Why the Age Pension is not keeping pace

older woman counting age pension

The Australia Institute senior economist Matt Grudnoff tells why the Age Pension and other government payments are not giving recipients the standard of living other Australians enjoy.

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The government has claimed as a virtue the biggest rise in the Age Pension in many years. But this increase is because prices have been rising at their fastest rate in many years.

While people tend to focus on the dollar value of incomes, economists like to look at what we call the real value. The real value is the dollar value with inflation removed.

For example, if you asked people would they prefer to live in a world where they earned $1000 or $800, most people would probably choose $1000. But an economist would want to know the prices of the things you usually bought in these worlds. If the things you bought in the world where you earned $1000 cost $1000 but these same things cost $700 in the world where you earned $800, you’d be better off living in the world where you earned $800.

The large increase in the Age Pension is just compensating people for the higher prices of the things they buy. While it might be a big increase in the dollar value of the pension, it is not a big increase in its real value. It is not necessarily making pensioners better off.

Read: September increase biggest in 12 years

The inflation rate

Another important consideration is that while we all talk about the inflation rate, this is just the increase in prices for an average household and in the real world everyone has a different rate of inflation.

Let’s compare two hypothetical retired couples on the Age Pension. Our first couple is having lots of health problems and is restricted from travelling around except to medical appointments. They spend a significant amount of their income on healthcare. Our second retired couple is much more fortunate. They are healthy and tripping around Australia in a caravan. They spend a significant proportion of their income on transport.

While both couples are retired and on the Age Pension, they spend their money on very different things. If transport costs are rising much faster than health costs, then the couple tripping around would face a higher inflation rate. If healthcare costs are rising much faster than transport costs, then the couple who are unwell would face a higher inflation rate.

Since everyone has a different inflation rate, it is tricky to find one right inflation rate by which to increase the Age Pension.

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Calculating the Age Pension

The current method is to increase it twice a year to either the Consumer Price Index (CPI) or the Pensioner and Beneficiary Living Cost Index (PBLCI). The CPI is the inflation rate faced by the average of all households, while the PBLCI is the inflation rate faced by the average household that gets the Age Pension and other similar payments.

Another important issue is why the Age Pension and other government payments are linked to inflation and not to the growth in wages. Wages usually grow faster than inflation.

By linking the Age Pension to inflation, you are fixing the standard of living of pensioners according to the amount of stuff they can buy with their pension. But standards of living usually go up over time. Think about the average standard of living for a household in the 1960s or `70s. It was lower than today because today we’ve had the benefit of 50 or 60 years of economic growth.

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Some might argue that if it was good enough for households in the past, then it should be good enough for households today. But this ignores rising expectations. It also is effectively saying that we should lock age pensioners out of the benefits of economic growth.

It seems strange that we would choose to pick this particular segment of society to be excluded from rising living standards.

We can get bogged down in discussions about which inflation rate the Age Pension and other government payments should be linked to. But we need to ask the wider question of why we think these people should not share in Australia’s growing economy.

The Age Pension and other government payments should keep people out of poverty and they should be linked to wages and not inflation so that these people can share in rising living standards over time.

Do you believe living standards for pensioners are falling despite big increases in the pension? Why not share your thoughts in the comments section below?

Written by Matt Grudnoff

Senior economist at the Australia Institute, Matt is a regular contributor to YourLifeChoices and has extensive knowledge on retirement incomes, taxation and tax concessions, the federal Budget, poverty and inequality, free trade agreements, housing affordability, energy economics and climate change. He worked at the Australian Bureau of Statistics and the Department of Climate Change. Matt is the brains behind Australia's most accurate cost-of-retirement table, the YourLifeChoices Retirement Affordability Index™.

6 Comments

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  1. For sure all this is true, but the one thing that no one wants to deal with is in the inequity of the pension when you are married.This is actual discrimination against married people.
    While the government Centrelink and the rest of their cronies will argue that two people can live cheaper than one this is not entirely true.
    Would they also argue that 3 ,4 or even 5 people on a single pension living in the same house and sharing costs and even getting rent assistance can live cheaper than 2 ?
    Blind freddy can see the discrimination here and I guess we are too weak to do any thing about it.
    In fact 2 people living together can be much more expensive than one.
    What if one of those is sick and requires much more medication than the other, consumes more water and electricity, has a higher food bill ?
    The government assumes that married couples will share the costs but in the real world that rarely happens.
    Generally each will protect their assets and only part with those assets on a need basis ,it’s not all in together, this is insane thinking.
    What if one partner is working and much younger than the older partner and is saving money so she or he can survive after the death of the older person?
    No one in their right mind would begrudge the younger person for trying to secure their future and yet the government fails to recognise that every relationship is different with different values and priorities.
    Rarely these days are couples joined to the hip, or share the same needs, or want to share at all.
    The model is wrong, we need one pension for all, a single pension ,then each person can be assessed up to a living wage standard , not this ridiculous suppression of income that the government now applies to those who can least afford it.

    • Totally agree. Our neighbor is single, and we are a couple. Our costs are higher than hers and CL cannot explain where the supposed savings of being a couple cut in. We would be better divorcing and being two singles sharing a home.

    • Yes it’s discriminatory paying people different rates of pension depending on their living arrangements. Just as bad is when one spouse is younger and still working his/her wages reduce the amount of pension the other spouse receives.
      To be fair, pensions should be the same for all individuals and one partners income should have no effect on the other partners pension.

  2. I totally agree with Eric about married couples being discriminated against, I am single but I can see the inequity of this. Everyone should be paid an individual pension.
    The way pension increases are given is completely out of step with what is happening in real life and how it affects the individual.
    For months everything has been going up and up and for me my savings (what little they are) are going down and down, and pensioners have to wait for months to get their rise in the pensions. I know that for months my groceries (for the same amount of items) has been going up and sits around $30 or more extra each week, and that excludes the cost of other things that have gone up which include rent, utilities, fuel, internet, phone, insurance, etc. But if we calculate $30 per week for 6 months is $780 that we are behind by waiting and waiting for our 6 monthly increase, that means at least $780 less in savings how do we get that money back, and in reality it is much greater than $780 perhaps even double.
    This new government goes on about the biggest rise in pensions giving themselves a pat on the back but in reality maybe they need a kick up the bum to make them wake-up.
    I sometimes wonder if the aim of governments is to keep pensioners under the poverty line which places them under more pressure and more stress, with a goal in mind… it amazes me that there are not more pensioners that permanently give up on life.

  3. Yes, as a married pensioner I do wonder why single pensioners receive more than married pensioners. My husband and I also don’t get rent assistance as we own our own home outright.
    Homeowner pensioners are always discriminated against by this.
    We do get a small amount of discount for our power supply and council rates. Medicines are free at this time of the year because we need quite a few but that is the same for renters. All our lives paying taxes while working to own our own home and save for our retirement so that we will not be a total drain on the public system we are now expected to give up the lifestyle we are accustomed to. Lower the pension rate for those who have needlessly depended on the welfare system, have never worked a day in their lives although they were capable of doing so, and raise the pension for those who have taken the right path and provided for themselves.

  4. Reality check…
    Two people canNOT live as cheaply or (much less) cheaper than one.

    This discrimination against marriage (which is what this really is) really needs to be stopped.

    Everybody should be paid the same, single pension rate, with no exceptions under any circumstances whatsoever. Yet again, here we are seeing the grossly “out-of-touch” political perspective of reality. Time to wake up and get real Albo and co, instead of pussy-footing around looking for votes at the expense of those less fortunate.

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