Imagine being taxed 118 per cent on your income–yes, paying more than you earn. It sounds absurd, but that’s effectively what can happen to older Australians on the Age Pension who choose to work a bit extra.

In one case, a pensioner who earned an extra $5,000 (increasing annual income from $55,000 to $60,000) actually ended up with less take-home pay for their effort.



How is that possible under a modern, supposedly fair system? Welcome to the strange world of pension income tests and tax traps, where working more can leave an older Aussie worse off.

And if punitive rules weren’t enough, add in a hearty dose of ageist stereotyping at the office, and it’s no wonder many seniors throw their hands up and say, 'Why bother?'

The cruel math of 'working for nothing'​

For Australians on a full or part Age Pension, there are strict income tests: earn above a modest threshold and your pension starts to shrink. In practice, it creates outrageous situations. A single pensioner who goes from $30,000 to $35,000 in employment income loses almost 80 per cent of that extra money to taxes and pension reductions.

They keep only about $1,100 out of the $5,000 they worked for. As income rises, the clawback gets even steeper–at certain points breaking the 100% mark. If that worker’s income grows from $55,000 to $60,000, their effective marginal tax rate isn’t the top bracket 45% you’d expect – it’s a staggering 118 per cent. In other words, they pay for the privilege of working more. And for a pensioner couple in a similar situation, it can climb to an eye-watering 122 per cent.


How does this happen? Essentially, for every dollar you earn above the threshold, you lose 50 cents of your pension, on top of normal income tax. It’s like getting hit by a tax double-whammy: one from the Tax Office and one from Centrelink. Economists call this an effective marginal tax rate – the share of each extra dollar that vanishes to tax or lost benefits.



For working seniors, Australia’s income test can create effective tax rates far higher than those faced by millionaire CEOs. In fact, a recent report found older Australians on the pension often encounter marginal rates between 60 per cent and 80 per cent, and sometimes over 100 per cent. The top income tax bracket by law is 47 per cent (including Medicare), so when a humble part-time job triggers a 118 per cent rate, something is clearly off-kilter.


This isn’t just theoretical math – it’s affecting real lives. Many pensioners who’d love a bit of extra income (to cope with cost-of-living pressures or just to stay active) quickly learn that working more can be futile. 'What’s the point of doing an extra shift if I lose most of it from my pension?' is a common refrain.

The federal government does have a small concession called the Work Bonus, allowing those on the Age Pension to earn a little (currently $300 a fortnight) without reducing their pension. Recently, they even added a temporary $4,000 boost to this income allowance to encourage seniors to rejoin the workforce. But once that modest buffer is exceeded, the punitive rate of 50 per cent pension reduction kicks in. The outcome? Countless older Aussies limit their work or avoid it altogether.

Only 3.3 per cent of Age Pension recipients currently report any employment earnings at all–a shockingly low figure. Some who do work have been known to take cash-in-hand jobs or under-the-table work to avoid losing their pension, a situation nobody condones but many understand. It’s a classic case of perverse incentives: the system discourages the very thing (working) that could benefit seniors and the economy.

'Retired' doesn’t always mean 'tired'​

The financial traps are one side of the coin. The other side? Outdated assumptions about older workers. Society often treats retirement as a time to 'step aside,' but that mindset is changing – or at least, retirees’ attitudes are. 'Retirement is changing, but the system hasn’t aligned well with that,' says HESTA super fund CEO Debby Blakey.

Many older Australians don’t actually want to fully retire the moment they hit pension age. Blakey observes that a lot of retirees are keen to keep working 'not just for financial reasons, but for connection or their mental well-being.

Part-time or casual work in retirement helps people retain a sense of purpose and fulfilment, while addressing critical workforce demand and boosting the broader economy'. In plain terms, a healthy 70-year-old may feel they have plenty to contribute – whether it’s a few days at the local hardware store, mentoring younger colleagues, or filling shifts in an aged care facility where experienced hands are desperately needed.


Staying in work later in life can indeed be a win-win. It can top up stagnant superannuation balances, help cover ever-rising bills, and just as importantly, keep seniors socially engaged. Loneliness and loss of purpose are real challenges in later life–a little job can be a remedy.



One gentleman I heard of joked that he only went back to work to get away from daytime TV and to have someone to chat with at smoko. Jokes aside, there’s truth there: work can offer routine, community, and identity that many miss after retiring. So when willing seniors are blocked by rules from participating, it’s not just their wallets that suffer, but potentially their wellbeing too.


Yet, despite these benefits, Australia hasn’t fully embraced its older workers. The national economy is actually barreling toward a demographic cliff: soon, the number of people retiring each year will exceed the number of new workers entering the labor force. We have an ageing population, and that has policymakers biting their nails about everything from pension costs to labour shortages.

Already, industries like aged care and healthcare are short-staffed, and a wave of experienced baby boomers exiting the workforce isn’t helping. There are over 55,000 job vacancies in health care and social assistance right now, many in roles that older workers are well-qualified to fill. It makes little sense – some would say it’s madness–to push seasoned workers to the sidelines when we actually need them on the field.

Ageist stereotypes die hard​

So why aren’t employers snapping up grey-haired candidates left and right? One reason is plain old ageism. Ask around and you’ll hear stories: resumes quietly binned when the birth year hints '1950s'; interviews that turn frosty once a candidate’s crow’s feet come into view. Age-based stereotyping is alive and well, sometimes blatant, sometimes subtle. In fact, a national inquiry found that 27 per cent of Australians over 50 had experienced workplace age discrimination, often when applying for a job.

Even more alarming, 4 in 10 companies admitted they avoid hiring people over 55 altogether. Think about that–almost half of employers, by their own admission, would bin a resume just because the applicant has been on this earth a bit longer.


Even those who have jobs aren’t immune to bias. Older employees can be passed over for training and promotions, left out of team activities, or edged towards the exit in countless passive-aggressive ways. On ABC Radio National recently, an HR professional made a frank admission that many recruiters carry a built-in bias against older applicants. Some see only the stereotypes–'older workers can’t learn new tech,' 'they’ll get sick or injured,' 'they’re stuck in their ways'–instead of the person. These tropes persist despite evidence to the contrary.



As Dr. Daniela Andrei of Curtin University puts it, 'We are losing a lot of talent. As people walk out the door to retirement, so does their experience and expertise.' Yes, older workers might not type as fast as a 20-year-old or may take a bit longer to recover from a cold, but they bring strengths that are in short supply: emotional stability, seasoned judgment, deep experience in their field, and often a work ethic and loyalty forged over decades. Research confirms that while some abilities (like quick processing speed) may decline slightly with age, they are offset by gains in knowledge, people skills and resilience.

Forward-thinking employers have started to catch on. A great example is dairy company Chobani (famous for its yoghurt), which actively recruits and retains workers from age 21 through to 71. Many of its staff are over 60. The company introduced flexible shifts and even set up an on-site wellness centre with regular health professionals visiting, knowing that helps older employees manage the physical demands of work. They even created a new perk–grandparental leave–offering three days off when a grandchild is born.

Imagine that: a workplace that celebrates, rather than penalizes, the life stage of being a grandparent! It’s a small but significant way to value older staff. Other big firms, like Bunnings hardware stores, have also benefited from hiring mature-age workers who can better relate to their similarly mature customers. These success stories show that when you ditch the ageist assumptions, everyone stands to gain.

Let pensioners work: a simple solution​

If both the economy and many seniors would benefit from later-life work, what’s the holdup? Largely, it’s policy inertia. The rules making seniors choose between a pension and a decent paycheck are decades old. Advocacy groups like National Seniors Australia are calling for a bold change: let pensioners work without losing their pension. The idea is elegantly simple–stop means-testing work income for Age Pensioners.

'Employment income should be exempt from the income test for all pensioners,' argues National Seniors, which has launched a Let Pensioners Work campaign. At the very least, they say, start with a trial exemption in critical sectors like aged care, disability care, childcare and agriculture, where mature workers are desperately needed. This would allow willing older Aussies to fill labor gaps without being penalized for it.



Critics might gasp, 'But what about the cost to the budget? If pensioners keep their full pension and a wage, won’t that be expensive?' Surprisingly, analysis suggests it might actually pay for itself. Modeling by Deloitte found that if just 8.3 per cent of Age Pensioners worked (or worked more hours) under an income-test exemption, the extra tax revenue and economic activity would offset the cost of those pensions – a cost-neutral outcome for the government.

In other words, get a sliver of pensioners back into work and the policy funds itself. And 8.3 per cent is not a high bar; currently only 3 per cent are working, largely due to the disincentives, but surveys show a much larger chunk would consider it if the penalties vanished.

In New Zealand, where seniors get a universal pension with no means test, around 24.8 per cent of over-65s choose to work, compared to only 14.2 per cent here in Australia. Our Kiwi cousins have shown that having a pension doesn’t stop older folks from contributing–if anything, it encourages it. They don’t have to deal with complicated reporting to Centrelink or agonize over losing benefits, so working part-time in later years is normalized.



Australia is inching in this direction, but ever so slowly. The recent one-off increase to the Work Bonus (an extra $4,000 allowance) was a tacit acknowledgment that we need older workers, but senior advocates say it’s just a band-aid solution. Doubling a small exemption or tinkering at the edges won’t eliminate the fear pensioners have of triggering a pay cut.

What’s needed is a fundamental rethink. Even the Productivity Commission and Treasury have been examining ways to boost workforce participation among over-65s, especially as we face an ageing population. It’s not often you find a policy change that could improve individual wellbeing, industry staffing, and government coffers all at once–but letting pensioners work longer might be one of those rare win-wins.

One estimate suggests that a mere 5 per cent increase in workers over 55 would deliver a $47.9 billion boost to Australia’s GDP. We’re talking tens of billions added to the economy–largely by leveraging the talents of people we currently push to the margins.


Beyond the dollars and cents, it’s about respect and choice. Older Australians should have the choice to remain in jobs they enjoy or to take up new work, without navigating a minefield of penalties. And they should have the respect of employers and policymakers, recognizing that a number on a birth certificate doesn’t determine someone’s worth or ability.



As Dr. Andrei noted, companies need to redesign work to accommodate 'longevity workers' and stamp out bias. Likewise, the government needs to modernize policies that were written in an era when turning 65 meant winding down completely. Today’s 65-year-olds could have 20 or 30 productive years ahead. Why shut them out?


Australia prides itself on giving everyone a 'fair go.' But right now, many seniors who want a fair go at work are met with unfair barriers–taxed to high heaven on one hand, stereotyped as 'too old' on the other. It’s high time we tear down those barriers. Let’s reward, not punish, the older Aussie who picks up an extra shift at the hospital or volunteers to mentor newcomers in an office. Let’s value the grandmother who retrains for a new career in her 70s just because she’s passionate about it. Our nation can only benefit from such contributions.


So, will we seize this opportunity to tap into the wisdom and skills of older Australians, or will we continue to sideline them with red tape and prejudice? In the end, it boils down to a simple question for all of us: why shouldn’t those who want to keep working in their golden years be allowed to do so without penalty? It’s a question worth pondering as we look around at workplaces that could be richer – and an economy that could be stronger – with the full participation of every generation.


What do you think? Should Australia scrap these outdated pension rules and rewrite our attitudes to make the most of our experienced older workers, or are there other ways to ensure seniors get a fair go in the workforce? Share your thoughts and opinions in the comments below!