At the start of 2015, the Reserve Bank’s cash rate was 2.5%. On Tuesday, this was lowered to just 1%. Yet over this period, there has been no change to the Government’s deeming rate – and this is hurting the real incomes of thousands of aged pensioners. The Government is again screwing our elderly citizens.
If you are not familiar with the concept of the deeming rate, this is an assessment rate used in the calculation of government aged pensions. To qualify for an aged pension, you are assessed under both an assets test and an income test, and the test that produces the least amount of pension is applied. Of the two tests, the income test impacts about twice as many as the assets test. The deeming rate is used in the income test.
Rather than calculate the actual income for every single investment, the Government applies a formula to determine your income from financial investments. This based on the deeming rate, and is applied to financial assets including bank accounts, term deposits, account based superannuation income streams or pensions, shares and managed funds.
For a single pensioner, the first $51,800 of financial assets are deemed to earn 1.75% pa, and everything over that is deemed to earn 3.25%. For a couple, the threshold is $86,200 (as per the table below).
Deeming rates and thresholds as at 1 July 2019
For example, Mavis is a single pensioner with life savings of $300,000 — $50,000 in a pensioner security account and $250,000 in term deposits. For the income test, her financial assets are deemed to earn 1.75% of the first $51,800 and 3.25% on the next $248,200 – a total income of $8,973.
The income test incudes income from all sources, including employment income, but it is typically the deemed income on financial assets that has the most impact. To get a full pension, a single needs to have income below $4,524 a year ($174 per fortnight). For each fortnightly dollar of income earned above that amount, the pension reduces by 50 cents per fortnight. When the income gets to $52,686 ($2,026.40 per fortnight), they are ineligible for an aged pension.
Annual income limits for full and part pensions
Let’s look at Mavis again, with her $300,000 life savings in the bank — $50,000 in a pensioner security account and $250,000 invested in a term deposits. She has no other financial assets (including superannuation). Under deeming, her income is assessed to be $8,973 or $345 per fortnight. Because this exceeds the threshold of $4,524 ($174 per fortnight), her pension is reduced from $926.20 per fortnight ($24,081 pa) to $840.60 a fortnight ($21,856 pa). It may not seem a lot, but it is still a reduction of $85.60 a fortnight.
What’s the problem with the deeming rate?
Because the deeming rate hasn’t kept pace with actual investment returns – that is, lowered in line with reductions in the cash rate – Mavis and thousands of aged pensioners have suffered a decline in real incomes .More likely hundreds of thousands, as there are more than two million elderly Australians receiving a part pension.
Back in 2015 when the RBA cash rate was 2.5%, Mavis was getting around 3.25% on her pensioner security account and around 3.5% on her term deposits. Today, she would be doing well to get 1% and 2% on those same investments. While her government pension has kept pace with inflation and there has been some relief from the indexing of the deeming thresholds, her external income has almost halved. This has been slashed from approximately $10,375 pa to $5,500 pa – a fall of almost $188 per fortnight.
If the deeming rates had been lowered by 1.5%, Mavis’s pension would have gone up – compensating in part for the fall in her external interest income.
Mavis has been screwed.
Of course, Mavis could have invested a little more aggressively and chased higher investment returns by investing in shares or other riskier investments – but is the outcome we want from our senior citizens, many of whom are in their eighties and nineties? Remember, this is the generation that is largely pre compulsory superannuation, in some cases has been savaged by the GFC, and is typically living in retirement accommodation with a modest nest egg to cater for that “rainy day”. Preservation of the nest egg is a key worry.
Why hasn’t the Government changed the deeming rate?
Pretty simple. From a Treasury perspective, changing the deeming rate costs money. Lots of money. Hundreds of thousands of aged pensioners would become eligible for higher pensions, and thousands of others, who are currently ineligible, would become eligible for a part pension.
Another possible explanation is that our politicians just don’t understand. Age pension eligibility, and deeming in particular, are complex, and with a generous superannuation scheme and comfortable remuneration arrangements, something that most politicians are unlikely to personally experience. There is probably a bit of truth in this. To be fair to the Morrison Government, they have announced a review of “retirement incomes policy”, but this was done before the election and the RBA has cut interest rates twice since then.
What should the Government do?
Immediately, cut the deeming rate by 0.5% or even more. Get the review of retirement incomes done, which should include a review of the rules around eligibility for the aged pension. If it is decided to keep a “deeming rate”, tie the level to the RBA cash rate so that future governments can’t screw our senior citizens.
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