Automated deeming rates set to reduce pensions

Article published 22 November 2023

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Deeming rates generally underestimate a pensioner's investment income. Replace deemed income with actual investment income, many will lose.

CURRENT deeming rates are frozen until 1 July next year. After that, rates can be changed at any time.

At the moment, deeming rates are 0.25 per cent (over first $60,400 for singles and $100,200 for couples) and 2.25 per cent (for anything over).

With annual term deposit rates around 5 per cent, it’s obvious pensioners are on to a good thing right now.

How deeming rates work

Deeming rates are used in pension income testing to calculate how much income you have made from financial assets: cash, term deposits, at-call bank accounts, shares and units in managed funds and superannuation funds. Half of that income is deducted from your pension.

It’s very likely that, in the absence of a ‘freeze’, deeming rates would be sitting at something like 1 per cent and 4 per cent.

Changes to the deeming rates usually coincide with the pension indexation dates of 20 March and 20 September.

However, this doesn’t necessarily mean they will go up on 20 September next year.

What will happen to deeming rates next year?

20 September 2024 will be very close to the next federal election. The earliest date on which this can be held is 3 August 2024, and the latest date is 17 May 2025.

It’s obvious that, during the election campaign, the Government and the Opposition will be forced into saying what they will do with deeming rates. We think that neither will be keen to commit to increasing them.

And, deeming rates being poorly understood, an increase would also upset many, many tens-of-thousands of pensioners whose pensions aren’t income-tested but asset-tested, or who simply wouldn’t lose any pension as a result of deeming.

For the current Government to say it would increase them would therefore not be smart.

Still, it will have to say something. What options does it have?

It is only speculation, but it’s very likely that the Government will extend the deeming rates freeze by another twelve months, citing the continuing cost-of-living crisis. This would postpone having to do anything to a point in time after the next federal election.

However, it may also spot the opportunity for reform of how deeming rates are set. Or, rather, of how to do away with deeming rates and replace them with something else that’s more accurate and arguably fairer.

Deeming rates are based on the at-call-account bank interest rate (lower deeming rate) and the twelve-month term deposit rate (higher deeming rate). Usually, the higher deeming rate is a little bit lower than the term deposit rate, which favours pensioners who have term deposits.

But, obviously, not everyone puts their savings into term deposits.

Superannuation, for example, generally achieves higher returns than term deposits, as do investments in shares generally. Yet, those returns are deemed at the same deeming rates as term deposits. This means that superannuants and share market investors who are also (part) pensioners tend to have a much greater advantage than term deposit holding pensioners.

Others have invested in residential real estate. Their net rental income is not deemed. It is all included in the pension income test. No advantage!

And those pensioners who still work get a break through Work Bonus, but otherwise all their income is included in income testing.

Given that there is now technology called data matching, there really is no need for the complicated, antiquated mechanism of deeming rates.

The Government can easily check bank balances, superannuation balances, stockbroker account balances and what have you and determine how much investment income pensioners have made for real.

Gone would be the outcries at each change to the deeming rates! Gone would be anxiety felt by pensioners who think they are (but are not) affected by deeming rates.

So, CPSA’s prediction for deeming rates is that the current freeze will be extended from 1 July 2024 to 1 July 2025. The Government will simultaneously announce an independent review of deeming rate setting. Independent, because if there is a public backlash against the review’s findings, the Government can always throw the review under the bus.

And that’s what they might well have to do, because this independent review will sure as anything recommend replacing deeming rates with data matching. Real income would replace deemed income. No pensioner would gain and most would lose.

Also read:
Deeming rate freeze: does it really help with cost-of-living?
Deeming rates and the veil of secrecy


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