Senior partner at Mercer David Knox has argued the Danish system, in which a portion of the pension is paid to all retirees – regardless of wealth – with the balance paid on an income-tested basis could be a way of promoting a “fairer system overall”.
He suggested this could take form as a universal pension equivalent to 10 per cent of the average wage, coupled with an income-tested pension that is equal to the balance at 17.6 per cent of the average wage.
Presenting this theory to the Actuaries Institute’s Financial Services Forum on Monday, Mr Knox said the approach could be a “possible way forward”.
“The universal pension would include provision of the health card, thereby removing the current incentive for many retirees to deliberately rearrange their affairs to receive a part pension and therefore the health card,” he said.
“Such an outcome would encourage all retirees to maximise their assets and income. The introduction of the universal pension would improve the retirement income for the average income earner but would have a reduced effect at higher incomes as it would represent a fixed payment in dollar terms.”
As for the income-tested pension, Mr Knox said that as it would represent less than 18 per cent of the average wage, the income test would not have any effect where other income exceeded around 40 per cent of the average wage.
“This would provide a much clearer incentive for those with the capacity to save to do so, whereas such behaviour is not always rewarded under the current system due to the assets test,” he said.
Further, Mr Knox said that the universal part pension would make feasible the option of increasing the taper rate on the income test from 50 per cent to possibly 75 per cent. He argued this would make it closer to other countries’ arrangements and reduce the cost.
Under this strategy, full pensioners would not be affected.
“Of course, there would be an extra expense to the government budget. That is, there would be an increase in the number of part pensioners,” he said.
“However, this expense would be offset, at least to some extent, by additional income tax from those with higher taxable incomes and possibly, a reduced demand on government services due to the extra income and the changed behaviour as additional saving would be clearly rewarded.”