As interest rates have come down over the past four years, the rate that retirees are “deemed” to have earned for the purpose of the pension income test hasn’t budged, meaning that although retirees have been earning less (in some cases a good deal less), they haven’t been getting more access to the pension.
Depending on how you look at it, it’s either been making a mockery of the idea of an income test, or making the test more restrictive.
So how did it happen? Why is income “deemed” rather than actually measured when determining eligibility for government benefits, and is the system hopelessly compromised?
It’s important to understand what deeming is and where it came from if we are to understand the debate that will ensue when the government completes its review of the deeming rate in the next few weeks.
Where did deeming come from?
Modern day deeming was introduced by former prime minister Paul Keating in his final budget as treasuer in 1990.
many pensioners still disadvantage themselves by holding their savings in accounts that pay little or no interest
He was being diplomatic. It was widely believed that many retirees deliberately earned low rates on their savings in order to qualify for the pension or get a bigger pension. It cost the government money (while making the banks money) and it cost many of the pensioners money, because they lost more in interest than they gained in pension – although for those that used low earnings to ensure they at least got some pension, the associated benefits cards made it worth it.
From March 1991 cash and deposits were to assumed to be earning at least 10%, whatever they actually earned. If they earned more than 10% they were treated as earning more.
Except for the first A$2000. That was treated as earning only what it did, because many pensioners held small savings in low interest accounts for day to day purchases.
How has it changed?
Deeming is different today. It applies to more assets, including gold,managed investments, superannuation account-based income streams and listed shares; and it is used to assess eligibility for more benefits, including veterans and disability pensions.
And it’s no longer a win-win for the government. If someone earns more than the deeming rate, their income is assessed at only the deeming rate.
if your investment return is higher than the deemed rates, the extra amount doesn’t count as your income
There are two rates: one for the first $51,800 of financial assets (for a couple, the first $86,200) which is currently 1.75%, and the other for those assets in excess of that amount, which is currently 3.25%.
We deem by whim…
Both the high and low deeming rate used to be below the Reserve Bank’s cash rate (with the low rate typically 1.5 to 2 percentage points below the high rate), but after the cash rate dived in 2016 they have been left above it, in the case of the low rate, for the first time ever.
The high deeming rates have meant applicants have been means tested on income they haven’t received.
Deeming rates versus RBA cash rate, 1996 - 2019, per cent
- ^ retiree tax (theconversation.com)
- ^ deemed (www.humanservices.gov.au)
- ^ review of the deeming rate (thenewdaily.com.au)
- ^ budget speech (bit.ly)
- ^ department of human services (www.humanservices.gov.au)
- ^ in line with the consumer price index (guides.dss.gov.au)
- ^ cut the threshold (www.aph.gov.au)
- ^ minister for families and social services (guides.dss.gov.au)
- ^ the first time ever (guides.dss.gov.au)
- ^ Australian government, RBA (guides.dss.gov.au)
- ^ deeming accounts (www.canstar.com.au)
- ^ 0.20% (www.nab.com.au)
- ^ 1.5% (www.westpac.com.au)
- ^ Why pensioners are cruising their way around budget changes (theconversation.com)
- ^ $1 billion per year (www.afr.com)
- ^ expenditure review committee (www.afr.com)
- ^ Henry Tax Review (bit.ly)
- ^ National Commission of Audit (www.ncoa.gov.au)
- ^ Words that matter. What’s a franking credit? What’s dividend imputation? And what's 'retiree tax'? (theconversation.com)
Authors: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University