Deeming cut could hit budget for $200m

The nation’s peak seniors body has attacked the Coalition and Labor over what it calls the deeming rates “pensioners tax”.

Treasurer Josh Frydenberg in his office at Parliament House in Canberra. Picture: Kym Smith

The nation’s peak seniors body has attacked the Coalition for failing to move earlier to slash deeming rates in line with interest rate reduction­s, accusing Josh Frydenberg of imposing an effective “tax” on pensioners.

With the Treasurer leaving the door open to reducing the deeming rates as soon as this week, ­following consecutive reductions in the official cash rate, National Seniors Australia chief advocate Ian Henschke declared that a freeze on the deeming rate had cost pensioners “hundreds of million­s of dollars” since 2015.

He called for an independent body to set the deeming rate, which is used to determine the asset test when people apply for the pension.

“This is the Coalition’s pension­er tax and the only reason Labor are probably not yelling so loudly out of it is because they were part of the scheme too. They were the ones doing it between 2010 and when Tony Abbott got in (in 2013),” Mr Henschke told The Australian. “If the franking credits issue is a retiree tax then the deeming­ rates rorts is the equivalent of a pensioner tax.

“You cannot have any credib­ility as a government if you say: ‘I want every bank in Australia to pass on the full interest rate cut every time there is a (official rate) cut.’ And then at the same time you don’t pass it on to the most needy and vulnerable in society.”

The interest on term deposits has sunk to levels not seen since the 1950s, but the deeming rate — or assumed rate of return on assets — for single pensioners is 3.25 per cent for assets of more than $51,200 and 1.75 per cent for those below.

Last Tuesday, the Reserve Bank dropped the official cash rate for the second month running, to a record low 1 per cent.

Actuarial firm Rice Warner said reducing the deeming rate by 0.5 per cent could cost the budget bottom line more than $200 million per year. “It’s quite possible that the amount of money the governme­nt would save as a result of not cutting the taper rate by 0.5 per cent today could be in excess­ of $200m per annum,” Rice Warner senior consultant Nathan Bonarius said.

Opposition social services spokeswoman Linda Burney yesterday offered in-principle support for Mr Henschke’s call for the deeming rate to be dropped by up to 1.25 per cent, in a move Labor claims will save pensioners up to $3875 a year.

“Where my thinking is at is the best term deposit you can get is about 2 per cent,” Ms Burney told The Australian. “So it would have to be that or lower.

“I’m not committing Labor to anything, and we are a long way until an election, but it certainly can’t stay at the rate that it is now.”

Assistant Finance Minister Zed Seselja said the government was “always looking at what we can do for pensioners”.

“We know many pensioners do it tough and we know that deeming rates is one part of that. It is about a quarter of pensioners,” Mr Seselja said.

“One of the reasons they have been steady is interest rates up until recently have been steady.

“We are very much listening to the concerns raised by pensioner groups.”

The taper rate is also an area ripe for reform, according to the Grattan Institute, which is calling for it to be cut in half.

In 2016, the government doubled­ the taper rate for age ­pensioners from $1.50 to $3 for every $1000 in assets held above a threshold over which they lose the full pension.

The change meant that, despite an increase in the full pension threshold, many people lost part-pensions as the steeper taper rate reduced the part-pension asset limits.

The Grattan Institute is calling for the taper rate to be reduced to $2.25 as a trade-off for including the family home — above a threshold of about $500,000 — into the assets test equation.