There has been great pressure on both of the major political parties to stop giving so-called rich retirees partial pension income. The conventional view has become that retired millionaires should not be feeding off the public teat.
At first glance this seems entirely reasonable. A million dollars, or anything close to it, sounds like an awful lot of money. But if we factor in current interest rates on the lowest risk option, term deposits, we get a very different picture. In terms of income, many of those ‘rich retirees’ would actually be better off on the pension.
Both the lower limit and upper limit on the assets test will change from 2017. At the lower end, the Government will increase the assets test limit to qualify for a full pension, from $286,500 to $375,000 for couples, and from $202,000 to $250,000 for single people. At the other end, the upper limit for receiving a part-pension and the associated benefits will fall: from $1,151,500 to $823,000 for couples and from $775,500 to $547,000 for singles.
The income from the aged pension is $860 a fortnight, or $22,360 a year for singles, and $1296 a fortnight, or $33,696 a year, for couples. Let us assume that single or couple retirees choose term deposits because they need income and they have a low tolerance for risk, so are unwilling to choose other riskier options, such as investing in shares. How much capital will they need to get the same result as the aged pension from a term deposit as the aged pension?
At current term deposit rates of about 2.5 per cent, the single retiree would need assets of $892,000 – $345,000 above the proposed upper limit cut off rate – to receive the same income as the full aged pension. Couples will need $1.3 million – $477,000 above the cut off rate – to get an equivalent income to the pension. So the government’s plans to cut off pensions at a lower asset rate will notionally put many retirees who have saved for their retirement in a worse position than if they had saved much less and gone on the pension instead.
The good news is that couples that have no, or low, savings and so rely on the aged pension are actually ‘worth' well over a million dollars, at current interest rates. A single retiree is ‘worth' almost a million dollars. It is further demonstration of