In Australia eligibility for the Age Pension is means tested. The rationale for this is two-fold. Firstly it helps ensure that Government entitlements go to those who need them most and secondly by putting a limit on the number of people that are eligible the Age Pension becomes more affordable for the Government.
Not all countries around the world apply a means test to their Age Pensions. New Zealand and The Netherlands for instance pay an Age Pension to everyone that meets their residency requirements, regardless of their financial position. This is often referred to as a universal Age Pension.
Why pay an Age Pension to everyone?
Paying an Age Pension to everyone might not at first seem very equitable. After all, shouldn’t those that need it most be prioritised? Isn’t the pension there to help people that can’t fund their own retirement? And wouldn’t offering an Age Pension to everyone mean a ballooning cost to government (taxpayers) or would it be funded by reducing the overall level of pensions?
There are some alternative arguments in favour of a universal Age Pension though. Here are just a few:
- The current system is complicated and costly to administer so the Government could save a lot of money. Ian Henske from National Seniors Australia said in the Sydney Morning Herald “If everyone of pension age received a pension, retirees could just add this to their other income and pay tax. Means testing is costly to administer.”
- David Knox from the actuarial firm Mercer argues that it would create more incentive for people to save for their own retirement. At present some people are reluctant to save as they fear it will reduce their pension entitlements
- Knox also argues that it would provide stronger incentives for people to downsize the family home if they were able to do so without impacting their Age Pension
What do you think?
It’s an issue with strong arguments on both sides and there will be lots of opinions. We’d love to hear yours.