It’s no secret that retirees are suffering from the repeated interest rate cuts, and many face the prospect of negative returns on term deposits when taking into account earnings versus the rate of inflation.
After last week’s Reserve Bank of Australia (RBA) interest rate cut to a record low one per cent, and with interest rates on term deposits at their lowest levels since the 1950s, the Government is again facing accusations of “balancing the budget on the backs of pensioners”.
“The Government understands that reductions in the official cash rate impacts on older Australians on fixed incomes,” Social Services Minister Anne Ruston told The Australian.
The current deeming rate for singles is 3.25 per cent for assets over $51,200 and 1.75 per cent for those under that level. These rates have not changed since 2015, even though the Reserve Bank has cut official rates by 1.25 per cent over that time.
Deeming rates work on the assumption that pensioners earn a specified return on their investments, but when the deemed rate is higher than this actual rate of returns – which it currently is –pensioners lose out.
Canstar data shows that 22 per cent of 12-month term deposits currently offer a rate under two per cent. After the RBA’s rate cut last month, the average term deposit rate was also cut by 0.27 per cent – more than the central bank’s 25-percentage point reduction. The inflation rate is currently 1.8 per cent and forecast to rise to two per cent next year, so more retirees with money in the bank will have negative returns.
Little wonder then that Labor and seniors groups are demanding an urgent reduction in the deeming rate to help those who have been punished by interest rate cuts.
“Up to 627,000 age pensioners, who are on a part-pension because of the income test, are impacted by the government’s refusal to reduce deeming rates,” said Opposition social services spokeswoman Linda Burney.
“How does Scott Morrison expect pensioners to find term deposits or other secure investments that pay anything like 3.25 per cent?”
Labor analysis reveals that if the Government cut deeming rates by that same 1.25 per cent, a single homeowner on a part pension would be up to $63 better off per fortnight or up to $1628 better off a year, with single non-homeowners potentially being able to gain up to $3125 a year. Couple homeowners could also have an extra $1850 and couple non-homeowners could be up to $3875 better off.
These amounts, which could be going to more than 600,000 retirees, instead line the Government’s coffers.
There have been reports that the Coalition will announce deeming rates reductions as early as this week, with Federal Treasurer Josh Frydenberg telling The Sydney Morning Herald to “watch this space” while cautioning that any deeming rate cut might not match the RBA cash rate cuts.
Should any deeming rate cut match the cash rate cut? Are you suffering as a result of the RBA cuts?
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