The stagnation of deeming rates at 1.75 and 3.25 per cent for the last four years is under scrutiny as the Reserve Bank’s second interest rate cut means that some pensioners are now facing a one-third reduction in their income.
The deeming rates, which were the notional earning rates the Government presumes investments earn when calculating pension entitlements, was last changed in March 2015 by then-Social Security Minister, Scott Morrison, since which there had been five interest rate cuts.
Its lack of change in the face of interest rate cuts meant that retirees relying on both social security and superannuation could face a shortfall as earnings from investments drop but Age Pension payments presume they stayed the same.
SuperConcepts’ executive manager for technical & strategic solutions, Phil La Greca, warned that this could see retirees more reliant on the Government for retirement funding as they were forced to burn through capital faster to make up for their pension reduction.
“As the gap widens between Deeming Rate and official interest rates, the population will find itself either increasingly reliant on fully funded government pension for their living wage; or increasingly reliant on consuming capital with the hope it doesn’t run out while you still need a living wage,” he predicted.
“If superannuation is designed to get you off the pension, why does a mechanism such as the Deeming Rate act to run your assets out more quickly and put you on the age pension quicker?”
La Greca called on the deeming rate to be linked to official interest rates and for the enshrinement of the objective of the superannuation system, saying that this would require deeming rate considerations to be guided by such an objective.