The current taper rate is penalising savers – as much as $1,000 a month in some instances!
National Seniors Australia has called on the Federal Government to use the upcoming review of the retirement income system to reset the asset test taper rate.
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.
However, changes to the taper rate in 2017 distorted this system.
In 2017, the taper rate was changed from $1.50 to $3.00.
The Coalition used the move to achieve estimated budget savings of $2.4 billion over four years.
For every $1,000 of assessable assets over the asset free threshold, the government now reduces the fortnightly pension by $3.00.
This change has undermined the value of saving more for retirement.
Estimates show the total income of retirees with assets over $400,000 starts to decline. This wasn’t the case in the past.
As the graphs on this page illustrate, a homeowning couple with $400,000 in assets would earn about $55,000 under the changed taper rate, whereas a couple with $800,000 in assets would earn only about $42,000.
Likewise, a single retiree with $600,000 in assets would be $6,815 better off if they only had $300,000 worth of assets.
Note: this estimate is based on a home owning couple with 20% of their assets invested in bank deposits returning 2% and 80% invested in Listed Investment Companies returning 5.5%.
This creates a perverse incentive in the retirement income system. Retirees are now rewarded for spending their savings because they would receive a higher income for doing so.
For example, a couple wanting to stay closer to the threshold to retain higher earnings, may spend some of their savings on renovations or holidays, eroding their self-sufficiency in the long term.
If a couple with $800,000 in assets reduced their assets by $400,000 to earn greater income overall, 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 self-reliance in retirement.
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.
National Seniors Australia will fight for changes to the retirement income system based on the principles of fairness, sustainability, adequacy and certainty.
A campaign website will be launched soon. Watch this space for more information about how to get involved.
In the meantime, check out some of our other campaigns and find out how you can join the fight to improve outcomes for all older Australians.
Together, we can make a difference.