2004 February 26 Thursday
Australian Treasurer Proposes Long Work Lives To Avoid Tax Increases

The Treasurer of the federal government of Australia, Peter Costello, is proposing to encourage Australians to work more years in order to avoid large tax increases to pay for a larger elderly population.

The Australian Treasurer, Peter Costello, will warn today that Australia faces higher taxes, deep Government spending cuts or massive budget deficits unless more mothers and older people stay in the workforce.

Mr Costello will use a speech in Sydney to unveil far-reaching measures to tackle the challenges of Australia's ageing population.

The reforms include changes to make the superannuation system more flexible and encouraging older workers to extend their working lives.

Among Costello's proposals is one to to allow more flexible access to the Australian tax-free savings accounts in order to discourage complete retirement in order to get access to it.

Federal Treasurer Peter Costello today unveiled plans to keep older people in the workforce longer and encourage retirees to take their superannuation savings as a pension rather than as a lump sum.

Australian Prime Minister John Howard agrees.

The Government wanted to cut the eligibility test back so anyone who could work at least 15 hours a week would no longer qualify but the Senate blocked the move.

Yesterday, Mr Howard described the discussion paper's subject as among the most critical facing Australia.

He said Australians should be encouraged to stay in the workforce instead of assuming they had to retire at a certain time of life.

Costello wants a finer granularity test of when retired people are retired or working.

Additional work rules apply to people aged 65 and over. The work test is consistent with superannuationís intended role as a retirement income vehicle. The rules apply to when a person can make superannuation contributions and when a superannuation fund must pay out benefits. People aged 65 to 74 must work at least 10 hours in each week to be eligible to make contributions; a superannuation fund must also pay out a memberís benefits if they fail this test.

Work opportunities for people over 65 are likely to increase as the population ages. However, the current weekly work test is too stringent and does not accommodate more flexible working arrangements, such as seasonal and irregular part-time work. It also imposes an administrative burden on individuals and superannuation funds.

From 1 July 2004 the Government will change the contribution and cashing rules for people aged 65 to 74 to an annual work test so these rules are consistent with current and future work trends. The Government will consult with the industry and community on an appropriate work test.

One doesn't have to understand the details of Australian retirement tax laws to see the thrust of what Costello is trying to do. He wants people to have more incentives to keep working and paying taxes in order to delay the date when retirees become net burdens to the government. He also wants to reduce the size of the burden by allowing retirees to more advantageously to work in a partially retired status and to switch back and forth between being completely retired and working.

Costello is also proposing changes in the rules for eligibility for complete disability so that some who are currently categorized as totally disabled will instead for part time and provide for some of their support.

Costello says longer work lives are necessary in order to avoid higher taxes.

Keeping taxes at low levels is not only a personal imperative but a national economic imperative as well. Citizens rightly demand that taxes be restrained so that their own financial freedom and prosperity can be improved.

But it is also vital for the economy that taxes are kept as low as possible. High personal taxes stifle incentive and enterprise and high corporate taxes will drive businesses offshore.

We need a tax system that will raise the required revenue to pay for our national defence, our health, our education, our aged.

The United States faces the same problem. The United States also needs to change tax laws, labor laws, and the rules of eligibility for entitlements programs to encourage people to spend more time in the workforce. Currently American politicians are ignoring the problem. By contrast, Australia's top leaders are discussing the problem publically and making substantial proposals to address it.

Update: US Federal Reserve Chairman Allan Greenspan says the retirement age must be raised.

"It's a problem for the U.S. budget," said John Shoven, director of the Stanford Institute for Economic Policy Research. "Economists of all political stripes are worried about this." To Greenspan, the response is inescapable. "We will eventually have no choice but to make significant structural adjustments in the major retirement programs," he said in a statement delivered before the House Budget Committee. He urged several actions to reduce payouts, including raising the age of eligibility for full benefits, now scheduled to rise to 67.

Greenspan says we can not afford to pay for all the commitments we have to retirees.

"We have been making commitments without focusing on our capability of meeting them," Greenspan said. "And I think it is terribly important to make certain that we communicate to the people who are about to retire what it is they are going to have to live with. And if we promise more than we can actually physically deliver, I think it will be a major blot on our whole fiscal process." Greenspan did not buy into Democratic plans to repeal some of Bush's tax cuts. Instead, he urged reducing the deficit mainly through spending cuts.

Read the links and you will see that John Kerry, John Edwards, and other Democrats reacted far more harshly to the proposal than the Republicans did.

Share |      By Randall Parker at 2004 February 26 12:17 AM  Economics Political

Engineer-Poet said at February 26, 2004 5:29 AM:

I had a post on this on my blog last night.  IMHO, we should have dealt with this problem two decades ago.  Could this possibly mean that sanity is finally spreading across the civilized world?

Patrick said at February 29, 2004 11:40 PM:

Note that Australia has already privatized it's old age pensions to a large extent. In many ways, the mere fact that the NAME was different, it was a "pension" rather than "insurance" seems to have made all the difference in reducing resistance to first Means testing, then asset testing, and finally (partly) replacing with a private scheme.

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