Asset test changes ‘actively discourage’ middle-income earners’ saving

By Lucy Dean

January 10 2018
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The Australian government has been warned that changes to the assets test rules are hurting middle-income earners’ attempts and capacity to save.

Warning, thumbs down, hurting middle-income earners, savings, superannuation

Speaking this week, the SMSF Association CEO John Maroney said the changes to the age pension asset test rules implemented on 1 January 2017 have reduced the incentive for middle-income earners to contribute more to their superannuation.

He explained: “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.”

The taper rate is the proportion of the fortnightly pension payment that is deducted for every $1,000 of assets above the lower threshold.

Mr Maroney said the changes to the taper rate calculation in particular impacts middle-income earners with an average superannuation balance and who also benefit from partial age pension payments that supplement their superannuation incomes.

He continued: “It [the changes] 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).”

The solution could be a simpler and more streamlined calculation that takes into account both superannuation and social security systems, he argued.

A single means test that applies a deeming rate to financial and non-financial assets, rather than the assets test is the SMSF Association’s preferred potential mechanism.

The deeming rate is a measurement of the income investments are expected to earn.

“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,” Mr Maroney claimed.

“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.

“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.”

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