It was back in February 2015 when then social security minister Scott Morrison announced the federal government was cutting the “deeming rate” — the official interest rate retirees are deemed to earn on their cash when being considered for the pension.
Morrison explained how it was necessary for the government to cut the maximum rate from 3.5 per cent to 3.25 per cent to prevent retirees on government pensions being penalised by falling interest rates — penalised, that is, through lower pensions and a potential loss of access to Commonwealth Seniors Health Cards.
“It says very clearly as economic circumstances change for part-pensioners, people on disability payments and carers’ allowances, the government needs to make adjustments so they can deal with those circumstances, and that is what we have done,” Morrison said at the time. “It shows the government does understand pensioners face pressures with cost-of-living increases.”
Fast forward 4½ years and the federal government has kept the maximum deeming rate at 3.25 per cent — while the Reserve Bank cut the official cash rate to 1 per cent on Tuesday.
In short, while retirees and those on pensions are getting at least 125 basis points less for their savings — assuming they are astute enough to move their money around to get the best rate — they are being penalised by a government that is still “deeming” many of them to be earning 3.25 per cent from their savings.
This “slow-boiling frog” situation reached an angry tipping point this week as retirees and others on fixed incomes coped with the latest cut in official interest rates and the prospect of more to come. While the Reserve Bank has cut rates in the belief it will help stimulate the economy, a regime of falling interest rates is making life increasingly harsh for millions of Australian retirees and those on fixed incomes.
The Coalition government led by Morrison and Treasurer Josh Frydenberg is now under pressure to cut the official deeming rate, with seniors lobby groups having learned the lessons of the recent election campaign battle against Labor’s proposed abolition of cash refunds on franking credits.
National Seniors’ chief advocate, Ian Henschke, describes the situation as a secret “pensioner tax”.
As he points out, when Morrison cut the deeming rate by 25 basis points in 2015, he announced it would put an extra $200 million back into the pockets of retirees and those on other allowances such as disability and carers’ allowances.
By not cutting the rate since then, while official rates have gone down by 125 basis points (five times 25 basis points), he estimates that seniors have been penalised by up to $1 billion.
“To leave the rates unchanged for more than four years while there have been five interest rate drops by the Reserve Bank shows the government is balancing the budget on the backs of pensioners who have money in savings accounts,” Henschke says.
“You can’t demand — as the Prime Minister and Treasurer have done — that the big banks pass on the full cut when the RBA lowers its rate and not do the same for pensioners.
“It’s not a good look.”
The deeming rate is the official rate people on pensions are deemed to have earned on all financial investments including money in savings accounts, term deposits, managed funds and superannuation.
The rates have been unchanged at 1.75 per cent for amounts under $51,800 and $86,200 for a couple, and 3.25 per cent for amounts above these levels.
The fact is many pensioners and people on low income earn next to nothing as they leave money in cash or low-interest savings accounts. National Seniors is calling for the federal government to cut the deeming rate by the full 1.25 per cent to reflect the fall in official rates since February 2015.
“If the deeming rate is not dropped by the full amount it will be manifestly unjust,” Henschke says.
“The government has been banking the difference for more than four years.”
Just back for its first parliamentary sitting week since the election, the government has indicated it is aware of the situation.
Social Services Minister Anne Ruston this week requested advice from her department on cutting deeming rate settings in the wake of the latest Reserve Bank rate cut, promising to discuss the issue with fellow members of the Expenditure Review Committee.
“The government understands that reductions in the official cash rate impact on older Australians on fixed incomes,” she said.
Ruston promised to “make further comment” on the issue “at the appropriate time”.
Finance Minister Mathias Cormann also confirmed this week that the government is reviewing the issue.
“We are currently considering how best to respond,” he said.
Ruston is expected to make a recommendation to the committee as early as next week on a cut to the rate.
The opposition was quick to jump on the issue in the wake of this week’s RBA cut.
“Labor is calling on the Liberals and Nationals to urgently reduce the deeming rates and ease the pressure on pensioners’ budgets,” opposition spokeswoman for families and social services Linda Burney said this week.
She estimates that up to 627,000 age pensioners who are on part-pensions because of the income test have been adversely affected by the government’s refusal to cut the rate.
“The gap between interest rates and deeming rates is growing,” Burney said.
“How does Scott Morrison expect pensioners to find term deposits and other secure investments that pay anything like 3.25 per cent?
“With interest rates at record lows, the government has run out of excuses. Every day the Morrison government refuse to reduce the deeming rate is another day they are short-changing pensioners.”
Franking credit sequel
Like the franking credit issue, the political pressure over deeming rates plays into a nervousness among retirees about their financial position well beyond the impact on those who are directly affected.
The ACTU has seized on the issue as well, declaring yesterday that the Reserve Bank had cut rates “to protect a fragile economy”, with the move exposing “vulnerable workers and retirees who have been victims of the Morrison government’s austerity policies”.
As the ACTU pointed out yesterday, the government’s move to leave the deeming rate unchanged was made even worse by changes made by the Coalition government to the asset taper rate, which have also made it harder to get the pension.
“The current asset taper rate is punitively high and causes some retirees to be worse off just for having superannuation savings,” ACTU assistant secretary Scott Connolly says.
“The asset taper rate undermines the integrity of the superannuation system by rendering pointless additional superannuation for many workers approaching retirement, needing to draw a part-pension.
“The government needs to urgently reform the asset taper rate so that retired workers are better off.”
Deborah Ralston, chairwoman of the Self-Managed Superannuation Funds Association, who was involved in organising the campaign against Labor’s proposed franking credit changes, is another one calling on the government to review the deeming rates.
“The rate reductions we have just seen now change the picture,” she says.
“The government can respond to this changed scenario.
“They did so in the wake of the GFC and now is the time to do it again.”
The environment of falling interest rates led to warnings this week that retirees and savers could start to seek out more risky investments to look for higher returns on their savings.
The acting president of the Association of Independent Retirees, Wayne Strandquist, told The Australian that savers and retirees now felt “trapped”.
“They’re very hesitant, certainly among the older cohort, to move into riskier investments,” Strandquist said.
“But some of them have no choice. They’re seeking advice on how they might deploy their funds into the sharemarket and riskier investments.
“The chief concern, then, is if the stockmarket has a correction, they will lose their capital.”
The federal government’s delay in changing the deeming rate regime has prompted calls by National Seniors for an independent body to be set up to oversee pension changes and the deeming rate regime.
The latest rate cut has added fuel to the fire of those calling for a more comprehensive review of the retirement income system.
“National Seniors is calling on all sides of politics to take the politics out of the pension and give a fair go to pensioners by having an independent body oversee both the deeming rates and the pension,” Henschke says.
Pensioners learn to fight
National Seniors has joined up with the Benevolent Society to “fight for a fair go for the Age Pension”.
“The Age Pension has become a prime target for federal budget savings, with an ageing population and the overall cost used to justify cutting the number of people receiving the pension,” Henschke says.
“Many part-pensioners have lost access to the welfare payment due to the 2017 changes to the assets test taper rates, while others have become ineligible for a Commonwealth Seniors card.
“The unfair deeming rate has added more pain for pensioners.
“The discussion around the age pension has become toxic, with younger taxpayers being told by the government they were bearing an increasing burden to fund it.
“Politics must be taken out of the process.”
The superannuation and retiree lobby is now also awaiting details of a review of Australia’s retirement incomes policy, announced by Frydenberg just after the election.
Industry groups are already preparing a wide range of submissions for the review but the Treasurer has yet to announce the details.
Retiree groups have learned from the franking credit row that they need to organise to have a stronger voice to articulate their concerns — otherwise they risk their interests being overlooked by governments keen to balance their budgets.
This week’s cut in the Reserve Bank cash rate has sparked a storm of concern among retirees much broader than the impact of the deeming rate.
But with retiree incomes now under pressure, the focus on the deeming rate issue takes on more serious political implications.
Glenda Korporaal - Glenda Korporaal has been covering business and finance in Australia and around the world for more than thirty years. She has worked in Sydney, Canberra, Washington, New York, London, Hong Kong and Singapore and has interviewed many of Australia's top business executives. Her career has included stints as deputy editor of the Australian Financial Review and business editor for The Bulletin magazine.
5 July 2019