The Age Pension is indexed twice a year – in March and September. As we all know, there was no movement in the rates last September due to the impact on the economy of the pandemic. It was the first time in more than 20 years that pension rates did not increase and was a result of a decline in “some of the indices used to adjust these payments”, not because of a government policy decision.
So, does that mean rates are sure to be changed in March?
Payment rates are indexed to maintain their real value, so they keep pace with the Consumer Price Index (CPI) – a measure of changes in the price of a fixed basket of goods and services – and maintain their purchasing power as the CPI rises.
The Parliament of Australia website explains that for most payments this is done by adjusting payments in line with movements in the CPI. However, since 2009, pension rates have also been adjusted using a different measure – the Pensioner and Beneficiary Living Cost Index (PBLCI).
The 2009 Harmer Pension Review found the CPI, as a general measure of price changes, did not reflect cost of living changes for certain households and recommended the use of an index that measured changes for pensioner households.
The PBLCI measures the effect of price changes on the out-of-pocket living expenses experienced by households whose main source of income is government payments.
Any change in pension payment rates in March will depend in part on the CPI from the December quarter, which is set to be released on 27 January.
The Combined Pensioners and Superannuants Association (CPSA) explains how the pension would be affected if the September quarter figures were used to index the pension.
“The CPI went up from 114.7 in the June quarter to 116.8 in the September quarter,” CPSA policy manager Paul Versteege wrote in The Voice.
“Based on that, you would think that the pension would go up, but would it?
“This is because the December 2019 CPI number was 117.1. For the pension to go up, the new CPI would need to be higher than 117.1.
“Until the CPI goes above 117.1, there will be no pension increase.”
So, what happened to the PBLCI?
“The PBLCI went up from 115.6 in the June quarter to 116.5 in the September quarter,” said Mr Versteege. “In the December 2019 quarter, the PBLCI was 116.3.
“116.5 is greater than 116.3. Therefore, the pension would go up.
“But, again, the September 2020 quarter will not be used. We have to wait to see what happens in the December quarter.
“In the December 2020 quarter, either the CPI will have to be greater than 117.1 or the PBLCI will have to be greater than 116.3 for the pension to be increased.”
Addressing the issue of the base rate of the Age Pension, Mr Versteege said: “Pension indexation is designed to maintain pensioners’ purchasing power. This means if the pension doesn’t go up, purchasing power is maintained without a rise.
“Arguably, the pension isn’t much to live on, but that can only be addressed by a real increase, such as occurred in 2009.”
So, what is the likelihood that the CPI or the PBLCI will deliver the numbers necessary for an increase in the Age Pension? We asked The Australia Institute senior economist Matt Grudnoff to check his crystal ball. This is what he told YourLifeChoices.
“I don’t expect the CPI in the December quarter will increase by much. Most of the economy has opened up and the unusual factors that caused the big fall in the June quarter reversed themselves with a big increase in the September quarter.
“Recessions are usually times of weak inflation. Businesses that are worried about selling their products are very reluctant to increase prices.
“There are also two other factors that are likely to keep the CPI low. The first is weak oil prices. As countries around the world are being hit hard by COVID, people are travelling less and so demand for oil has been weak and oil prices have been low. This has meant petrol prices have also been low.
“The second factor is the strength of the Australian dollar. The chaos in the US and other countries has meant that our economy has been stronger than most and it has meant our dollar has remained relatively strong. A stronger dollar means consumers can buy imports cheaper, which puts downward pressure on prices and inflation.”
Are you banking on an increase in the Age Pension payment rates in March? Do you believe your living costs have increased?
If you enjoy our content, don’t keep it to yourself. Share our free eNews with your friends and encourage them to sign up.