Retiree groups are calling for a fair go for the elderly, whom they say are losing out from interest rate cuts.
While most of the focus of the rate cuts by the Reserve Bank has been on the benefits to home buyers through lower mortgage rates, for those living off their savings, it is another story.
Not only are retirees earnings less on their savings in safe investments such as term deposits, but retiree groups say their members are being short-changed by the government because the "deeming" rates have not be changed for 2? years, while the interest rate paid by banks on cash deposits has fallen.
Those receiving means-tested Centrelink benefits, such as the age pension, are deemed to have earned a certain rate of interest on their money held in term deposits, shares and managed funds, regardless of the actual interest rates earned.
Deeming rates make the calculation of income from investments easy.
Historically, the deeming rates have always been a bit lower than retirees can actually earn on safe investments such as term deposits.
But while the Reserve Bank has lowered the official cash rate by 1.5 percentage points during the past year, the deeming rates remain unchanged from March 2010.
For a pensioner couple, the deeming rate is 3 per cent on savings up to $75,600 and 4.5 per cent on the amount above that. Government data from 2010, the latest available, shows age pensioners, on average, hold about $46,000 of deemed financial assets such as cash term deposits, shares and managed funds.
On average, investors were receiving 5.9 per cent on term deposits of $50,000 two years ago and are now receiving 4.55 per cent, data from RateCity shows.
The chief executive of National Seniors Australia, Michael O'Neill, says deeming rates need to be changed to reflect the changes in the market.
"It's time for the federal government to step up, match interest rate movements and lower social security deeming rates," he says.
The government has made a concession to pensioners by increasing the threshold at which the higher deeming rate applies. The threshold has been gradually increased to $75,600, from $70,000 in March 2010.
The effect of the higher threshold is that pensioners are able to earn an extra $5600 with a deeming rate of 3 per cent, rather than 4.5 per cent. However, that is a benefit of a little more than $50 and insufficient to compensate for the lower interest rates, says a director of the Association of Independent Retirees, Robert Curley.
"The call is for the government to lower the deeming rates to truly match what retirees are actually earning," he says.
Access to the age pension and the level of pension payments is governed by an income and assets test.
Curley suspects the government might be reluctant to lower the deeming rates because that would increase age pension payments to some pensioners and gain access to a part pension for retirees who do not qualify at present.
The deeming rate is also used for other means-tested government payments.
The Minister for Families and Community Services, Jenny Macklin, is responsible for setting the deeming rates used by Centrelink. A spokeswoman for Macklin says the government has increased the pension, introduced a new pension supplement, improved the seniors' work bonus and improved the indexation system.
The department has advised Macklin that returns equal to, or greater than, the upper deeming rate are available from financial institutions.
The spokeswoman says changes in official interest rates are just one of the factors taken into account when setting deeming rates.
Changes in deeming rates depend on the returns available from a range of investments, such investment accounts, shares and managed investments, not just term deposits, she says.
Frequently Asked Questions about this Article…
What are deeming rates and how do they affect retirees' Centrelink benefits?
Deeming rates are used by Centrelink to estimate the income retirees earn from their financial assets like term deposits, shares, and managed funds, regardless of the actual interest rates. These rates affect how much pension or other means-tested benefits retirees receive because Centrelink assumes retirees earn a set rate of return on their investments.
Why are retirees concerned about the current deeming rates?
Retirees are concerned because deeming rates haven't changed in over two years despite significant cuts to official interest rates by the Reserve Bank. This means they might be earning less from actual investments but are still being assessed as if they're earning the outdated, higher deeming rates, potentially causing unfair reductions in their pension payments.
Have there been any changes to the thresholds for deeming rates recently?
Yes, the government has gradually increased the threshold at which the higher deeming rate applies—from $70,000 in 2010 to $75,600 now for a pensioner couple. This means retirees can earn a bit more at a lower deeming rate before the higher rate kicks in, providing some relief, but it’s generally not enough to fully offset lower actual interest earnings.
How have term deposit interest rates changed over the past few years for retirees?
Term deposit rates have dropped noticeably—from around 5.9% two years ago to about 4.55% now on a $50,000 deposit, according to RateCity data. This decline has significantly impacted retirees living on interest from these safe investments.
Why hasn’t the government lowered deeming rates in line with falling official interest rates?
One reason may be that lowering deeming rates would increase pension payments to some retirees and might allow access to part pensions for others who currently don’t qualify, potentially increasing government outlays. The government also considers returns from a broad range of investments, not just official interest rates or term deposits, when setting deeming rates.
What is the government's response to concerns about deeming rates and pension fairness?
The government has introduced measures like increasing the deeming threshold, improving the indexation system, increasing the pension, adding a new pension supplement, and boosting the seniors’ work bonus. However, they maintain that deeming rates are set after considering returns from various investments, and official interest rates are just one factor.
How do deeming rates impact access to age pension and other social security payments?
Deeming rates are used to calculate deemed income from financial assets for the income and assets tests that determine eligibility and payment levels for the age pension and other means-tested government benefits. If deeming rates are set higher than actual returns, retirees might receive lower payments than they should based on their real financial income.
What are retiree groups like National Seniors Australia calling for regarding deeming rates?
Groups such as National Seniors Australia are urging the federal government to update deeming rates to better reflect current market conditions and actual returns retirees are earning on safe investments. They want deeming rates lowered so pension assessments are fair and aligned with today’s interest rate environment.
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