Asset portfolio retirement decisions: the role of the tax and transfer system
This study examined how Australia’s tax and transfer system, especially in relation to the Age Pension, impacts on household retirement choices. As the population ages, fiscal challenges created when many individuals retire from working and paying tax to drawing government funded benefits and services present some stark policy choices. Understanding how retirement decisions are shaped by the tax and transfer system is essential to developing a system that allocates resources efficiently across the economy, is consistent with principles of equity and is sustainable. Any such tax system is likely to have important implications for housing choices and housing markets.
The tax and transfer system has important implications for the choices Australians make around retirement and retirement planning. Any meaningful reform of the tax system must recognise that the financial incentives embedded in the tax and transfer system shape decisions of Australians throughout their working life and following their withdrawal from the labour force. Those financial incentives have implications for the portfolio choices of Australians. Given that owner-occupied housing usually represents the largest single component of the household wealth portfolio, the tax and transfer system is likely to have important implications for housing-related decisions.
- This report examines how the rules embedded in the tax and transfer system, especially in relation to the age pension (AP), may impact on household choices. The empirical analysis identified the following patterns of behaviour.
- Notwithstanding that the exclusion of owner-occupied housing from the AP assets test creates an incentive to hold a larger share of household assets in this form, there is little evidence that households structure their wealth portfolio to maximise access to the AP.
- There is evidence that the 2007 reduction in the AP taper rate (from $3.00 to $1.50 for those households holding that held non-exempt assets exceeding the lower threshold) led to increases in saving. The estimated effects are in the order of $300,000 of additional savings for affected households. Such effects are large and likely overstate the behavioural response, with valuation effects likely influencing the estimated impact of the reduction of the taper rate.
The empirical analysis indicates high-income individuals responded to the removal of the superannuation surcharge (SS) in 2005 by increasing contributions to superannuation. Reform of the tax and transfer system as it relates to retirement incomes poses challenges because of the long-term horizon that such decisions usually involve. A useful starting point for addressing some of the issues raised in this report is to reassess the parameters of the AP assets test. Such steps will provide opportunities to develop a sustainable tax and transfer system in a manner that recognises the concessional treatment of owner-occupied housing in the tax system over the life cycle.