Fair and consistent deeming rates
National Seniors Australia is calling for a fair and transparent approach to setting deeming rates.
Deeming is an integral part of the pension system.
It is used in the Age Pension means test and to calculate eligibility to the Commonwealth Seniors Health Card and aged care fees.
As part of the means test, deeming is used to estimate the amount of pension a person receives.
Deeming assumes financial assets earn a specific rate of income, regardless of their actual return.
According to the Department of Human Services, by treating all financial investments the same, deeming rules:
- encourage people to choose investments on their merit rather than on the effect the investment income may have on the person's pension entitlement
- provide an incentive to invest in higher return investments, as any interest rate achieved above the deeming rates doesn’t count as income
- create a simple way to assess income from financial assets, increasing predictability and reducing fluctuation in payments.
Deeming rates affect retirees when the income test, not the asset test, is used to set the pension.
Currently, 660,000 Age Pension recipients have their pension entitlement determined by the income test.
The decline in the Reserve Bank official interest rate from 2012 laid bare the deeming rate problem.
Between 1996 and 2011, changes in the deeming rates largely matched changes in official interest rates.
After 2011, something changed.
The deeming rates decoupled from changes in the cash rate, with negative impacts for pensioners. This is reflected in the graph below.
But since the election, things have flipped, thanks to a two-year freeze on any change to deeming rates and a rapidly rising cash rate.
Now, the upper deeming rate is below the RBA cash rate, back closer to where it was in the past.
The million dollar question is: What happens when the two-year freeze is lifted?
Figure 1: Changes to the upper and lower deeming rates relative to the cash rate, 1996 – 2019
Sources: Department of Social Services; Reserve Bank of Australia
National Seniors Australia wants an independent approach to setting deeming rates.
It should be linked to changes in the RBA cash rate to reflect the returns available.
A consistent and transparent method for determining deeming rates will ensure Australians know the pension is fair and adequate and that arbitrary changes are not being made at the expense of pensioners’ living standards.
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