National Seniors Australia (NSA) has reacted angrily to the federal governments changes to the pension deeming rate, accusing the government of having its “hands in pensioners’ pockets at a time when they can least afford it”. From The Guardian:
The National Seniors Australia chief advocate, Ian Henschke, said the Coalition’s $600m commitment was welcome, but the change did not go far enough. “The truth is the Morrison government still has its hands in pensioners’ pockets at a time when they can least afford it,” Henschke said.
“What the government is telling pensioners is that they are earning three per cent on their investments, when most term deposits are not even returning two per cent, how is that fair?” he said…
The shadow minister for social services, Linda Burney, characterised the move as too little too late. “Pensioners were expecting better, after waiting over four and a half years since the government last adjusted the deeming rates,” Burney said.
Under the Coalition’s changes announced over the weekend, the deeming rate used to calculate how much a pensioner earns on their financial assets will decrease from 1.75% to 1% for financial investments up to $52,000 (single pensioners) and $86,000 (couples), whereas the upper deeming rate will be cut from 3.25% to 3%. The changes mean single pensioners will see up to $804 extra a year in their pockets, and couples $1,053.
NSA’s argument that the deeming rate is unfair does not pass scrutiny. Deeming rates apply to all financial assets, including equities like shares and unit trusts. And equities typically rise as the cash rate falls.
Deeming rates have to provide a simple benchmark that takes account of cash returns, dividends and other equity returns. That’s why there are two deeming rates – a lower one biased to cash (1.00% on the first $51,800 of investment assets for a single), and a higher one biased to equities (3.00% on investment assets over the amount of $51,800 for a single).
The Morrison Government has appropriately slashed the lower one to 1% – in line with the cash rate – while also cutting the upper one by 0.25%. If anything, the upper deeming rate is still far too generous, since actual earnings on equities (dividends) are typically much higher than 3%. Council on the Ageing Australia CEO, Ian Yates, made this exact argument on Monday, noting that most pensioners earn more than 3% on their investment earnings:
Chief executive Ian Yates noted the announcement would not affect 75 per cent of age pensioners.
“Those calling for the full cut in the cash rate to be applied to deeming need to be honest about how many pensioners are affected, and about the fact that if the Government replaced the deeming rate with actual earnings the majority of part pensioners would be worse off,” he said.
“We appreciate the frank and constructive discussions we have had over the last week with relevant ministers in the Morrison Government and the positive outcome that has resulted.”
The Guardian’s Greg Jericho also make the important point that it is not current, but future, retirees that are likely to suffer under the current system, due to the rise in household debt among pre-retirees, alongside plummeting home ownership rates:
In 2017-18 something happen that has never occurred before – more 55-64-year-olds were still paying off a mortgage than owned their home outright:
At the turn of the century, 64% of people in their pre-retirement years lived in a house owning no mortgage; now it is just 37%.
Forty per cent of such households are still paying a mortgage compared to 20% in 2000.
The percent of renters aged 55-64 has also risen in that time from 14.7% to 21.0%.
And this is where that nice little sentence in the superannuation guides comes back with a vengeance. Because “assumes you own your home” means assumes you have paid off the mortgage.
If you go to the Association of Superannuation Funds of Australia’s retirement guide, none of the budget expenses for “ASFA Retirement Standard for retirees” include rent or mortgage repayments.
For those aged 44-54 the issue is even more stark…
In 2000, almost as many 44-54-year-olds had paid off their mortgage as held one. Now 55% have a mortgage and just 17% have paid it off…
Right now our retirement systems operates with three quarters of retirees owning a home; in 20 years it will need to work with less than a third doing so.
That’s right. Australia’s retirement system is geared towards people owning their home. However all generations, other than today’s retirees, have seen home ownership rates plummet:
All of which makes the whinging from today’s over-fattened retirees a bitter pill to swallow.