Mercer calls for universal Age Pension for greater security of retirement income


12 February 2020

Australia, Melbourne


In its submission to Treasury for the Retirement Income Review, Mercer has called for a universal Age Pension to be considered, scrapping the means tests and simplifying the Australian retirement system.


Mercer identified the means tests as the primary obstacle to the effective interaction between the three pillars of Australia’s retirement system.


Mercer Senior Partner Dr David Knox said the original purpose of the means test was to ensure that those most in need had access to the Age Pension, alleviating poverty among seniors. Its use, however, extended far beyond this with two-thirds of Australians above the eligibility age accessing the part or full pension.


“In comparison to the means-tested pension of other OECD countries, Australia’s is unusual,” Dr Knox said.


“Firstly, at 28 per cent of the average wage, it’s one of the most generous. Secondly, we have a much lower taper rate at 50 per cent, while other OECD countries employ a stronger rate of 80 to 100 per cent, limiting access of the pension to fewer retirees. And thirdly, unlike many others, we have an income threshold before the taper rate applies, providing greater access for more Australians,” he said.


Dr Knox said a universal Age Pension where all eligible individuals receive the pension had enormous benefits for retirees and households, as well as the economy and superannuation industry. He said with the right tax structures, a universal Age Pension was feasible without a substantial impact to the Commonwealth budget.


“Significantly, if the universal Age Pension was an important source of retirement income for all Australians together with superannuation, the Superannuation Guarantee rate need not rise to 12 per cent, while still providing the same living standard in retirement for average income earners,” Dr Knox said.


“This would reduce the cost of projected superannuation taxation concessions, increase the level of take-home pay and increase taxation revenue. But, if the pension remains means-tested, the Superannuation Guarantee must rise to 12 per cent.”



Other factors for Treasury to consider on how the costs of a universal Age Pension could be funded are:


  • Taxing the Age Pension for all those who receive it, which could be achieved by basing the Age Pension tax rate on the balance of an individual’s tax-exempt pension accounts
  • Given every eligible aged Australian would receive the Age Pension, modifying the tax arrangements for super, such as introducing a limited tax on the investment income generated in the pension phase
  • Drawing on some of the fiscal headroom expected since the projected cost of public pensions in Australia will be one of the lowest of any OECD country by 2050.

“With a universal Age Pension, Australians will have an incentive to save for retirement. This isn’t the case today,” said Dr Knox.


“While the Age Pension would be taxable, there would be a clear benefit to the individual for every extra dollar contributed into super, ensuring the three pillars of the system – the Age Pension, compulsory super and voluntary contributions – are complementing each other.”


In addition to incentivising super savings, a universal Age Pension would:


  • Ensure financial decisions made by retirees were not informed by how to best maximise their access to the Age Pension 
  • Provide retirees with greater security of income with the knowledge of longevity protection, leading to a better quality of life
  • Provide stronger incentives to downsize from the family home, improving housing affordability for younger families
  • Enable a simpler, more efficient system with reduced administration costs incurred by the Government from the means-tested Age Pension.


“While the universal Age Pension may not be a viable option in the current political environment, it is a compelling proposition for a simpler, more effective system with a clear objective that delivers stronger long-term retirement outcomes for older Australians,” Dr Knox said.






About Mercer

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of $17 billion. Through its market-leading businesses including MarshGuy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit Follow Mercer on Twitter or LinkedIn.