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Age pension changes dictated by a need for fairness

The social security means test has long underpinned the Australian age pension system.

Social Services Minister Christian Porter says the changes are all about consistency.
Social Services Minister Christian Porter says the changes are all about consistency. Photo: Alex Ellinghausen

A critical principle of the means test is that every potential recipient's assets (with the notable exclusion of the family home) and income are assessed to determine whether that person is eligible for a pension.

A second critical principle is that, in assessing a person's income, what should matter is the amount of income they receive from sources other than the age pension. What should not matter is the source of the income; be it from superannuation, private savings, rent or any other source.

In combination these two principles reflect the fact that the age pension in Australia has always existed as a non-contributory social security payment. Eligibility isn't based on past income or contributions or taxes paid during a person's working life, but rather is based on comparative need.

Indeed, the fact that the pension system is based on comparative need has never been more important. The number of people of traditional working age for every person aged 65 and over has fallen from 7.3 people in 1974-75 to around 4.5 people today. By 2054-2055, it's projected to nearly halve again to only 2.7 people.

There will be a smaller and smaller proportion of people paying taxes available to pay for a larger proportion of people requiring the Age Pension. It's crucial the social security system fairly assesses a person's need for income support so that we can provide better support for those who have less, and less taxpayer support for those who can support themselves.

The goal has always been to assess comparative need in a way that's consistent and fair, with like cases treated alike. This imperative explains recent changes to the assessment of income from defined benefit schemes.

Simply put, as an unintended result of tax changes made in 2007, a small number of Australians (overwhelmingly retired public servants) who happened to receive income from some defined benefit schemes enjoyed an advantage in the income test for access to the age pension that retirees who received income from other sources did not enjoy.

It's only fair that the relatively small number of pensioners who receive income from defined benefits should be treated in a similar manner as the much larger number of pensioners who receive income from annuities, shares, rent or superannuation.

A defined benefit income stream is a pension paid from an employer fund where the amount of the pension generally reflects years of service and final salary. In the overwhelming majority of defined benefits schemes the employees didn't contribute towards the income streams in a way analogous to other superannuation structures, but where a person has made contributions, a proportion of their defined benefit income stream can be excluded from the social security income test to reflect it is a return of their own personal after-tax contributions.

Defined benefit income streams are indexed, paid for life, are not assessed under the social security assets test, and in themselves have been considered a generous structure for employees to the extent that indeed very few still exist.

The 2015-16 federal budget included a measure to cap the deductible amount that may be claimed against a defined benefit income stream. From January 1, 2016, the maximum level of income from defined benefit income streams that can be excluded from the income test is 10 per cent. This rectified the 2007 anomaly.

Ultimately, this change affects a small group of people. The vast majority of retirees with a defined benefit income stream will not be affected. Of those who are, only a fraction will no longer be able to receive a part pension.

The 2007 anomaly meant that a small number of people were able to receive substantial incomes from a defined benefits scheme and also get a part pension.

For example, a retired married state government public servant could get a part rate age pension, while receiving a defined benefit pension of $120,000 a year with a deductible amount of 50 per cent, so that only $60,000 was assessed under the income test. Under the new measure, the individual's deductible amount reduces to $12,000, and $108,000 is assessed under the income test and the individual is no longer able to receive any age pension.

For most people affected it means a reduced rate of part pension more in line with what the average person with income from another source receives.

A couple with no additional income or assets receives around $33,980 per year from the age pension. A couple with a $600,000 investment property and receiving $30,000 a year in rent receives an asset tested part-rate age pension – around $51,500 per year in total.

A couple with a defined income stream providing $30,000 per year under the recent changes will receive an income tested part rate Age Pension – around $54,000 per year in total.

But before January 1, 2016, that same couple (with a defined benefit income stream of $30,000) and a deductible amount of 40 per cent, would have received around $59,000 per year.

I do understand and appreciate why some recipients of defined benefits are concerned about the changes. While this was a difficult decision for the Turnbull government, it was a fair one because it ensures that one group of pension age Australians are not treated more beneficially than another group simply because their income comes from a different source.

Christian Porter is the federal Minister for Social Services.