Deeming change questioned as roundtable considers pension access cuts

Is the government’s surprise move to tighten access to the pension through higher deeming rates a sign of things to come?

Pensioners with assets will be impacted by the increase in the deeming rate.

The timing of a surprise lift in deeming rates is under question as the government considers ways to crimp pension access as part of this week’s economic summit.

Deeming rates – the rate at which the government “deems” investment returns to determine access to the pension – have not changed for four years.

The extended freeze in the rate under different governments – starting with Scott Morrison in 2021 – had led some to believe the issue would be put in the “too hard basket” by the government.

However, with submissions to the economic summit calling for cutbacks to pension access – including the assessment of family home values in pension calculations – the government has now clearly signalled it is ready to make changes in a highly sensitive area affecting many older Australians.

Investors had expected any change in deeming would have occurred as part of the federal budget, however Social Services Minister Tanya Plibersek left it until this week to announce the rates would rise on September 20 – by 0.5 per cent.

Ms Plibersek’s own department had warned this year that generous levels of pension access had allowed some retirees to accumulate wealth through the social welfare system.

In The Australian’s latest Money Puzzle podcast, financial adviser Will Hamilton of Hamilton Wealth Partners says the deeming changes are part of a wider plan from the government. “They’ve got to curtail expenditure and, you know, people have got used to this middle class welfare. So the government are going to start to do that … this is the first sign.”

Under the new rules, the two deeming rates are up 0.5 per cent. The lower rate moves from 0.25 per cent to 0.75 per cent and the higher rate from 2.25 per cent to 2.75 per cent.

With bank cash rates coming down at the same time, the changes are sharper than might first appear – narrowing the gap between what the government “deems” investors are making on their money and the rates they are achieving in the commercial market from banks.

The majority of older Australians receive a full or part government pension. There is an estimated 771,000 who are currently affected by deeming rates – that number will now be reduced, saving an estimated $1.8bn.

Further lifts in the deeming rate can also be expected as the government indicated the new move was the first in a series of phased increases.

The return of a “live” deeming rate which is meant to stay in line with RBA rates also means that the measure becomes more important as a benchmark for other government initiatives.

As debate continues to rage over the new super tax and its calculation of unrealised gains, Treasury officials have floated an alternative to the measure which would hinge on a version of the existing deeming rate.

However, Treasury worked on a deeming rate of 7.5 per cent, which is more than double the updated deeming rate for pension access.

The super tax deeming solution has not gained much traction since industry experts believe the arrangement could trigger a range of problems, including the arbitrage opportunities for retirees between two deeming systems.