Mitigating work related financial disincentives faced by Age Pensioners can help address the skills shortage

Much like the broader economy, national and state labour markets have come under increasing strain as they emerge from the shadow of covid. In July the national unemployment rate fell to 3.4 per cent, reaching its lowest level since August 1974. The number of unemployed has now fallen to a level where there is effectively one job vacancy for every unemployed person. As a consequence, businesses are finding it increasing difficult to secure the labour and skills they need.

While international migration can help to address labour force pressures, inward migration has been slow to return to pre-pandemic levels. Indeed, to fill labour shortages Australia would seem to require a substantially higher rate of permanent and long-term arrivals than the record levels recorded prior to the pandemic.

One solution to meeting labour force needs would be to increase the labour force participation of those aged 65 years and over. The ABS estimates that labour force participation for this cohort was 15.3 per cent at February 2022. Raising participation of this cohort by 1 per cent would increase the Australian labour force by 43,000 per annum.

However, current rules around Age Pension eligibility are a barrier to increasing the labour force participation of older Australians. Age Pensioners earning more than $180 per fortnight from personal sources such as employment lose $0.50 of Age Pension per fortnight for each $1.00 of increase. This is effectively a marginal tax rate of 50 per cent. Although the financial disincentive is lessened somewhat at present by a Work Bonus that allows up to $300 per fortnight to be earned before the $180 per fortnight gap starts to apply, it only enables a modest increase in hours worked before pension entitlements start to be phased down.

In a research paper undertaken on behalf of the SACES Independent Research Fund, we examine a potential policy reform designed to address the current financial disincentive to participate in the labour force faced by those on the Aged Pension. The two main reform options identified comprise:

• reducing the current loss of $0.50 of Age Pension per $1 of employment income; and/or
• expanding the amount of employment income available before the Age Pension is reduced (i.e. increasing the Work Bonus).

The budgetary cost of adopting a less aggressive benefit loss is also considered in the research paper.