A complex set of means tests are used to determine your pension entitlement. This includes both an income test and an assets test.
The income test looks at the various forms of pre-tax income you receive. This may include wages, fringe benefits, real estate income, deemed income from financial investments, overseas pensions and more.
The assets test considers property or items that you or your partner own (in full or part), or have an interest in. Basically, the more income and assets you have, the less pension you receive. You can read more at www.humanservices.gov.au/
A sliding scale is applied to both tests to determine your pension. This sliding scale is the taper rate.
The income and assets tests are applied whenever Centrelink calculates your pension. Both tests use different thresholds and taper rates to estimate your pension entitlement.
Because they are different, the rate at which each test reduces your pension is different. This results in different pension estimates.
As Department of Social Security data shows, two-thirds of part-pensioners are affected by the income test. In March 2019, there were:
- 643,500 pensioners whose pension was determined by the income test (these people are the ones who are affected by the deeming rate), and
- 320,900 pensioners whose pension was determined by the assets test.
Because your pension changes if your income or assests change, you need to make sure you update your information with Centrelink on a regular basis.Assests test tip
From 1 January 2017, the assets test taper rate doubled from $1.50 for every $1,000 of assets above the lower assets test threshold, to $3.
This led to 300,000 pensioners receiving less pension and about 100,000 pensioners losing their pension altogether.
It was argued that some pensioners would receive a higher pension because the lower assets test threshold was increased, but this was not true in practice. Most of these people would have been affected by the income test anyway. Remember, Centrelink uses the test that results in the lowest pension entitlement.
Some people welcomed the change, arguing that those with ample assets shouldn’t receive a pension at all. However, the change in the assets test taper rate created a perverse disincentive in the retirement income system.
Retirees are now rewarded for spending their money, instead of saving it. The graphs below illustrate this problem.
Under the new assets test taper rate:
- a single homeowner would be $7,000 worse off a year in terms of their overall income if they saved $300,000 more for their retirement than someone with $300,000 of assets
- a homeowning couple would be $13,000 worse off a year in terms of their overall income if they saved $400,000 more for their retirement than someone with $400,000 of assets.
This was not the case under the old taper rate.
You may read this and say ‘I’d love to have the problem of having assets over three or four hundred thousand dollars’. But there are also significant ramifications for the sustainability of the retirement income system.
For example, if a couple with $800,000 in assets reduced their assets by half to increase their income, they would become a greater cost to the system. 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
- retirees who use up their savings quicker will end up relying on the pension over the long term, undermining self-reliance in retirement
- encouraging retirees to spend their investments quicker will erode the overall superannuation and investment pool, diminishing the nation’s wealth.
National Seniors, along with other organisations like the Alliance for a Fairer Retirement System, the Actuaries Institute, Rice Warner and the Grattan Institute, are calling for the taper rate problem to be fixed.
If you would like to support our campaign for a fairer retirement income system, visit nationalseniors.com.au/FairRetirement