The federal government has been accused of deliberately making money at the expense of part-pensioners for the last five years, with new analysis showing the Coalition has created the biggest gap between what retirees are assumed to make from their investments in pension income tests and what they are actually earning.
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As the government prepares to reveal new deeming rates which affect the fortnightly payments to more than 600,000 retirees, critics claim the system has been "broken" by policy decisions going back to 2014 to save money.
An analysis of the difference between average term deposit rates and what the government deems part-pensioners make on their financial assets that are included in pension income tests shows the largest gap on record.
The government assumes a rate of return on these investments which is described as the deeming rate. Currently, the deeming rate for singles is 3.25 per cent for assets over $51,200 and 1.75 per cent for those under that level.
In April of 2008, the average interest rate across all financial institutions for a $10,000, six-month term deposit was 6.84 per cent. The higher deeming rate then was 6 per cent while the lower rate was 4 per cent.
Through the global financial crisis, as interest rates and the value of other financial assets tumbled, the deeming rate also fell. By April 1, 2009, the top rate had halved but it was still above average term deposit rates.
Up until early 2013, the top deeming rate was still lower than than the average return on $10,000, 6 month term deposits.
Since then, apart from a short period in 2014, the top deeming rate has been above the average term deposit rate.
Before the most recent round of cuts in official interest rates, the average return on a $10,000 term deposit was 2.29 per cent, almost a full percentage point below the top deeming rate.
There has also been a substantial squeeze on those retirees with less than $51,200 in financial assets. The gap between the lower deeming rate and the average term deposit return has been half a percentage point for the past two years, the lowest gap on record.
Canstar finance expert Steve Mickenbecker said the best six-month term deposit available at the moment is 2.45 per cent with the average rate at 2.02 per cent.
Online savings accounts were worse, with the highest base rate being 2 per cent, the average 1.13 per cent, while the nation's biggest banks were only offering 0.3 per cent.
"With a deeming rate so far under the actual rate on savings available, it feels like the whole principle of deeming has been forgotten," he said.
"The reality is that pensioners cannot earn the upper deeming rate of 3.25 per cent on bank savings and yet that is what they are being deemed to earn when it comes to assessing their part pension."
The reality is that pensioners cannot earn the upper deeming rate of 3.25 per cent on bank savings.
- Canstar finance expert Steve Mickenbecker
The government is expected to announce new deeming rates within days although it is understood to have rejected suggestions to cut the top rate by 1.25 per cent as demanded by some retiree groups.
Mr Mickenbecker said for the first 20 years after the introduction of deeming, the upper rate was roughly in line with the RBA cash rate.
This started to break down between July 2011 and July 2013 when a 1.25 percentage point gap opened up between the upper deeming rate and the cash rate.
"This was a two-year turnaround of 1.5 per cent, devastating for retirees. It has never recovered," he said.
After the RBA's most recent move there is now a 2.25 per cent gap, the largest on record.
A design element of the deeming system is that returns above the deeming rate are not counted as income.
National Seniors chief advocate Ian Henschke said it appeared the government had allowed the deeming rate to sit higher than term deposit rates as a deliberate policy to claw back cash from retirees.
"To leave the rates unchanged for more than four years while there have been five interest rate drops by the RBA shows the government is balancing the budget on the backs of pensioners who have their money in savings accounts," he said.
In the 2014-15 budget, the government sought to reduce the thresholds at which the lower and upper deeming rates kicked in. In a move that would have saved almost $40 million a year, then-treasurer Joe Hockey wanted to "reset" the thresholds back to 1996-levels - which would have seen the asset threshold drop from $46,600 to $30,000 for singles and from $77,400 to $50,000 for couples - with the savings used to improve the budget bottom line.
After an uproar from pensioner groups, among others, the change was abandoned the following year.
- SMH/The Age
