We have discussed this topic before and suggested that while it is a relatively simple mechanism to ‘average’ the various investments returns, we are concerned with the growing discrepancy between the applied rate and the cash rate.
The current (May 3 2016) RBA cash rate is 1.75% while the Centrelink deeming rate continues be as high as 3.25%. While even the most common term deposit rates are less than 2.5%. Four years ago there was virtually no difference between the cash rate and the highest deeming rate. The result? Pensioners are receiving less!
Some of the arguments put forward by those supporting the 3.25% rate include:
Q. “Commercial superannuation returns are more than 7%, what’s wrong with 3.25%?”
A. Super ‘funds’ generally recommend a more conservative fund balance balance for those in retirement. If we use web sites such as Super Ratings we can see that the majority of super funds reported on this site have a return rate of less than 2% for the last 12 months. This site also reports that those funds largely exposed to the share market report negative returns. It should be noted that these returns are also gross returns.
Q. “The Government sets the deeming rate based on the CPI. Isn’t that the fairest benchmark?”
A. Of course the Government’s decision is based on advice from the Department of Human Services and Centrelink. Also the deeming rates consider the simple Consumer Price Index (CPI). However, that index does not usually reflect costs of the age pensioner. That is why the Government has a number of price indexes. The one that covers age pensioners is the Selected Living Cost Indexes.
Of course also remember that on the Jan 1 2017 the Government is reducing the deeming rate thresholds - further negatively impacting on age pension payments.