The Federal Government is considering a revision of the pension taper rate as an alternative to the proposed indexation changes to the Age Pension suggested in last year’s budget.
Increasing the pension taper rate for wealthier retirees may be a way for the government to achieve much-needed savings that could make the pension more sustainable in the future. The current cost of the taper rate is estimated at over $1 billion per year – savings the government would be able to spread throughout the budget should the rollback occur.
The current system of payment rates came about during the Howard era almost a decade ago, when the budget was in a surplus of $17.2 billion. The previous reduction rate of $3 for every $1000 in assessable assets over the threshold was halved to $1.50. It was created as an incentive for retirees to keep working and saving for their retirement, and therefore, receive a bigger part Age Pension once in retirement. However, there’s evidence that the increased costs of Howard’s plan may be outweighing its intended benefits.
The proposed rollbacks would reduce part Age Pensions for retirees with assessable assets amounting to more than $1 million. This, in turn, would mean that those receiving full Age Pensions would not be affected as a result of scrapping of the changes to proposed indexation of payments for all of Australia’s 2.4 million age pensioners.
Prime Minister Tony Abbott has said that the government is open to negotiations on making pensions more sustainable.
“We believe in a decent, social security system, we believe in a strong retirement income system, we want to encourage people to save for their retirement, we want to ensure that the pension is adequate for people who need the pension,” he said.
Whilst this is another proposal in a long list of ideas to make the pension system more sustainable, it seems as though the government is finally on the right track when it comes to deciding how best to fund pensions in the future.
Amending the pension taper rates to target those with substantial private assets means that those who can least afford it should be safe from future pension reductions, whilst allowing retirees who have invested their life savings into their family home to still be able to qualify for a part or full Age Pension. It should also protect full pensioners, who have little or no assets, from being victimised by an overall reduction in pension payments.
This reform may also obviate the need for the government to introduce the increasingly unpopular plan to match the Age Pension indexation to CPI only, in order to create savings from within the pension system.
Finding a way to make the pension system more sustainable has been a thorn in the side of the government ever since it introduced its unpopular proposals in its first budget. The proposal to apply a broad cut to all pensions was never well-received by pensioners – especially when there are so many retirees receiving a pension who could otherwise afford to fund, or at least partially fund, their own retirement.
If the government is looking for a sustainable outcome for funding pensions, then focussing on retirees with assessable assets of over $1 million seems a good place to start.
What do you think? Will you be affected by this proposal? Do you think increasing the pension taper rate is a fairer way to make the Age Pension more sustainable? Is the government on the right track with this proposal?