Rethink dual Age Pension tests

Most older Australians will receive at least a part Age Pension at some stage during their retirement. Economist Sean Corbett identifies the key areas of the pension that he believes should be changed after the Government’s retirement income review.

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A single means test
Eligibility for the Age Pension, and payment rates, should be based on a single means test, rather than on both income and assets tests, as is currently the case.

I believe that a simplification of the multiple means tests into a single assets test is the most appropriate way to assess people’s true ‘means’ for the purpose of calculating Age Pension entitlements.

Any source of income can be converted into an asset value. Conversely, any asset value can be converted to an income value. All that is required is to use an appropriate earning rate.

In fact, the deeming system that is currently in use essentially does this. It takes the asset value and applies an assumed earning rate to it to calculate the income that the asset is deemed to provide. Essentially, only the asset value is relevant, while the actual income earned is not relevant.

The deeming system was introduced to overcome the problem of people intentionally investing in low or nil returning investments (assuming that it was the income test that determined their entitlements) in order to qualify for higher Age Pension entitlements, while unreasonably preserving their assets by investing in low-risk/low-return investments.

Having a separate income test also discourages investment in higher returning but more volatile asset classes.

The Government should be encouraging older people to consider investing in higher returning but more volatile assets – instead of discouraging them – because such investments are most likely to maximise the income of retirees and decrease reliance on the Age Pension. Of course, there are risks involved in such a strategy, but there are also ways in which these risks can be minimised. One such approach involves putting ‘excess’ returns in a reserve when times are good, then drawing down on those reserves in leaner times.

However, the income test discourages people from adopting this approach by reducing their Age Pension entitlements when returns are higher. This means that excess returns earned in good times cannot be saved for leaner times because they need to be used immediately to replace lost Age Pension entitlements.

The deeming system overcomes the problem that is inherent in the normal income test by replacing the assessment of actual income by ‘deemed’ income, so that a constant amount is assessed rather than higher or lower amounts of income whenever returns are higher or lower.

However, as previously pointed out, under the deeming system the asset value is the only really relevant amount, so why not simply use a single assets test?

If a single assets test were applied, it would be easier to build a case to include the family home, perhaps over a certain threshold value, in the test. The benefit of doing this would be that the distinction between homeowners and non-homeowners within the current means tests would potentially be able to be eliminated, further simplifying the operation of the Age Pension system.

Homeowners v non-homeowners

The assets test thresholds for homeowners versus non-homeowners are perhaps no longer appropriate to allow for the fact that non-homeowners have to pay rent in the current low interest rate environment.

The thresholds are shown below.

Even if you assumed that the difference in the thresholds of $210,500 earned three per cent per annum (which would be almost impossible to earn from a secure investment at the current time), then that would give a return of $6315 per annum or $121.44 per week.

People in our capital cities, where the vast majority of Australians live, would find it difficult to rent something reasonable for that amount.

Change the taper rate for the assets test back to the pre-2017 rate

The taper rate for the assets test changed in 2017, but I believe this change should be reversed.

Until 2017, fortnightly Age Pension entitlements were reduced by $1.50 per $1000 of assets above the threshold. From 2017, the rate of reduction was doubled to $3.

While adjustments were made to the asset thresholds to try to compensate for the change, the effect was that people would get back a much lower amount as extra income in retirement than the additional amount of super they had saved.

For example, a person would have received 84 per cent of his or her extra super savings back as extra income in retirement before the change, but only 60 per cent back after the change.

A further effect of this change is that those who save more super will receive a lower amount of total income (Age Pension plus income from super) in the earlier years of retirement in contrast to the situation if they had not bothered to save more super. That’s because of the high rate at which the Age Pension reduces under the new taper rate for the assets test.

The range of super savings that is affected extends between about $400,000 and $1 million, depending on the circumstances of the person, and this range captures most people. The overall effect will be to strongly discourage people from saving more super for their retirement.

You really have to wonder why the Government introduced a change that discourages people from providing their own retirement income and instead relying more heavily on the Age Pension.

A final word

It seems to me that we have a situation where some rules, particularly newer rules, punish those who attempt to provide for their own retirement.

This article covers only part of that story. The greatest instance of the way the rules have been changed recently, to the detriment of everyone who seeks to make their retirement a comfortable one, has come about as a result of the tremendous growth in the amount of money in superannuation (though that was entirely predictable) and the inability of the Government to resist increasing taxes on superannuation. It is a tale of greed, lies and treachery.

Do you believe the Age Pension tests are overly complicated? Would a single means test be a step in the right direction?

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