Pensions

Budget Review 2015–16 Index

Michael Klapdor

Dropped 2014–15 budget measures

The 2015–16 Budget confirms that the Government will no longer proceed with most of the 2014–15 budget measures affecting pension payments, including proposals to:

  • index pension and pension-equivalent payment rates according to movements in the Consumer Price Index (CPI) only, rather than the current method which indexes pensions by the higher of increases in the CPI or the Pensioner and Beneficiary Living Cost Index (PBLCI), and benchmarks the rate against a percentage of Male Total Average Weekly Earnings (MTAWE)
  • reduce the income test deeming rate thresholds, which affect how much income is deemed to be earned from certain assets, to the level at which they were set in 1996 and
  • freeze CPI indexation of the pension income test free areas and deeming thresholds for three years.[1]

These three measures were to commence in 2017. The pension rate indexation measure was expected to save $449.0 million from 2013–14 to 2017–18 and the Parliamentary Budget Office estimated savings of close to $25.5 billion from this measure by 2024–25.[2] Not proceeding with the other two measures will cost an estimated $217.1 million over the forward estimates period.[3]

The 2014–15 Budget’s proposal to increase the Age Pension eligibility age to 70 by 2035 has not been dropped.

Asset test changes

In place of last year’s proposed pension rate indexation change, the 2015–16 Budget introduces a new savings measure which will tighten the assets test for pension payments. The measure is expected to achieve net savings of $2.4 billion over five years which includes savings from the assets test change and the expense of dropping the 2014–15 Budget’s indexation change. The measure consists of two parts: raising the assets test thresholds and increasing the rate at which pension payments are reduced (known as the ‘taper rate’).

All income support payments are means tested under both income and assets tests. Both tests are used in calculating the rate of payment, with the one that results in the lower rate being the one that is applied. The assets test thresholds apply differently for allowances (such as Newstart Allowance) than they do for pensions (such as the Age Pension). For allowances, assets over these thresholds will mean a person is not eligible for the payment. For pensions, assets over the thresholds affect an individual’s rate of payment. Currently, every $1,000 of assets over the relevant threshold reduces an individual’s fortnightly pension payment by $1.50, so those with significant assets may only receive a part pension rate. The level of assets which would reduce a person’s fortnightly payment to zero is known as the asset test limit. The budget measure proposes to raise the assets test thresholds and increase the taper rate from $1.50 to $3.00 for every $1,000 in assets over the relevant threshold. This arrangement would be the same as that which applied prior to 2007. The last Howard Government Budget included a measure which halved the taper and, as a result, doubled the asset test limit.[4]

The following tables set out the current assets test thresholds and limits applicable in different circumstances and the thresholds and limits that would apply from 1 January 2017 under the Budget measure:

Asset test limits for allowances and thresholds for full pensions

 
Current
From January 2017
Family circumstances
Homeowners
Non-homeowners
Homeowners
Non-homeowners
Single
$202,000
$348,500
$250,000
$450,000
Couple (Combined)
$286,500
$433,000
$375,000
$575,000

Asset test limits for part pensions

 
Current
From January 2017
Family circumstances
Homeowners
Non-homeowners
Homeowners
Non-homeowners
Single
$775,500
$922,000
$547,000
$747,000
Couple (Combined)
$1,151,500
$1,298,000
$823,000
$1,023,000

Sources: S Morrison (Minister for Social Services), Fairer access to a more sustainable pension, media release, 7 May 2015; Department of Human Services (DHS), ‘Assets’, DHS website.

Currently, around 1.4 million out of 2.4 million age pensioners receive the full-rate and only around 420,000 receive a part-rate under the assets-test.[5] The new assets test arrangements will benefit a small number of pensioners with low-asset values (an estimated 170,000 will have their pension rates increased as a result of the threshold increasing) while those with significant assets could receive either a reduced payment rate or lose eligibility for their pension altogether (due to the steeper taper rate).[6] An estimated 235,000 will have their payment reduced while 91,000 are expected to lose eligibility for the pension as a result of the changes.[7] Those who lose eligibility for the pension as a result of this measure will be granted either a Commonwealth Seniors Health Card (CSHC) or Health Care Card (HCC) (depending on their age) to make up for the loss of their Pensioner Concession Card. The CSHC and HCC provide access to discounted medicines under the Pharmaceutical Benefits Scheme as well as some state and territory government funded concessions.

Reaction

The Australian Council of Social Service has welcomed this budget measure describing it as a ‘modest step in the right direction’.[8] COTA Australia, a peak body representing older Australians, also welcomed the measure but continued their call for a broad review of the ‘whole retirement space’ to address inequities, inefficiencies and waste.[9]

Comment

The measure will draw significant savings from the largest single component of budget expenditure (after payments to the states and territories), the Age Pension, with only those with significant assets affected.[10] This will achieve the same goal as the proposed indexation measure in the 2014–15 Budget (that is, budget savings) while, unlike the dropped measure, only affecting a small minority of relatively wealthy pensioners. An array of academics and think tanks have called for more extensive changes to the assets test to encourage pensioners to draw upon their home equity in retirement to reduce their dependence on government payments and lower the cost of the Age Pension (more than $44.1 billion in 2015–16).[11] However, with both the Government and the Opposition currently opposed to any changes affecting the family home, modest changes to the pension assets test, such as those proposed in this Budget, present the most achievable option for budget savings in this area.

Changes for pensioners travelling or residing overseas

The 2015–16 Budget includes a measure which will affect the payment rates of pensioners who travel or move overseas. While most income support payments can only be paid for a limited period of time if a recipient is overseas (known as the portability of the payment), the Age Pension, Widow B Pension, Wife Pension and the Disability Support Pension (in special circumstances) can continue to be paid while a person is overseas indefinitely and even where an eligible pensioner chooses to reside in another country. However, if a pensioner is overseas for a period longer than 26 weeks, their payment rate may be reduced to a proportion of the time they spent in Australia between the age of 16 years and the age pension age. This period is known as their Australian Working Life Residence (AWLR). Those with less than 35 years AWLR will, after 26 weeks overseas, have their payment reduced to a rate equivalent to the proportion of 35 years their AWLR represents. For example, a person with 16 years of AWLR will receive 46 per cent of the rate otherwise payable if they resided in Australia. Those with 35 years or more AWLR residence will not have their payment reduced.

The Budget proposes to commence payment of the proportionalised rate earlier—after six weeks overseas rather than 26 weeks. The measure is expected to save $168.6 million over four years from 1 January 2017. The specifics of the savings (year and agency) were not provided with the budget papers, which simply stated that ‘savings for this measure have already been provided for by the Government’. Pensioners overseas at the time of the measure’s commencement will not be affected unless they return to Australia and make another trip overseas. The measure follows on from an increase in the AWLR required to receive a full pension rate from 25 years to 35 years which commenced on 1 July 2014.[12]

New income test rules applying to defined benefit superannuation schemes

The Budget also includes a change to the way in which income streams from certain defined benefit superannuation schemes are treated under the social security income test—the change is expected to realise savings of $465.5 million over five years. This measure will limit the proportion of superannuation income that can be excluded from the income test to ten per cent of the individual’s annual defined benefit payment from 1 January 2016. Currently, the amount that can be excluded, the ‘deductible amount’, is based on elements of the tax treatment of the particular defined benefit income stream. The Howard Government’s Simpler Super reforms in 2007 equalised the tax treatment of income streams from different defined benefit schemes but also saw some schemes benefit from a new tax-free component based on certain years of employment. This component is included in the deductible amount under the social security income test. The current arrangement has meant that some former state government employees and employees of large corporate firms have had a sizeable proportion of their actual superannuation income not included in their income assessment for the Age Pension.

The measure will ensure that a greater proportion of the income from defined benefit superannuation schemes is used to assess an individual’s need for income support—it is expected to affect around 48,000 people.[13] Recipients of veterans’ pensions, such as the Service Pension, and/or defined benefit income streams paid from military superannuation schemes will be exempt from the measure.


[1].          See M Klapdor, ‘Changed indexation of pensions and tightened eligibility for all benefits’, Budget review 2014–15, Research paper series, 2013–14, Parliamentary Library, Canberra, 2014.

[2].          Australian Government, Budget measures: budget paper no. 2: 2014–15, p. 203; Parliamentary Budget Office, ‘Update of major yet to be legislated payment measures’, Response to request for budget analysis—outside the caretaker period, 27 February 2015, p. 2.

[3].          The budget information in this article has been taken from the following document unless otherwise sourced: Australian Government, Budget measures: budget paper no. 2: 2015–16.

[4].          Australian Government, Budget 2006–07: a plan to simplify and streamline superannuation, p. 11.

[5].          Department of Social Services (DSS), ‘DSS Demographic December 2014’, data.gov.au website.

[6].          S Morrison (Minister for Social Services), Fairer access to a more sustainable pension, media release, 7 May 2015.

[7].          Ibid.

[8].          Australian Council of Social Service, Step in the right direction on retirement incomes, much more to be done, media release, 7 May 2015.

[9].          COTA Australia, Budget 2015: aged care excitement but otherwise not much for older Australians, media release, 12 May 2015.

[10].       Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, p. 5-13.

[11].       For example: S Cowan and M Taylor, The age old problem of old age: fixing the pension, Research report, 3, Centre for Independent Studies, April 2015; E Millane, The entitlement of age, Research paper, Per Capita, August 2014; J Daley and C McGannon, Budget pressures on Australian governments 2014, Report, 2014-7, Grattan Institute, May 2014.

[12].       A Biggs, L Buckmaster, C Ey and M Klapdor, Social Services and Other Legislation Amendment Bill 2013, Bills digest, 29, 2013–14, Parliamentary Library, Canberra, 2013.

[13].       S Morrison (Minister for Social Services), Press conference, Sydney, transcript, 7 May 2015.

 

All online articles accessed May 2015. 

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