The taper rate is used to gradually reduce the pension in recognition that retirees with greater wealth will be able to derive income from these assets.
Unfortunately, changes to the taper rate in 2017 have distorted the retirement income system.
Retirees are being unfairly penalised for saving more for their retirement
In 2017, the taper rate was changed from $1.50 to $3.00.
For every $1,000 of assessable assets over the asset free threshold, the government now reduces the fortnightly pension by $3.00.
As the graphs on this page clearly show, this change has undermined the value of saving for retirement.
Retirees with assets above a certain level are effectively paying a wealth tax because their assets are not able to earn as much as they lose in pension.
The difference in income is stark
As the estimates in the graphs show, under the changed taper rate, a home owning couple with $400,000 in assets would earn about $55,000, whereas a couple with $800,000 in assets would earn only about $42,000*.
This creates a perverse disincentive in the retirement income system. Retirees are now rewarded for spending their savings because they would receive a higher income for doing so.
The impact on the cost of the pension is significant.
* Based on investment income on assets of 20% bank deposit @2%, 80% LICs @5.5%.
If a couple with $800,000 in assets reduced their assets by $400,000 to earn greater income, they would become a greater burden on the budget. This is because:
- The cost of providing a pension to a couple with $400,000 in assets is about $32,000 a year more than for a couple with $800,000 in assets.
- Eroding savings will entrench reliance on the pension over the long term undermining long-term self-reliance in retirement.
Reduce the asset test taper rate
This situation is clearly unfair and unsustainable.
Reducing the taper rate will make it more attractive for people to save more for their retirement, reducing the incentive to spend wealth just to get a higher income.
While decreasing the taper rate will increase the cost of the pension in the short term, it will improve the capacity of retirees to sustain higher incomes for longer, taking pressure off government spending over the long term.
National Seniors is not alone in calling for the taper rate to be dropped
The Actuaries Institute along with respected actuarial group Rice Warner and The Grattan Institute are all calling for the taper rate to be reduced.
The retirement income system review is the perfect opportunity to rectify this unfair policy.
This campaign will fight for a retirement income system based on principles of adequacy, sustainability, certainty and fairness.