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Australian Pension Funds Set Incentive for World

In developed nations, more than 60% of senior income is derived from public sources but reforms in a number of countries, introduced to ease the financial toil on public funding coffers, has caused social and economic turmoil. Means testing has been suggested as one way for the American pension system to introduce reforms. Mean testing generally affords wealthier people fewer benefits for their tax dollars and gives more to the people who need it the most. But then, of course, questions are raised over that the means testing would be based on- would it be current or lifetime income? You also have the situation of high earners who do not save; would they be left with nothing in this system?

The Australia model, Age Pension, has already tried to get to grips with some of these issues already and is being looked up to by the rest of the world, despite the internal local criticisms over its efficacy. The program exists together with the private savings account, the Superannuation Guaranteed Scheme, which employers must contribute to. When the program was launched two decades ago employers had to contribute 3% of an employee’s salary into a fund. Right not the contribution has increased to 9% and is set to increase to 12% later this year. There is an option for employers to contribute more, but the point of the program is to reduce retirees’ dependence on the state.

Australian Pension FundsWe all know that supers alone are not enough to finance retirement, especially those earning in the lower income brackets and people who do not stay permanently employed for their entire working careers are also not likely to reap the full reward of the system, but people who do not earn enough may qualify for Age Pension. To prove eligibility for this you need to pass the means test and be able to show insufficient income and wealth including investment returns.

Those earning less than $7200 per annum, with assets that total less than $281,000 are eligible for the state pension of $28,745. Your primary residence is not counted in the value of your assets but items like boats, antiques and cares are included. If you earn higher than the benchmark your pension is reduced by $13 for every $27 with of income you earn over $7200 and by $40 for every $1000 over your asset value of $281,000. Testing is applied to both assets and income. If you qualify for the Age Pension you are also entitled to lower costs on your medication prescriptions, plus other benefits.

Compared to other developed countries the Australian savings rate is relatively high and the country is considered to be in relatively good financial health. Proof comes under the form of a highly competitive savings and term deposits market, as evidenced by the rates at the Bankwest term deposits page for example. In Australia, Government spend on elderly people is predicted to comprise 4% of the country’s GDP, a favourable statistic compared o the forecasts that have been issued for Europe.

In truth many economists do not favour means testing because it can set some strange incentives. Just having an extra $1000 in your bank account can make the difference between you not qualifying for the stat and pension and losing benefits for your prescription medication. That means it creates the default incentive for locals to invest their money into non-interest bearing assets like jewellery, holiday homes and art. When you get to retirement you can withdraw your super earnings in a tax-free lump sum and spend it as you see fit, or give it to your children (but there is an annual limit set for gifting your super funds). For those who are on the verge of getting their state benefits it makes logical sense to do that and then submit an application for the Age Pension.

Written by Ayesha Khan

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