MrAntonioZappiaMP

Member for Makin

PO Box 775

ModburySA5092

8 April 2010

Re: Emerging adverse effects of the 2009 age pension reforms

Dear MrZappia,

On 20-3-2010 the fortnightly base age pension rate for each member of a couple changed from $506.50 to $528.30, and for a single person from $671.90 to $701.10. These are increases of 4.3% which deliver an extra $44 p.f. ($1,144 p.a.) to a couple and $29.20 p.f. to a single pensioner. But not for people in the transitional system.

In the transitional system the increases have been from $504.70 to $512.30 and from $624.90 to $634.30. These are increases of 1.6% that will deliver relatively small increases of $15.20 p.f. to couples and $9.40 p.f. to single pensioners. The reason for the difference is that the base pension rate used in the transitional system is indexed to the CPI only while the normal rate is indexed to the best of CPI, Pensioner and Beneficiary Living Cost Index (PBLCI) and wages.

At most age pension adjustments made in future something similar to the above will be repeated for as long as the transitional system continues to exist. This is all that anyone needs to know to confirm that the change to the income test made as part of last year’s age pension reforms has been detrimental to people who now find themselves in the transitional system. There are hundreds of thousands of people across Australia in the transitional system, many of whom are retired State and Commonwealth Government employees reliant on defined benefit superannuation pensions. There are many more defined benefit superannuants who had not reached age pension age by 19/9/2009 and these people are, or will be, even more adversely affected.

The Table on the next page makes a comparison of the way last year’s age pension reforms are affecting three different couples. Each couple has $10,000 in cash and $60,000 in personal assets (assets not producing income but counted in the assets test). For the couples in receipt of Super SA pensions, 95% of the pension value is counted in the Centrelink income test.

The Association claims that couple 3 in the Table, with $514,000 in an allocated pension account, have greater private means than couples 1 and 2 with Super SA pensions of $40,600 p.a. The basis for our claim has been set out in the paper entitled ‘Making a Valid Comparison of Private Means’ sent to you with our letter of 3rd March, 2010. It is inappropriate for couples 1 and 2 who have smaller private means to be receiving less age pension than couple 3 with greater means.

Private means / Super SA Pension $40,600 p.a. / Allocated pension account $514,000
Pension commencement / Couple 1: age pension begins 19/9/2009 or before / Couple 2: age pension begins 20/9/2009 or after / Couple 3: age pension begins any time
Means testing / Income tested in the transitional system / Income tested in the new system / Asset tested in the new system
Age pension at 20/9/2009 / $13,315($94 p.a. less than couple 3) / $10,177($3,232 p.a. less than couple 3) / $13,409
Age pension at 20/3/2010 / $13,671($882 p.a. less than couple 3) / $11,271($3,282 p.a. less than couple 3) / $14,553
Increase from 20/9/2009 / $356 / $1,094 / $1,144
Age pension at 20/9/2010 / Figures to be published in the next issue of The Superannuant
Increase from 20/9/2009 / Figures to be published in the next issue of The Superannuant

Note: the difference between the increase in age pension received by couples 2 and 3 is due to the change in deeming rates that also occurred on 20/3/2010. Deeming rate changes only affect income-tested people. However, the Association is not critical of the change in deeming rates or of the fact that it does not affect asset-tested people.

In the Table the entitlements at 20/3/2010 show what lies ahead for all income-tested part age pensioner couples. Couples 1 and 2 are exemplars for all income-tested couples with private incomes above about $15,000 p.a.

Couple 1: at 20/9/2009 this couple was only $94 p.a. behind couple 3 but now, six months later, they are $882 behind. They are destined to be the same distance behind couple 3 as couple 2 is. They might take 5-6 years to get there and when they do they will move into the new system and thereafter track along about $3200 p.a. behind couple 3 who, on the Association’s assessment, have private means greater than theirs.

Couple 2: they began their age pension getting a payment $3200 p.a. less than couple 3. This will continue for the remainder of their lives even though couple 3, on our assessment, has private means more substantial than theirs.

Where couples have private incomes less than $40,600 p.a. the permanent detriment arising from last year’s reforms will be smaller than $3200 p.a. and they will move out of the transitional system sooner. For larger private incomes the stay in the transitional system will be longer and the permanent detriment greater than $3,200 p.a.

Between now and the next Federal election (and subsequent Federal elections should it be necessary) the Association will be working to help all defined benefit superannuants better understand the effect on them of last year’s reforms. We hope the combination of the merit of our claim that the income test is much more severe than the asset test, and possible electoral consequences flowing from this, will see the income test withdrawal rate moved back to 40 cents.

Yours sincerely,

Vic Potticary, Secretary