Age of entitlement: age-based tax breaks

by John Daley, Brendan Coates and William Young

Why special tax breaks for seniors should go


The Commonwealth Government could save about $1 billion a year by winding back three tax breaks for older Australians that are unduly generous and have no sensible policy rationale.

Seniors pay less tax and get a higher rebate on private health insurance than do younger workers on the same income. They do so through the Seniors and Pensioners Tax Offset (SAPTO), a higher Medicare levy income threshold, and higher private health insurance rebates that are available only to older Australians.

Fewer people paying income tax – the rise of the “taxed-nots” – is in part due to age-based tax breaks. Despite their rising incomes and workforce participation rates, the proportion of over 65s paying tax has halved in the past 20 years.

At the same time, the Commonwealth is running annual budget deficits of about $40 billion and must make tough saving and spending decisions if it is not to hand an unsustainable bill to future generations.

SAPTO and the Medicare levy income threshold should be wound back to save about $700 million a year. Reducing the private health insurance rebate so that seniors get the same rebate as younger Australians would save about $250 million.

Only pensioners should qualify for SAPTO, while those with enough private income that they do not qualify for a full Age Pension should pay some income tax.

The proposed changes would have little effect on the 40 per cent 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.

Some argue that the tax breaks are a fair reward for paying tax while under 65. 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.

Listen to a podcast of John Daley discussing the report

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