While discussion was focused on the federal government's economic reform roundtable last week, a significant change that will mainly affect age pensioners flew under the radar.
Author
- Susan Thorp
Professor of Finance, University of Sydney
For the first time in five years, the government will adjust the rates it assumes pensioners earn from their savings and investments, which for many will mean a change their social security payments.
The rates have been fixed since May 2020, when they were reduced in line with the record low interest rates set during the COVID pandemic.
Although official interest rates were increased 13 times since 2022 - which lifted the interest rates that pensioners could actually achieve on term deposits as high as 4% or 5% - pensioners were assumed or "deemed" to be only earning 0.25% interest on savings below a threshold ( currently $64,200 for single pensioners ), or 2.25% interest above that threshold.
For the government, the one-size-fits-all "deeming rates" simplify the way it calculates pensions and other income support payments. The rates also simplify reporting for pensioners who do not need to declare the actual income earned on their investments.
So, what's changing?
Low deeming rates were worth $1.8 billion
Since 2020, the widening gap between the actual income many pensioners earn on their savings and the income the government assumed them to have earned is estimated to have been worth A$1.8 billion to social security recipients.
Social Services Minister Tanya Plibersek said maintaining the gap at "artificially low" levels had shielded people on income support from high inflation during the post-COVID recovery.
The increases means the gap will narrow, raising deemed incomes, reducing some pensioners' payments, and likewise reducing government spending on social security.
From September 20, a deeming rate of 0.75% will apply to financial assets under $64,200 for singles and $106,200 for couples. That's up from 0.25% currently.
Assets over this amount will be deemed at a rate of 2.75% . That's up from 2.25% currently.
Support is targeted
Australia targets income support to needier households so that payments are designed to fall as household incomes and wealth (assets) rise.
Targeting is done through "means tests". There are two types of means tests: income tests and assets tests . The government uses deeming rates to calculate the assumed income that pensioners earn, which affects income tests.
Some pensioners, including age pensioners, hold large pots of savings as bank accounts, term deposits, retirement income products and investment funds. These savings earn interest, make capital gains (for example, as share prices rise), and pay dividends. In other words, they earn income.
How will the change work in practice?
What difference will this make to age pension payments, for example?
Around 64% of Australians over age 64 - around 4.5 million people - receive an age pension. Of those, around 25% are impacted by the income test that the deeming rates factor into.
Right now, a single, home-owning age pensioner can earn up to $218 of income each fortnight and still be eligible to receive the full pension ($1,149 including supplements).
At the current low deeming rates, this mean the pensioner can have around $285,000 of savings and investments (not including the family home) on the full pension.
If the pensioner's savings and investments rise by $10,000, deemed income also rises and their fortnightly pension goes down by almost $5. (The assets means test starts to apply above $321,500.)
From September 20, both the income limits and deeming rules are changing.
The savings and investments that a single pensioner can hold and still get the full pension under the income means test will be lower, because the rules will treat them as earning more income.
In addition, the reductions in the pension as financial assets rise will be a bit larger. For every $10,000 in savings and investments above $210,000, the pension will be lowered by $7, since those extra savings will be deemed to earn more than under the pre-announcement rules.
To put the pension reductions into perspective, we can compare the deemed rates of interest with interest that people could actually have earned on their savings since mid-2022. The graph shows the difference between actual and deemed rates on regular bank accounts.
It's also worth noting that many pensioners hold their financial assets in account-based pension products that earn higher rates of return than term deposits, and are tax-free to retirees over 60. Some of these superannuation retirement products have earned rates over 8% per year over the past 10 years.
The social services minister said adjustments to deeming rates are needed to ensure that the social security system is "grounded in fairness".
From now on, the deeming rates will be set by the Australian Government Actuary - an independent advisor to the federal government - although the government retains the right to adjust deeming rates in "exceptional circumstances".
Susan Thorp receives and has received research funding from the Australian Research Council, the Australian Securities and Investments Commission, the TIAA Institute (USA), IFM, and from UniSuper and Cbus Superannuation funds via ARC Linkage Grants. She is a member of the ARC College of Experts, the Steering Committee of the Mercer CFA Global Pensions Index, the Australian Securities and Investments Commission (ASIC) Consultative Committee, the UniSuper Consultative Committee, the Board of New College (UNSW) and the Research Committee of Super Consumers Australia. She periodically receives payment for presentations to financial services firms including banks and superannuation funds.
