Pension indexation simplified

There is much talk about how pensions should be indexed and it’s important to understand which rules are currently applied to increase payment rates.

Currently the Age Pension, Disability Support Pension, Service Pension and Carer Payment are indexed twice a year, in March and September.

Payment rates are indexed to the rise in Consumer Price Index (CPI) or the Pensioner and Beneficiary Living Cost Index (PBLCI), whichever is greater. The CPI measures changes in the prices of a fixed ‘basket’ of goods and services and is used to ensure the real value of pensions. The PBLCI measures the effect changes in prices of out-of-pocket living expenses which are experienced by those households where the main source of income is a government payment and is designed to check whether their disposable incomes have kept pace with price changes.

After indexation is applied, the payment rate is then benchmarked against a percentage of the Male Total Average Weekly Earnings (MTAWE). The single rate of pension equals 27.7 per cent of the MTAWE and the couple combined rate is equal to 41.76 per cent. If, once initial indexation is applied the rate is less than the benchmark of the MTAWE, the payment rate will be lifted to equal the agreed percentage.

The benchmarking of pensions to the MTAWE is to ensure pensioners maintain a certain standard of living, relative to the rest of the population.

Written by Debbie McTaggart