One deeply unpopular measure in the 2014 Federal budget was the removal of the existing indexation system used for the Aged Pension. This measure was never passed by the Senate and so never became law. In the 2015 Federal budget the original indexation system has been officially reinstated.
The Age Pension indexation system involves increasing the pension twice a year by the maximum of the increases in the CPI and a special pensioner living cost index (the PBLCI). It is also “bench-marked” to male total average weekly earnings (MTAWE). For a home owning couple the benchmark rate is 41.76% of MTAWE. If the increase in the pension resulting from the maximum of the CPI and the PBLCI is less than the benchmark rate, which has been occurring in the majority of cases to date, then the benchmark rate applies, as described here. If the benchmark rate is less than the increase due to the CPI/PBLCI increases, then the CPI/PBLCI rate applies.
This article argues that this system is unfair, over-compensates pensioners and suggests that CPI indexation is more appropriate. I half agree with this article, however CPI indexation is not the answer as this tends to under-compensate. The reason is that if the pension is indexed to CPI it is likely that the amount of funds received from the pension will not allow pensioners’ lifestyle to keep pace with improvements in the way the rest of Australians live. To give an example published elsewhere,
For example, if the latest model washing machine has increased in price, it is compared to the model it has replaced to see if it has any improvements compared to the previous model. If it has any improvements, the price increase reflected in the CPI is adjusted downwards by the estimated value of the improvement(s). So, if for example the current model has increased in price by 4% and it is ascertained that the improvements account for half of the 4% total price increase, the CPI will only reflect a 2% price increase. The trouble is, if you can’t buy the superseded model, then your pension hasn’t been adequately increased to meet the new price!
If you accept that pensions should be indexed to community standards, then indexing to CPI is not appropriate. However neither is indexing to MTAWE because:
- The community is made up of males and females. The pension should be bench-marked to TAWE rather than MTAWE.
- The median income more accurately reflects community standards than the average, so benchmarking to the median is more appropriate.
This article provides more information about the effects of making these types of changes (along with lot of other pensioner-unfriendly changes!).
Retiring early for Australians 