspirations of pensioners who want to keep working.

The compulsory nature of superannuation contributions means that a significant proportion of a person’s income is unavailable for immediate use, making it difficult to purchase the kinds of assets that are key to a person’s wellbeing before and after retirement.

The most obvious example of this kind of asset is a home.

Those who retire without owning their own home are significantly disadvantaged compared to those who do, with their retirement income having to cover rental expenses, and denying them the option of drawing additional income from such an asset.

For both young and old, getting into a home of your own is paramount for long-term security.

This is why the Institute of Public Affairs (IPA), in its submission to the Senate’s inquiry into improving consumer experiences, choice, and outcomes in Australia’s retirement system, called for first-time homebuyers who are struggling to afford the deposit on a home, to be able to draw from their superannuation account.

Helping young Australians get into a home today, is a vital investment in their retirement tomorrow.

The IPA’s submission also highlighted the punitive taxes those who receive the age pension face if they desire to keep working.

The IPA has long argued that this is a drag on workforce participation and is a key factor in protracted nationwide worker shortages.

Currently, those on an age pension can earn an average maximum amount of $226 per week, approximately a day and a half on the minimum wage, before their earned income triggers a reduction in their pension entitlement.

The amount earned before pension benefits are clawed back  is called the “work bonus”.

Every extra dollar earned over this amount results in 50 cents being taken away from their pension.

On top of this, once a pensioner starts earning income, their pension is immediately subject to income tax.

Since pension payments over a year rise above the income tax free threshold of $18,200, a pensioner already sits in a taxable income bracket of 19 per cent, even before they earn any employment income.

The combined effect of these tax and pension rules means a pensioner who works is potentially subject to an effective marginal tax rate of 69 per cent.

Even though two-thirds of Australians want to remain in the workforce after retirement age, these tax setting arrangements mean just three per cent of all Austrlian pensioners engage in any work today.

This has larger implications for Australia’s labour market.

We are currently experiencing an acute and persistent worker shortage crisis, with job vacancies currently double the average number during the ten years prior to the pandemic.

This crisis is directly costing Australians $32 billion a year in lost wages, and the Federal Government $7 billion in lost income tax.

Luckily, we only have to look across the ditch to find a solution.

New Zealand does not impose additional taxes on retirees who work, meaning the marginal tax rate on NZ pensioners’ combined income and pension is as low as 10.5 per cent.

Because of these commonsense tax policies, one in four New Zealand pensioners work.

Research by the IPA has established that these policies have helped our trans-Tasman neighbours reduce job vacancies to pre-pandemic levels.

Vacancies in New Zealand are just five per cent higher today than 2020, compared with Australia where vacanices are 60 per cent higher.

Adopting New Zealand’s flexible tax model, and allowing people to use their superannuation for specific investment purposes, would set more Australians up for a better retirement in which, if they so choose, their work is properly rewarded.

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