Australia has one of the most generous superannuation systems on the planet; there is just one problem – it’s unsustainable. Under the current rules, a couple can have up to $1,151,500 of assets, plus a family home of unlimited value, before losing access to at least a part pension. The cut-off point for the income test is $74,818 a year.
The Coalition tried to reduce age pension expenditure by tying increases to the cost of living instead of average weekly earnings. For some reason, which I still can’t understand, this was attacked on all sides and the proposal has been abandoned, at least for the time being. They have now announced they are changing the taper rate – that is the rate at which pension decreases as assets or income rise.
But changing the taper rate is fraught with difficulties. If you make the taper too steep, pensioners are placed in the invidious position that it’s not worth earning extra income because of the effect on the pension. If you make it too shallow, as it is now, you push out eligibility so far that even a person earning $74,000 a year is eligible for a part pension.
Currently, under the income test, every additional dollar earned above the threshold causes a reduction of $0.50 in pension. Under the assets test, the full pension is reduced by $1.50 per fortnight for each $1000 above the threshold. Pension eligibility is then assessed using the test which produces the lowest pension. Because of the way the numbers work, almost everybody with financial assets in excess of $350,000 is assessed under the assets test.
The government has now announced that the asset test taper rate is going to be changed, but by increasing the threshold at which it starts, a significant number of part pensioners will become full pensioners. For a single homeowner, the base will rise from $202,000 to $250,000 and for a homeowner couple it will rise from $286,500 to $375,000.
The cut-off points will be approximately $535,000 for single homeowners, and $810,000 for homeowner couples. These are approximate numbers as the changes will not take effect until 2017, and the numbers will be increased on 1 July each year by the CPI.
This will hit hardest on retirees with substantial assets. An age pensioner couple with $750,000 of assessable assets should currently be receiving $602 a fortnight pension. Under the new rules, this would drop by $430 a fortnight, or $11,180 a year. That’s going to be a big impact on their budget.
I was discussing this on Radio 2UE last Saturday with George and Paul, and a listener pointed out that under the proposed rules, a person with $900,000 in assets would get no pension whatsoever, and if their money was in the bank earning 3%, the income generated would be just $27,000 a year. They contrasted this with the situation of a full pensioner with minimal assets, who would be getting $34,000 a year indexed.
It’s a valid point, but as I said to the listener, the person with $900,000 would be taking a very high risk if they kept their money in cash. They should have a diversified portfolio which hopefully should be giving them at least 6%.
Yes, I am well aware that many retirees are risk averse – this is why I have been urging my readers for years to get acquainted with growth assets like shares at an early an age as possible.