Lower deeming rates ‘long overdue’

Scott Morrison is on track to announce a long overdue reduction to high deeming rates.

Scott Morrison in parliament yesterday. Picture: Kym Smith

Scott Morrison is on track to announce a long overdue reduction to high deeming rates as soon as next week after an outcry from retirees grappling with negative returns after inflation on a quarter of all term deposits.

The move — confirmed yesterday by multiple government sources — comes as the Reserve Bank slices interest rates to a new record low of 1 per cent and as seniors groups accused the government of “balancing the budget on the backs of pensioners”.

The RBA rate cut will trigger a series of deep interest rate cuts from the banking sector to already meagre savings rates offered on term deposits.

Social Services Minister Anne Ruston last month asked her department for advice on cutting deeming rates, which the government uses as a standard rate to means-test investments held in term deposits. She is awaiting a sign off from the Expenditure ­Review Committee.

Although interest rates on term deposits have sunk to their lowest levels since the 50s, the current deeming rate for singles has remained stuck since 2013 at 3.25 per cent for assets over $51,200 and 1.75 per cent for those under that level. It was last reduced by Mr Morrison when he was social services minister.

“The government understands that reductions in the official cash rate impacts on older Australians on fixed incomes. I will make a further comment on the matter at the appropriate time,” Senator Ruston told The Australian.

However, any move to make a one-off reduction to the deeming rate will fall short of calls to peg it to the RBA’s cash rate.

National Seniors chief advocate Ian Henschke told The Australian: “If the deeming rate is not dropped by the full 1.25 per cent it will be manifestly unjust.

“The government has been banking the difference for more than four years. To leave the rates unchanged for more than four years while there have been five interest rate drops by the RBA shows the government is balancing the budget on the backs of ­pensioners.”

Under current social security laws, pensioners are income-tested on the assumption they are earning a specified return on their investments. If a deemed rate is higher than an actual rate, the pensioner loses out.

Opposition social services spokeswoman Linda Burney said a reduction in the deeming rate was urgent. “Up to 627,000 age pensioners, who are on a part-pension because of the income test, are impacted by the government’s refusal to reduce deeming rates,” she said. “How does Scott Morrison expect pensioners to find term deposits or other secure investments that pay anything like 3.25 per cent.”

Following the RBA’s rate cut last month, the average term ­deposit rate was sliced by 0.27 per cent — more than the central bank’s 25-basis-points reduction — meaning savers are bracing for a further round of bruising cuts as the banking sector targets retirees to shore up profitability.

With inflation at 1.8 per cent, and forecast by the RBA to rise to 2 per cent by next year, more retirees with term deposits face the prospect of negative returns on investments, meaning they will lose money by keeping it in the bank.

Data obtained by The Australian from industry consultants Canstar shows 22 per cent of 12- month term deposits offer a rate under 2 per cent. For three-month deposits, this figure rises to 26 per cent of all term deposits on offer.

“We are at all-time low cash rates and this is working its way through bank balance sheets,” Canstar executive Stephen Mickenbecker said.

“Home borrowers win and savers and self-funded retirees lose, as they have been losing since the last cash rate increase in 2010. It’s been a long time between drinks, if they can still afford drinks.”

Some of the lowest rates on offer include 12-month deposits for more than $50,000 at 1.5 per cent offered by HSBC, and 1.7 per cent offered by Macquarie Bank. Commonwealth Bank and its subsidiary Bankwest are offering savers in “gold term deposits” a paltry 1.9 per cent, while Westpac is offering retirees 1.95 per cent.