Budget Review 2014–15 Index

Michael Klapdor

The 2014–15 Budget contains a range of measures which will affect the payment rates and eligibility conditions for pension payments made to the aged, veterans, carers, people with disability and single parents as well as income support payments paid to the unemployed, the sick, and young people. The measures include changed indexation arrangements for pensions, a freeze on means test limits and thresholds for all benefits and changes to the income test for pensions.

Changes affecting pension payments for the aged, veterans, carers and people with disability will not take effect until July 2017, after the next election. Those affecting pension payments for single parents and other benefit recipients will take effect from July 2014. At the 2013 election, the Coalition promised ‘no cuts to pensions’—the delayed commencement of these changes ensures that the savings measures affecting the main pension payments do occur during the 44^th Parliament.[1]

Pension indexation

The 2014­–15 Budget proposes to change indexation arrangements for the Age Pension, veterans’ pensions, Carer Payment, Disability Support Pension and Parenting Payment (Single) so that payment rates are only adjusted by movements in the Consumer Price Index (CPI). The measure will save $449.0 million over five years.[2]

Currently, most pensions are indexed twice each year (on 20 March and 20 September) by the greater of the movement in the CPI or the Pensioner and Beneficiary Living Cost Index (PBLCI). They are then ‘benchmarked’ against a percentage of Male Total Average Weekly Earnings (MTAWE). The combined couple rate is benchmarked to 41.76 per cent of MTAWE; the single rate of pension is set at 66.33 per cent of the combined couple rate (which is equal to around 27.7 per cent of MTAWE). ‘Benchmarked’ means that after it has been indexed, the combined couple rate is checked to see whether it is equal to or higher than 41.76 per cent of MTAWE. If the rate is lower than this percentage, the rates are increased to the appropriate benchmark level. Other income support payments such as Newstart Allowance are also indexed twice a year but only in line with movements in the CPI. Parenting Payment (Single) was previously adjusted in the same way as other pensions but from 2009 has been indexed to CPI and benchmarked to 25 per cent of MTAWE.

Indexing pension rates to CPI maintains their real value over time. The PBLCI is designed to check whether pensioners’ disposable incomes have kept pace with price changes. The MTAWE benchmark is not intended to maintain the value of the pension relative to costs; it is seen as ensuring pensioners maintain a certain standard of living, relative to the rest of the population.

Previous changes to indexation

Prior to 1997, pension payments were only indexed in line with movements in CPI (automatic CPI indexation commenced in 1976). Labor policy from the Whitlam Government onwards was to benchmark single pension rates to 25 per cent of MTAWE and ad hoc rate increases were made in line with this policy. The Howard Government introduced automatic benchmarking of the single pension rate to MTAWE in 1997. In 2009, the Rudd Government increased the single rate of pension, and introduced the current indexation method which reflects movements in the CPI, PBLCI and MTAWE.[3]

Removing the earnings benchmark and the PBLCI from the indexation formula

In recent decades, earnings have tended to increase at a faster rate than prices, meaning that pension rates have increased significantly in real terms and led to a growing gap with allowance payment rates. This has also meant increases in expenditure on pensions. The Age Pension is the Commonwealth’s largest expense program (after revenue assistance to the states and territories), and expenditure on pensions for seniors, people with disability and carers will total almost $67 billion in 2014–15 (not including expenditure on pensions for veterans or single parents).[4] Removing the MTAWE benchmark will curb the rate of growth in expenditure on the various pensions significantly in the years beyond the forward estimates, assuming CPI does not outstrip wage growth. Removing the PBLCI from the indexation formula is also likely to reduce the rate of increase considering the PBCLI has driven three of the ten pension increases since it came into use (six were driven by MTAWE and the most recent by CPI). 

The National Commission of Audit recommended benchmarking pensions to 28 per cent of Average Weekly Earnings (AWE) rather than the current MTAWE benchmark.[5] AWE includes male and female wage earners and is lower than MTAWE which only measures average male earnings (both measure both full and part-time earnings). The 2009 Harmer Review of pensions considered pension rates and indexation in detail and found that both CPI and MTAWE have drawbacks that make them ‘less than ideal measures to ensure the maintenance of an appropriate rate of pension over time’. The Harmer Review recommended the development of the PBLCI and also recommended replacing the MTAWE benchmark with a measure of the net income of an employee on median full-time earnings. The Review found that this measure, while not without limitations, would more accurately reflect community living standards.

Indexation policy is concerned with maintaining payments over time and this is connected to the question of whether the payment offers adequate support. Determining adequacy is very difficult given the diverse levels of need for income support recipients and differing opinions on whether support should be in terms of costs or relative to general living standards. The Government has not addressed these questions in changing the indexation settings for pensions, stating only that this will ensure indexation is consistent across social security payments and expenditure is sustainable.[6]

Reduced rates and restricted eligibility

The budget savings from this measure arise from lower growth in the rate of payment provided to pensioners. Effectively, pensioners will receive a lower payment over time than they would have had the indexation method not been changed. Lower payments also affect the impact of the pension means test with less people likely to qualify for a payment under the income and assets test over time. The savings predicted in the Budget are modest compared to the impact of these measures in the years beyond the forward estimates.

‘Fair’ and ‘unfair’ indexation

The Government recently passed legislation applying the current pension indexation arrangements to some military superannuation benefits. The Coalition has long described this as applying ‘fair indexation’ to these military superannuation benefits.[7] The Budget has allocated $1.4 billion over four years to help fund the military superannuation indexation measures. The measures will also increase the unfunded liability of these schemes by $5.1 billion as at 1 July 2014.[8] Boosting the benefit rates for these military superannuation benefits, at a significant cost to the Budget, while lowering the anticipated payment rate of veterans’ service and disability pensions appears to be grossly inconsistent and inequitable.

The proposed changes to indexation will mean the end of automatic real increases in pension rates but will maintain the real value of the payment rates over time. Massive savings are likely though not included in the forward estimates due to the delayed implementation of the main pension measures until after the next election. Pensioners will see lower increases in their payments than would have been anticipated and will gradually fall behind in relative measures of income and living standards. However the relativity with other income support payments will be maintained.

Indexation freeze on income and asset test thresholds for all pensions, allowances and benefits

The Government estimates that $1.5 billion will be saved over four years through a freeze on the income and asset test threshold for all Australian Government payments.[9] The thresholds for Family Tax Benefit, Child Care Benefit, Child Care Rebate, Newstart Allowance, Parenting Payment (Single and Partnered) and Youth Allowance will not be subject to annual CPI indexation for three years from 1 July 2014. The relevant thresholds for pension payments (including Age Pension, Carer Payment, Disability Support Pension and veterans’ pensions) will not be subject to annual CPI indexation for three years from 1 July 2017—as with the changes to pension rate indexation, the delayed commencement of the measures affecting pensions is intended to meet the Government’s ‘no cuts to pensions’ commitment.

A range of income thresholds and limits are indexed in line with movements in the CPI, either on 1 January or 1 July of each year. Relevant thresholds include:

• income free areas—the amount of income a person can earn before their payment begins to be reduced. For example, the income free area for single pensioner increased from $152 a fortnight to $156 a fortnight on 1 July 2013
• asset test limits—the maximum value of assets a person can have before losing qualification for a payment. For example, the asset limit for a single, non-homeowner Newstart Allowance recipient increased from $332,000 to $339,250 on 1 July 2013 and
• payment limits or cap—the maximum amount a person is entitled to claim. For example, the Child Care Rebate limit which is set at $7,500 per child (and has had its indexation frozen since 2011–12).

Savings will arise from lower rates of payment being provided to those whose earnings or assets increase in value over time as well as from less people being eligible for the various affected payments as their income or assets push them beyond the qualifying limits. Significant savings to the Budget will arise in the years beyond the forward estimates as the freeze on limits for pension payments begin to take effect.

The Government has continued in the tradition of successive Labor government budgets which identified large savings through indexation freezes. This method of achieving savings has a less noticeable impact than eligibility rule changes or payment rate cuts but will still see a comparatively large number of people affected as their income and asset values increase and they lose more of their benefits. The measures are purely savings measures and do not constitute real reform of the welfare system.

Reducing the deemed income thresholds for the pensions asset test

A further change to the pension means test, lowering the deeming thresholds, will accrue minor savings of $32.7 million for one year of operation (in 2017–18) but significant savings in the years beyond the forward estimates.[10] Deeming is used to assess income from financial investments for social security and veterans’ payments. Deeming assumes that financial investments of a certain value are earning a set rate of income, regardless of the amount of income actually earned. The main types of financial investments to which deeming rules apply are: bank, building society and credit union accounts and term deposits; managed investments, loans and debentures; and, listed shares and securities.

Currently a deemed income rate of 2 per cent applies to the first:

• $46,600 of a single pensioner’s total financial investments and
• $77,400 of a pensioner couple's total financial investments.[11]

A deemed income rate of 3.5 per cent applies to financial investments above these amounts. The thresholds at which the higher deeming rate begins to apply are indexed in line with the CPI in July each year while the deemed income rate is determined by the Minister for Social Services. The Budget measure will reduce the amount of assets to which the lower deeming rate applies to $30,000 for singles and $50,000 for couples (the level set in 1996). This will increase the amount of income included in the income test for pensions and mean more people will receive a part-rate pension and some will lose eligibility for a pension altogether.

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