What happens to the Age Pension when inflation goes down?

shocked older man

The cost of living is always going up, never down, right?

Not right. And that also means the Age Pension, when it is indexed, doesn’t necessarily always go up.

The Consumer Price Index (CPI) has been published 299 times since 1943. On 11 occasions, the CPI fell – most recently in June 2020 by 1.9 per cent.

The September pension indexation in that year produced an increase of zero per cent. Nada. Zilch.

When the CPI goes down, the pension doesn’t go down. That is good. But neither does it go up. And there’s another nasty hiding in the grass. The pension won’t go up until subsequent inflation catches up with the inflation level just before inflation went down.

Indexation

The September 2020 pension indexation was followed by the March 2021 indexation. Inflation had more than caught up, so the pension went up again.

Normally, inflation is caused by rising wages. People have more to spend. Demand for goods and services increases and so do prices.

But back in 2020 with COVID raging, it wasn’t demand that had gone up and caused inflation. That time it was supply that had been squeezed.

COVID lockdowns in China closed down manufacturing plants and fewer goods were coming through. Since then, the ban on Russian oil has meant less petrol and diesel coming through.

These things caused prices to skyrocket. But now the tide is turning.

Even China got sick of lockdowns. Factories there have reopened, producing goods as usual and bringing down the price of those products. It’s only the supply of petrol and diesel that’s still a problem, but prices at the bowser haven’t gone as crazy as was predicted.

Now that most supply problems have been sorted out, the CPI has dropped from its peak of 7.8 per cent to 5.4 per cent. The monthly CPI indicator for the month of October is even lower: 4.9 per cent.

Inflation

It all seems to be part of the trend of things going back to normal, with normal rates of inflation.

It means pensioners will need to get used to the March and September pension indexations producing far lower pension increases than we have seen over the past 18 months or so.

High inflation equals high indexation, low inflation equals low indexation. While it may seem that you’re better off with high indexation, you’re not. Indexation maintains the purchasing power of the pension at the same level. 

The only way to increase the purchasing power of the pension by indexation is for inflation to go negative and stay negative. You would be receiving the same dollar amount in the pension, but you could buy more with it.

Do you understand how inflation affects the Age Pension? Why not share your thoughts in the comments section below?

Also read: Age pensioners are paying a ‘poverty premium’

Paul Versteege is policy manager at the Combined Pensioners and Superannuants Association.

Written by Paul Versteege

9 Comments

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  1. More than a year ago mentioned about the pension be at $1000 fortnight, inflation can go down or up by my experience goods prices never goes down they kept high and always will be high, no matter what more money we get woolies, coles, will try to get and benefit them self.

  2. I have no real problem with the pension remaining steady due to indexation. You can’t have it both ways, large jumps in the pension when inflation is high and large jumps in the pension when the inflation is low, not really on, it. I think what really peeves most pensioners and people who depend on some kind of Government Support are the vast amounts of monies seemingly wasted by Government’s. I believe in the old adage charity begins at home, so look after Australia and the Australian People first. Health, Health, Health, that should be the first and main problem to be sold by the Government of the day. So before you go handing out Australian Taxpayer Funds to every Country in the World that has a problem, stop, think and don’t. Fix our many home grown problems first. When Every Australian can walk into a Hospital or a Doctors Surgery and receive immediate attention and when Every Australian has a roof over their heads and three square meals a day, then and only then should the Australian Government be worried about the living conditions of other Countries. Not Their Job. Jacka.

    • The government gives money to some struggling countries for strategic reasons more so than helping them. A few gifts can help with keeping friends which enhances our own security. If we stopped all gifts other countries would fill the gap and Australia could find itself out in the cold and surrounded by not so friendly influences. That is the reality of the world.
      As to our health system it does need improvement but money is only a part of the answer. There are two obstacles, one is a growing population due to high immigration and the other is a lack of qualified medical professionals to staff the system. No amount of money can fix this problem if there are not enough doctors and nurses to fill the positions.

  3. British Pensioner

    My pension is not indexed so I enjoyed zero inflation. Also the Australian dollar helped. Now I’m getting the double whammy!

    I cant get the Australian pension as I own another property that houses a young family who don’t pay rent.

  4. NEVER MIND ALL the FANCY WORDS, they don`t mean a toss when you`re forever struggling
    because the politicians don`t rate you as worthy.

    the pension may go up twice a year ( and could do with at least three times a year.
    AND NEEDS TO BE A REAL rise. –NOT the insult amount that it usually is.
    it needs to be enough to keep up with the current cost`s —NOT that of twenty years previous.

  5. There is also a group that are over 65 retirement still a couple of years off and don’t have superannuation that has accumulated over a full working life. Compulsory superannuation only commenced in 1991. People retiring in the next 14 years are not likely to have the level of superannuation that others who contribute from their first working day are likely to have. These people will have very little to support any government payments they might receive. All this stress on older people to save the government a few dollars so they can waste millions elsewhere. Anyone who thinks the government considers average Australians might be blinded by benefits paid to families earlier in life.

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