Changes to the assets test rules for the age pension that took effect from 1 January 2017 actively discourage middle-income wage earners from saving to be self-sufficient in retirement, says SMSF Association CEO John Maroney.
He says the changes to the means test taper rate and thresholds, which reduce the entitlement to the age pension as a person or couple’s assets increase, have had “significantly adverse and presumably unintended consequences”.
“The Association supports appropriately targeted means testing to ensure the sustainability of the age pension, but our deep concern is that this measure is not appropriately integrated with the broader retirement income system.
“We believe having the superannuation and social security systems properly integrated is a key facet to achieve an efficient and sustainable retirement income system, and that the current siloed approach to policy making in these areas is creating perverse outcomes for individuals and couples.”
Maroney says the changes to the taper rate for the age pension assets means test have a significant impact on middle-income earners who have accumulated an average-sized superannuation balance and benefit from a part age pension payment that supplements their superannuation income.
“For home-owning couples who have a superannuation balance between $500,000 and $800,000, the increased taper rate creates a ‘black hole’ where their assets above the asset test free amount cause them to be worse off in terms of income.
“This is caused by the taper rate of the equivalent of 7.8 per cent a year, reducing their pension entitlement at a rate exceeding the income they earn from their superannuation balance above the asset free area. This is especially so in a low interest rate and investment return environment.
“Consequently, it actively discourages middle-income earners from saving for retirement and has other detrimental behaviour effects, such as providing an incentive to shift investments from assets that are included in the means test (e.g. superannuation) to those that are excluded (e.g. the family home).”
Maroney says the Association believes that a more appropriate and simpler mechanism to integrate superannuation and age pension means testing is to shift to a single means test that applies a deeming rate to financial and non-financial assets, removing the assets test.
“The Australia Future Tax System Review recommended that a single comprehensive means test should be pursued to ensure that assets are fairly accounted for, to remove distortions based on the form of savings and to ensure that appropriate incentives to save and use savings effectively remain, and the Association concurs.”