Monday’s ‘pension increase’ a side show to the real reform needed

ideas-1 Age pensioners woke on Monday morning to the news that 770,000 of them would be getting a pension increase. Scott Morrison, Minister for Social Services, was on ABC Radio National claiming "…part-pensioners will receive an average increase in their payments of $3.20 a fortnight, $83.20 a year".
 
While one would have thought that a modest pension increase would be welcome news to the Australian Council of Social Services (ACOSS), Executive Director Cassandra Goldie, said "It is extremely disappointing that…the government appears to be prioritising people with investment assets".
 
The truth is that the $200 million pension increase to begin later in March is neither middle class welfare nor part of the Abbott government's "…plan to support pensioners deal with rising costs of living…", it is nothing more than the routine operation of the pension means test.
 
It is not the dividends and coupon payments earned from financial assets such as shares and bonds that are means tested. Since 1996 these assets are 'deemed' to earn a rate of return and it is this 'deemed income' that is included in the income test — regardless of the amount that was actually earned.
 
The advantage of deeming is that it provides pensioners with some certainty regarding their pension payments rather than leaving them exposed to short-term fluctuations in market returns. By treating all financial investments in the same way, pensioners are encouraged to choose investments on merit rather than on their implications for their pension entitlement.
 
Under current deeming policy, a single person's financial assets of less than $48,000 are deemed to earn 2%, while assets over this amount are deemed to earn 3.5%. For couples, the rates are the same but the threshold is $79,600.
 
As of March 20, both deeming rates will be lowered by 0.25%. Lower deemed income means higher pension payments for part-pensioners.
 
While the deeming threshold is indexed to the Consumer Price Index the rates are set at the discretion of the Minister of the day, on advice from the Department of Social Services, and "reflect rates of return available on a range of financial products".
 
Since the last revision of the deeming rates in November 2013, the yield on 10-year Commonwealth bonds has fallen by just under 1.5% and, despite recent growth, the All Ordinaries has been trending sideways for much of this time.
 
It is therefore difficult to argue that Monday's announcement was aimed at "prioritising people with investment assets" though Goldie's assertion that "Those affected are by and large better of…than those relying on the full pension" is correct — in as far as 'better off' refers to those with greater (assessable) assets.
 
With the Age Pension projected to account for 12 per cent of the growth in total spending over the medium term there can be no doubt that there is need for pension reform. Unfortunately, Monday's events have shown how the least controversial aspects of pension policy are so easily politicised.

 

Matthew TaylorMatthew Taylor is a Research Fellow at the Centre for Independent Studies.