Pensioners are being “ripped off” to the tune of $1 billion by the Morrison government’s income test that overestimates seniors’ investment income despite record low interest rates.
Seniors face cuts to their aged-pension payments under the current income test when they are “deemed” to be earning a 3.25 per cent return on investments.
But because official interest rates are nowhere near that amount, the government is assuming that retirees are earning more income than many seniors are getting.
The $1 billion figure is the estimated cost over the next four years of reducing the 3.25 per cent deeming rate by 1.25 per cent.
But the actual figure has not been confirmed by the government.
National Seniors Australia is calling for the deeming rate to be taken out of the hands of the politicians, raising concerns over a long-running issue where increases to the aged pension may have been partially funded by short-changing retirees on the deeming rate.
“How can you go to an election accusing Labor of having a retirees tax, when you’ve been running your own pensioner tax?” National Seniors Australia advocate Ian Henschke told The New Daily.
As pressure grows on Prime Minister Scott Morrison to act, there are fears that a one-off fix will not address the systematic rips offs of seniors by successive Labor and Liberal government.
After examining the history of changes to deeming rates and the aged pension around 2010 – when Labor’s Wayne Swan delivered a big increase to the pension – Mr Henschke said it was clear Labor and Liberal governments had engaged in a fiddle.
“Both Labor and Liberal governments have both been on the take,” he said.
“I think Labor started the fiddle and the Liberals continued it and now it’s got so big that people have finally noticed.
“It’s like what the banks do. If you want to make a lot of money, just cream a little bit of money off a lot of people.”
Mr Henschke said if the Morrison government cuts the deeming rate but fails to realign it with the actual interest rate, seniors will still get ripped off.
“They are still going to make a motza out of it. It’s fundamentally unfair. It’s still higher than the cash rate,” he said.
Mr Henschke said one reason why the government was getting away with it was that most people don’t understand what the deeming rate is or how it works.
“Let’s say you’ve got $100,000 in a bank account. The deeming rate assumes you’re getting $3250 [in interest]. But that person is actually getting $2000,” he said.
“So they are then potentially losing 50 cents in the dollar from the pension under the income test.
“You need to take this off the politicians once and for all. They should not be able to have their hands anywhere near this.
“How can the Treasurer [Josh Frydenberg] attack a bank for not passing on the full interest rate cut when you’re not passing it on as the government to pensioners?”
But any changes to deeming rates is complex and expensive, because it affects not just aged pensioners, but also veterans’ pensions, carers and disability support pensions.
Social Services Minister Anne Ruston has indicated the government is close to making a decision on whether or not to lower the deeming rate.
“(I) have sought some pretty detailed advice which I’m considering and I’m consulting with my other cabinet colleagues,” she told ABC radio on Monday.
“We will be making our decision imminently.”
While 75 per cent of pensioners we not impacted by deeming rates issues the minister acknowledged it was an important matter for the remaining 25 per cent.
What is the deeming rate?
The deeming rate is part of the income test for the pension. It is used to assess income from retirees’ financial investments. Deeming assumes that financial investments are earning a certain rate of income, regardless of the actual income.
On the plus side, it has also meant sometimes pensioners have enjoyed more generous rates of return on investments than the government assumed when applying the income test for the pension.
If your investment return is higher than the deemed rates, the extra amount doesn’t count as your income.
What is the current deeming rate?
If you’re a member of a couple and at least one of you receives a pension, the first $86,200 of your combined financial assets has the deemed rate of 1.75 per cent applied. Anything over $86,200 is deemed to earn 3.25 per cent.
The current deeming rate if you’re single is 1.75 per cent for the first $51,800 of your financial investments, and 3.25 per cent above that.
For retirees without a family home, the assets test allows a couple to have $600,000 in investments and still qualify for a full aged pension.
A couple can live in the family home regardless of value and also have $394,000 in investments and still qualify for a full aged pension. But it then gets reduced based on the income test and the deeming rate.
What is the retirees’ beef?
Since 2015, the deeming rates have remained unchanged at 3.25 per cent.
During this time, the RBA cash rate has fallen 1.25 per cent. So the government is assuming retirees are securing a greater return on investments than many are getting.
Who is affected?
About 600,000 pensioners are affected by the deeming rates issue. The number was once as high as 770,000, but a number of people were kicked off the pension under changes introduced by Mr Morrison when he was Social Affairs Minister.
How much will retirees get if the deeming rate is changed?
According to a recent Labor analysis, retirees could be better off by anywhere from $62 and $3875 a year.
But that’s only if the deeming rate is reduced to 1.25 per cent. There’s no guarantee from Treasurer Josh Frydenberg the government will go that low.
“Pensioners would be up to $149 a fortnight, or $3875 a year, better off if the government reduced the deeming rates by 1.25 per cent – in line with reductions in the cash rate,” Labor spokeswoman Linda Burney said.
“Since March 2015, the Reserve Bank has cut the cash rate five times, but the Liberals and Nationals haven’t adjusted the deeming rates at all.
“Scott Morrison has been deliberately short-changing pensioners for years.”
So it’s like an actual retirees’ tax?
It is according to the nation’s peak seniors group, National Seniors. During the election Mr Morrison run a huge campaign against Labor on the grounds that planned changes to the dividend imputation tax regime would hurt seniors. But Labor exempted pensioners from the plan – unless they were in self-funded super schemes.
Will the budget still be in surplus if the government does something about deeming?
Yes. The Morrison government has forecast a modest surplus of $7.1 billion for 2019-20. That means in theory that the forecast surplus would be reduced to $6.9 billion or less if it only cost $200 million a year.
Why didn’t the Labor Party campaign on that at the election?
Hindsight is a beautiful thing. But one reason could be that the deeming rate fiddle was helping to pay for higher pension payments. Also, the issue didn’t arise until the Reserve Bank recently cut interest rates again twice. That highlighted the growing gap between the deeming rate and reality.