Deeming rate freeze: does it really help with pensioner cost-of-living?

Article published 10 May 2022

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THE Coalition has announced that if they are re-elected income limits for the Commonwealth Seniors Health Card would be increased from $53,000 to $90,000 for singles and from $89,000 to $144,000 for couples. Labor has matched the Government’s offering, calling it “a good idea”.

A day later, the Coalition announced that deeming rates would be frozen for two years. Labor has also matched this offering. Another good idea.

The aim is to shield anyone who is retired from cost-of-living increases.

But who will benefit from these two measures?

Obviously, a lot of self-funded retirees previously unable to qualify for the Health Card will qualify for it now. The Government says 50,000.

Also, benefitting are existing Health Card holders who just managed to squeeze in under the annual (deemed) income limits of $53,600 for singles and $89,000.

Plus, from 1 July when the new (deemed) limits kick in, the new entrants will be protected for two years by the deeming rate freeze.

Deeming rate freeze! To pensioners, to plagiarise John Keats, the very phrase is like a bell.

But …

The majority of pensioners (around 60 per cent) are full rate pensioners, so they are not affected by deeming rates no matter how high or low these rates are, freeze or no freeze.

Then there are around 15 per cent of pensioners who are paid their part-pension under the assets test. They, too, are by definition not affected by deeming rates of whatever temperature, hot, lukewarm or cold.

This leaves about a quarter of all pensioners, some 625,000, who are paid their part-pension under the income test. They can in principle be affected by deeming rates, and the deeming rate freeze could benefit them.

But does it?

Right now, no one is losing a part of their pension solely as a result of the application of deeming rates (0.25 per cent on up to $53,600 for singles and $89,000 for couples, 2.5 per cent thereafter).

The current deeming rates are so low that with just cash and equity investments no pensioner can lose pension because of them. The amount of cash, shares and what-have-you need to trigger the income test are so high that the asset test will kick in first.

Now the deeming rates freeze will keep it that way for two years. Guaranteed!

Is this of benefit to part-rate pensioners paid under the income test?

Let’s assume your savings and household assets (valued at $30,000) are at the lower asset limit of $270,500. If you just added the 0.25 per cent of the Reserve Bank interest rate hike to the lower and upper deeming rates (bringing them up to 0.5 per cent and 2.5 per cent), you would lose a maximum of $5 per pension payment as a single.

A couple in a similar situation would lose nothing at all. For them it would require another rate hike to be (slightly) affected.

But this is at the higher end of savings, just before the assets test kicks in, and deeming rates become irrelevant.

For those, the majority, with lower levels of savings, it would take quite a lot for deeming rates to kick in. Let’s say, there were a total of fourteen interest rate hikes by the RBA over the next two years, and the deeming rates were increased fourteen times as well, bringing the lower deeming rate to 4.75 per cent and the higher rate to 6.75 per cent. In that case, singles could still have $100,000 in savings before they started losing pension as a result of deeming. For couples, that would be $175,000.

If your savings are lower than that, it would take even longer for deeming rates to kick in and cause you to lose pension.

Now, there’s a trend here.

To qualify for the Commonwealth Seniors Health Card, there’s only an income test.

With the increased (deemed) income test limits of $90,000 for singles and $144,000 for couples, singles with financial assets of $4 million and couples with financial assets of $6.5 million will be able to apply successfully for the Commonwealth Seniors Health Card.

They will pay $6.80 per prescription to an annual ceiling of $326.40, and they will be eligible for any other rebates and discounts which federal and state governments provide from time to time.

Now, have you noticed in all this that 75 per cent of pensioners, about 1.9 million people, receive no cost-of-living protection at all under these two measures?

That includes one-and-a-half million full rate pensioners, that is, the people most affected by cost-of-living increases, which for the March 2022 quarter were tracking at 4.9 per cent according to the Australian Bureau of Statistics.

Plus, many part-pensioners paid under the income test will not benefit either.

See the trend?

Related article:

Deeming rates and the veil of secrecy

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