BUDGETS are about reading the future or, if you prefer, soggy tea leaves.
The federal Budget presented this week was full of forecasts for lots of things, but not for how the pension would fare four years from now.
So, CPSA cranked up its trusty old calculator and did the forward estimates on the pension.
How much will the pension be in the years up to September 2026?
But first, how much will the pension go up by next time the pension gets indexed, in March 2023?
To calculate this, we used the inflation estimates provided as part of the federal Budget earlier this week.
When the pension is indexed next, in March 2023, the inflation rate for the last six months of 2022 is used. That rate is 3.75 per cent, or 7.75 per cent minus the 4 per cent inflation for the six months before that.
This means the full rate single pension will go up by another $37 a fortnight and the full rate couple’s pension by $56 a fortnight, give or take a few cents and provided the federal Treasury’s inflation forecast for 31 December this year is right. That’s still two months away, and a lot can happen in two months.
This would increase the single pension to $1,063 and the couple’s pension to $1,603 per fortnight.
Using the federal Treasury’s inflation estimates, at the September 2026 indexation the single pension will go to $1,117 per fortnight (more than $30,500 a year) and the couple’s rate will go to $1,778 per fortnight (more than $46,000 a year).
However, what if the federal Treasury proves to have estimated inflation incorrectly? With all the things going on in the world at the moment that contribute to the current inflation problem that is a distinct possibility. If Treasury has got it wrong, it is likely that they will have underestimated inflation. In that case, the pension is likely to go up by far more than we’re predicting here.
Can Australia afford this?
More than likely it can. One major cause of inflation is rising energy prices. Australia exports loads of coal and gas and is getting mouth-watering prices for these commodities, which generates a lot of tax revenue.
The fact remains, though, that high inflation means that pensioners have to find a lot of extra money to cover rising prices for everything until the next pension indexation comes along.
There are three ways pensioners can gain in real terms from pension indexation and get a little bit less poor. The first way is if there’s deflation. Just as inflation reduces the value of money, deflation increases it. And because the pension never goes down, deflation means more purchasing power for the pension.
The second is if wages take off and outstrip inflation, because that’s when the pension gets indexed based on wages. Unfortunately, the Government says wages will not go up for another two years.
The third way is explained in this article.