Any cut to the deeming rate will erode the budget surplus, with a reduction from 3.25 per cent to 2.25 per cent likely to cost the Commonwealth $1 billion over four years.
Seniors Australia chief advocate Ian Henschke said the government had saved large sums on pension payments by keeping the deeming rate too high for too long and that this proved the power to set the rate should be handed to an independent authority.
What is deeming?
- Deeming is a set of rules used to work out the income created from financial assets.
- It assumes these assets earn a set rate of income, no matter what they really earn.
- The main types of financial assets include savings accounts and term deposits, managed investments and listed shares.
- Deemed income is then included in the income test when people apply for a pension.
- The income test is used to work out how much the government will pay.
“To leave it as a political tool for balancing the budget is just unconscionable,” Mr Henschke said.
“It has to be taken away from the politicians. If you want to have a fair system it must be a system people can trust.
“You cannot allow the politicians to use pensioners as a political football and to balance the budget on the back of the most vulnerable people in the country.”
Council on the Ageing chief executive Ian Yates said the government should set up a transparent review of the deeming rate or use its new retirement incomes review, announced on May 22, to set up a new way to set the rate.
“The current situation is significant because it means people are losing money,” he said.
“It also undermines the integrity of the pension system for the rate to be discretionary. The government owes pensioners a degree of certainty.”
The government is preparing to adjust the deeming rate as soon as this week after a proposal is taken to the expenditure review committee of federal cabinet, but this may leave cabinet ministers with discretion to set the rate as they see fit.
Prime Minister Scott Morrison cut the deeming rate from 3.5 per cent to 3.25 per cent in February 2015, changing the official assumption about the earnings a part-pensioner can earn on assets over about $50,000 before losing pension payments.
Mr Morrison, the social security minister at the time, cut the “lower deeming rate” from 2 per cent to 1.75 per cent for assets worth up to about $50,000.
The government said the 2015 change led to an average payment increase of $83.20 a year for 770,000 part-pensioners and allowance recipients, suggesting a cost of about $64.1 million each year.
While the government has not released any costings for a further cut, pensioner groups believe the 3.25 per cent rate should fall to at least 2.25 per cent or below.
This would be four times the size of Mr Morrison’s previous decision and might cost $256 million a year, or $1 billion over the four years of the budget estimates.
“What I’m fearful of is that they will make some sort of concession which is nothing near what it should be,” Mr Henschke said.
Seniors Australia is calling for the deeming rate to change in line with term deposit rates in order to reflect real-world conditions, rather than be decided at the discretion of a minister.
The government indicated again on Sunday that it was about to change the rate.
“The government is always looking at what we can do for pensioners,” assistant finance minister Zed Seselja told Sky News on Sunday morning.
“We’re very much listening to the concerns raised by pensioner groups, peak bodies and others, and so obviously there may well be announcements coming.”
David Crowe is chief political correspondent for the Sydney Morning Herald and The Age.