THE FOLLOWING IS AN EXTRACT FROM THE PREVIOUS ACPSRO WEBSITE AND IS KEPT FOR HISTORICAL PURPOPSES:
YOU need to take action, before the next election drowns YOU out!
ACPSRO and other retiree organisations are often told by politicians that they have heard from the ex-military but they seldom hear from the rest of us – retired police, firemen, teachers, health care workers, public servants, local government staff, etc – who are trying to survive in retirement on what are called “defined benefit pensions”, schemes that were developed in the olden days, when our retirement pensions were considered to be a good reason to pay us less while we were working.
Unless YOU bring your concerns to your local politicians and electoral candidates before the next election, and preferably before Christmas, they are likely to be ignored in the election campaigns. What follows is intended to provide you with information about some of the bad policies affecting you, so that you can use the arguments in meetings and correspondence with politicians (and would-be politicians), but you must act soon!
We want you to write to your local politician or senator. We have prepared a draft letter about CPI indexation for your use, click here .
More information is available in a paper prepared by the President of the Superannuated Commonwealth Officers Association (WA), Inc., Ron de Gruchy, entitled Indexation of CSS and PSS Summary December 2018
We also provide additional information below about a number of other issues that might have affected your pension. If you are affected by any of those, please feel free to use the following for inspiration. Add as little or as much as you like, but please do it soon. There are some technical bits, which don’t need to be included in correspondence, like the explanation of the inadequacy of CPI to set any form of income. Those are just to give you the facts to support your arguments.
Table of Contents
The Inappropriateness of CPI Indexation
- ACPSRO Letter re CPI indexation
- Just what is indexation supposed to achieve?
- Technical explanation of the above
The 10% cap on non-assessable defined benefit pension income for the Age Pension
Policies affecting all or many seniors include:
- The ALP’s proposed elimination of “unused” imputation tax credits.
- Increase in the pension age to 67
- Progressive tightening of the assets and/or income tests for the Age Pension
- The deeming rates for assets under the Age Pension assets test have not been adjusted to fairly reflect the real market interest rates people can achieve
- Removal of the ability to claim as a tax deduction, medical/health care costs exceeding a certain amount
- Cutting off incentives for Medicare bulk billing of pathology and magnetic resonance imaging
- Removal of over the counter PBS items including low dose aspirin, Panamax and Panadol Osteo
- Freezing of the indexation of Medicare benefits
- Introduction of a bank tax
- People over the age of 65 being ineligible to apply for the National Disability Insurance Scheme, NDIS.
The inappropriateness of CPI indexation
Indexation methods – Why are they so different? – Do they achieve their purpose?
In Australia there is a wide range of methods used to index the vast array of income payments, pensions, welfare benefits, associated income/asset cut off/threshold levels, commercial contracts and superannuation annuity payments. For example, within and across several federal government agencies such as Centrelink, Veterans’ Affairs and Comcare, a range of income support payments are indexed quite differently. The CPI, Male Total Average Weekly Earnings (MTAWE) and the Wage Cost Index (WCI) are but some of the myriad of indices used to adjust payments and eligibility thresholds.
Some examples of the significant difference over time in the percentage movement in just a few of these indexation methods is clearly seen in SCOA’s indexation graph.
In examining the variations in different indexation tools, it is critical to appreciate their relative compounding effect over time. The resultant long term effect on the lives of many Australians of a poorly chosen indexation method is enormous. Many such Australians are at the lower end of the socio-economic scale. The age range of those affected is quite vast; they are recipients of payments such as Newstart, the Age Pension, Supporting Parents Benefits, Comcare compensation payments, to name a few.
Questions therefore arise as to why indexation methods vary, what is their purpose and do they need regular review to ensure that they still achieve their intended purpose? Associated with this must surely be a fundamental principle that those affected are treated fairly and that their actual and relative standard of living is not adversely affected by whatever indexation method the government of the day determines.
Over time, some of these indexation methods have changed across the range of indexed payments for example the Age Pension which was once indexed by the Consumer Price Index (CPI). From 1997, this was changed and it was benchmarked to 25% of Male Total Average Weekly Earnings (MTAWE). In 2000, it was benchmarked to 26% of MTAWE following the introduction of the GST. It was further changed in 2009 to be the better of the CPI and the Pensioner and Beneficiary Living Cost Index (PBLCI) and benchmarked to 27.7% of MTAWE.
For too long Australians have understandably been confused by government and media reporting, using terms such as inflation, cost of living, standard of living etc. They rightly ask, are they the same, are they connected, just what do they measure?
A fundamental question needs to be answered; precisely what criteria is used to set the indexation tool for the many payments and benefit thresholds, annuities etc. that ultimately determine the standard of living of millions of Australians? Is that criteria carefully and appropriately selected to ensure that those same Australians have their income payment adjusted in a fair way to ensure that when they shop, their indexed payment is capable of keeping pace with real shop prices they pay from day to day? Is their relative standard of living being maintained? That is hardly too much to expect.
A thorough Senate inquiry into these indexation methods and how/why they are chosen is long overdue. They simply can’t all be correct and fair.
The CPI is inadequate for indexing an Income.
This opinion is shared by many who are directly affected by it but rarely by those who are not. As at the end of 2018 the issue is unresolved. It is time to put the issue beyond debate.
Those who think that that CPI indexation should be adequate point to the exhaustive efforts by the Australian Bureau of Statistics to survey a wide range of consumer prices every quarter and to periodically update the contents of the basket. The Australian CPI is prepared in close alignment with the norms set out in the “Consumer Price Index Manual” first published in 2004 by the International Labour Organisation and endorsed by the IMF, OECD, Eurostat, the UN and the World Bank. The proponents of the CPI point out that it is a Cost of Living Index, it measures the change in the cost of living and therefore an income indexed by CPI is sufficient to maintain a constant standard of living.
On the other hand, the 2014 Abbott Government Budget included a proposal to change the indexation of the Age Pension to the CPI. The protests were almost universal that this was unnecessarily harsh and eventually the Government backed down. The Newstart Allowance for unemployed has been indexed to the CPI since 1996. There are many calls today that the Newstart Allowance is inadequate and does not cover even the most basic living costs. In 2014 the Government did agree to improve the indexation of some military pensions previously indexed to CPI in recognition of the unique nature of military service. These three instances suggest that CPI indexation is possibly not as adequate as its proponents believe. It is surely time to understand what the CPI attempts to measure and what it does not do.
The CPI does not track prices that consumers are actually obliged to pay. All prices collected by ABS are first adjusted for any quality change before inclusion in the calculation of the CPI.
This fact is rarely acknowledged and its impact even more rarely explained. The almost universal trend in consumer products and services is for a steady increase in quality. This means that market place ticket prices will on the whole be subject to a downward adjustment before inclusion in the CPI. It doesn’t matter if the ticket price has decreased since the ABS last looked at the item. If the quality has improved there will be a further downward adjustment in price before the CPI is calculated. This is why the CPI does not track what consumers are actually obliged to pay.
The CPI says that in the last 18 years prices have increased 61%. The prices that consumers are obliged to pay have increased a lot more than that because of the downward adjustments for changes in quality.
The ABS has always adjusted prices for changes in quality
This is frequently offered as a defence but it only serves to reinforce the fact that the prices that go into CPI are not market place ticket prices.
The standard ABS example of an adjustment for quality is the price adjustment that is necessary because the contents of a tin of tomato soup have increased. The does not do justice to the vast range of adjustments that are made for quality changes that are unavoidable by consumers. In some areas the ABS has used USA data and from that we know for example that between 1994 and 1998 the price index for personal computers fell by 33.3% pa, of which 7.7% pa was due to a fall in the shelf price and 25.6 % pa was due to improving quality.
Quality adjustments have become more prevalent because of rapid technological change.
Again, this only serves to reinforce the point that the CPI does not track the prices consumers are actually obliged to pay. More technological progress means more downward adjustment to ticket prices.
The ABS does not record information about the extent to which quality adjustments reduce the annual increase in the CPI (currently 2.1%). In 1996, the Boskin Commission in the USA investigated inadequacies in the estimation of the CPI by the Bureau of Labour Statistics (roughly equivalent to our ABS). It was critical of the Bureau’s work and concluded the Bureau was overlooking some quality adjustments that would have further reduced the USA CPI by 0.6%. It did not publish any estimate of the adjustments that the Bureau was already making but it can be assumed these covered the majority of quality improvements. Technology improvements have increased in pace substantially since 1996 and, today, a believable scenario is that the reduction of the USA CPI for all quality adjustments would be between 1% and 2% per annum.
The report of the Boskin Commission in 1996 appears to have been the stimulus for a tightening in the way the CPI is estimated in the USA, here and elsewhere. A great deal of work was carried out internationally to codify how the CPI should be estimated. This culminated in the “Consumer Price Index Manual” referred to earlier. It requires complete thoroughness in adjusting for changes in quality.
In response to FOI requests the ABS released some heavily redacted training manuals and related material used to train staff engaged in the collection and preparation of data for the compilation of the CPI. This material clearly shows the thoroughness of the ABS in making these adjustments. The material can be examined at:
http://www.abs.gov.au/websitedbs/D3310114.nsf/home/Disclosure+log (scroll down to 2015/02)
Newstart has been indexed by CPI since 1996. This means that the value of a Newstart allowance has maintained its value measured by what it will buy in a consumer market at 1996 levels of quality. That market no longer exists. An unfortunate Newstart client has to make do in a 2018 market in which place prices have increased much more than CPI because of the relentless downward adjustment of prices for improving quality since 1996. This is the key reason for the inadequacy of the CPI. It does all that its proponents say it does but only in the context of the fiction of a still existing 1996 market place.
The 10% cap on non-assessable defined benefit pension income for the Age Pension.
This 2015 measure reduced the amount of a defined benefit pension that could be excluded from assessment when calculating an Age, or part-Age pension. There were no “grandfathering” provisions, which would have allowed for decisions made years earlier to buy the tax-free supplements to defined benefit pensions, unlike most other retirement income changes. This is what happened:
The 2015 Budget made a significant cut from 50% to 10% for the salary cap for the Age Pension income test for those who purchased additional pension using their superannuation lump sum, i.e. their after-tax contributions. This decision primarily affected defined benefit retirees receiving only a relatively small defined benefit superannuation pension, whereas it was claimed by the Government that the policy was targeting those receiving superannuation pensions at the top end of the scale (>$100,00). The reduction or, for some, the total loss of their Age Pension has severely affected those least able to afford it. Because it wasn’t “grandfathered”, retirees who had elected to purchase additional pension years earlier because half would tax-free lost the very reason that they had made that decision. Meanwhile, those with very large defined benefit pensions were totally unaffected by this policy change!
You can probably use that text in your correspondence as it stands. Perhaps just add your personal experience. The injustice should be evident.
Policies affecting all or most seniors include:
The ALP’s proposed elimination of “unused” imputation tax credits. The Age Pension income and assets tests require pensioners to provide details of their financial investments, including details of their share-holdings. At present their share-holdings are deemed to return 7.8% per annum, which presumably assumes that the earnings are inclusive of the imputed franking credits. Advice from the office of Mr Bowen, the Shadow Treasurer, is that there are no plans to lower the deeming rate, which means that if the present ALP policy is implemented, some people will effectively be prevented from receiving a part Age Pension because of excess franking credits that they are not going to receive, which is unfair.
Those who are just over the threshold for a part Age Pension can apply to get a Commonwealth Seniors Health Card, CSHC. The income test for the CSHC is different from the income test for the part Age Pension, because instead of deeming a return from share-holdings, it asks for one’s taxable income. If one has income from shares, the imputed franking credits form part of one’s taxable income, and therefore present ALP policy would prevent some people from getting a CSHC because of excess franking credits that they will not be getting. That is also unfair.
Increase in the pension age to 67. This policy denies many senior Australians who’ve worked in most cases for about half a century, a pension at an age when they justifiably deserve to put their feet up and enjoy retirement. It also overlooks the fact that for the many who’ve worked in manual jobs, their bodies are not capable of continuing that manual work. It also ignores the fact that employers invariably select younger applicants to fill vacancies, even when older applicants may have re-skilled. Whilst ever we have unemployment, isn’t it preferable that we don’t force senior Australians to compete for work with younger Australians? i.e., it’s smarter and fairer to let those who don’t want to work, to retire, leaving more jobs for those who want to work.
Progressive tightening of the assets and/or income tests for the Age Pension. This policy has made it more difficult for seniors to qualify for the Age Pension or has reduced the pension for many already receiving it. In essence, it means that politicians are able to adjust the “taper rate” that applies to retirement incomes and/or assets virtually at will. The taper rate is supposed to recognise that many retirees have saved for their retirement. Currently the taper rate is 50%.
The deeming rates for assets under the Age Pension assets test have not been adjusted to fairly reflect the real market interest rates people can achieve. Pensions are therefore paid at a lower rate than they should be if the deeming rate reflected real life returns on investments.
Removal of the ability to claim as a tax deduction, medical/health care costs exceeding a certain amount. This policy, whilst affecting all Australians, more severely hits senior Australians who have greater health care episodes as they age.
Cutting off incentives for Medicare bulk billing of pathology and magnetic resonance imaging. This policy means that in addition to the other health costs seniors must face, they sometimes now have to pay for these services which are often expensive.
Removal of over the counter PBS items including low dose aspirin, Panamax and Panadol Osteo. This has added to the cost of these medicines because they now require a doctor’s script.
Freezing of the indexation of Medicare benefits
Whilst the indexation of these benefits has been restored, the benefit base has been eroded and so net medical costs after the Medicare rebate are greater than what they were previously.
Those last four policy decisions will have substantially added to the cost of health care for all senior Australians.
Introduction of a bank tax. The cost of this is passed on to customers.
People over the age of 65 being ineligible to apply for the National Disability Insurance Scheme, NDIS. People acquiring a disability after turning 65 cannot get support under the NDIS. People with the same disability who acquired it before turning 65 do get support. Their needs are the same. How can this be fair?
The Banking Royal Commission
The Defence Force Welfare Association (DFWA), a member of ACPSRO, requested ACPSRO’s support in their campaign to have the Terms of Reference of the Banking Royal Commission expanded to include the Commonwealth Superannuation Corporation.
Click on the relevant links below to see DFWA’s correspondence and Fact Sheets which explain their concerns.
|Fact Sheet # 1||DFWA Fact Sheet 1 – Overview|
|Fact Sheet # 2||DFWA Fact Sheet 2 – Rebuttal|
|DFWA’s open letter to the Prime Minister||DFWA Open Letter to Prime Minister 15 June 2018|
On 21 June 2018, ACPSRO wrote a letter to the Prime Minister, pointing out that, “Given the extent of the unexpected problems that have been disclosed in the Royal Commission to date, it would seem prudent if Treasury’s views with regards to the governance of Commonwealth retirement benefits and superannuation funds could be at least tested, by including those funds in the Royal Commission’s Terms of Reference”.
The inadequacy of the CPI
As part of its push to demonstrate the inadequacy of the CPI to reflect real costs of living for all sectors of the community, ACPSRO wrote to the Minister for Finance on 12 September 2017, as the minister responsible for the Australian Bureau of Statistics, recommending that while capturing statistics that measure the CPI, ie including quality adjustments, the ABS should publish the raw retail prices from which those CPI figures are derived.
We received the Minister’s response on 23 October 2017 which, readers will note, attempts to answer some matters that were not raised in ACPSRO’s letter but does not address all the issues raised or the questions that were asked. It does, at least, seem to recognize that there are problems with national standards of living which the Government does not propose to try to quantify!
A 7 November 2017 article in the Australian Financial Review (AFR) about changes being made to the CPI, which will have the effect of further reducing the CPI, was responded to by an ACPSRO letter to the AFR’s Editor on 9 November 2017. That, in turn, appeared to trigger an article in the Canberra Times written by their Economics Editor, possibly at the behest of the Australian Bureau of Statistics. That has been responded to by ACPSRO’s 15 November 2017 letter to the Canberra Times’ Editor, drawing attention to the fact that the CPI is becoming increasingly irrelevant to people’s standard of living.
On 29 November 2017, the Canberra Times published an article by their correspondent Ross Gittins about the cost-of-living pinch on wage earners. In the article, Ross Gittins, said that rising wages are the main cause of rising prices. Price rises have been small because wage rises have been small. For the past four years, wages have only risen by about 2% per year, barely keeping up with the rise in consumer prices (as measured by the CPI). Increased competition and changes in technology have been driving down the prices of many things. He said that prices of various commodities had been falling, but provided no price data to support that assertion.
In a letter to the editor, published the following day, ACPSRO explained that wage earners are now experiencing the same cost-of-living pinch that retirees and many pensioners have been experiencing for years, due to the use of CPI indexation.
On 14 December 2017, Peter Martin, The Age’s Economics Editor, had an article published in both the Canberra Times and The Age, explaining that the Government is very concerned that wage demands are not high enough to stimulate the economy. In a letter to the editors of both papers, published in the Canberra Times on 18 December, ACPSRO tried to explain that statisticians have been adjusting the CPI since 1995-6 to minimise social welfare and wage demands. Now that is taking effect, the inadequacy of the CPI to maintain standards of living is becoming apparent to everyone.
On 16 January 2018, The Canberra Times published an article by Erik Bagshaw (headlined in that paper as “Counting the cost of low wage rises”) expressing concern because “The government has predicted inflation will rise from 1.9 per cent to 2.25 per cent by next year, which could leave some workers with a pay cut in real terms.” ACPSRO responded with a Letter to the Editor on 17 Jan, explaining that, due to the way the Consumer Price Index is calculated, even a wage increase equal to the CPI leaves a worker worse off, in terms of purchasing power. As defined benefit pensioners will be well aware, due to compounding over several years those workers with just CPI wage increases will have to reduce their spending, which will have an adverse effect on the national economy.
On 3 February 2018, The Canberra Times published an article by Ross Gittins trying to explain that everyone is getting it wrong when they think that prices are rising faster than their incomes. ACPSRO wrote to the Editor, explaining that, with wages growth at or less than CPI, actually almost everyone – wage earners, Age Pensioners, Centrelink beneficiaries and retirees – are getting it dead right. That’s because, due to “quality adjustments”, the CPI reduces the retail cost of the basket of goods that it measures. The ACPSRO letter is shown in the table below.
At the end of January 2018 ACPSRO developed a short paper – ACPSRO – Consumer Price Indexation (CPI) – which explains why CPI indexation is not appropriate for setting any forms of income. Since then the ACTU has launched a major national campaign to obtain higher wages. Now that that campaign is well underway, ACPSRO has released a 26 March media statement Why typical wage rises don’t cut it showing how it is not just defined benefit pensioners but almost all wage earners, pensioners and Centrelink beneficiaries who are suffering quite severely from the inappropriate use of CPI income adjustments over many years.
You can read or download the correspondence in the table below.
|Date||Click here to download|
|6 February 2019||ACPSRO – Letter to the Editor – Canberra Times – 6 Feb 2019|
|4 February 2018||ACPSRO Letter to the Canberra Times 4 February 2018|
|17 January 2018||ACPSRO Letter to the Editor Canberra Times 17 January 2018|
|14 December 2017||ACPSRO letter to the Editor – 14 Dec 2017|
|30 November 2017||ACPSRO Letter to the Editor 30 Nov 17 2017|
|15 November 2017||ACPSRO Letter to the Editor Canberra Times 15 Nov 2017|
|12 November 2017||Peter Martin article on CPI Canberra Times 12 Nov 2017|
|8 November 2017||ACPSRO Letter to the Editor Financial Review 8 Nov 2017|
|12 September 2017||ACPSRO letter to 12 September 2017 re CPI|
|23 October 2017||Government response to ACPSRO re CPI|
The ten percent cap issue explained
One of the issues ACPSRO, together with SCOA, has been advocating on recently, is the so-called Ten Percent Cap issue. In the following, you will find comments and links to what we have done so far. Please check this page regularly. It will be updated as we continue to pursue this issue and achieve the outcome we want for our members, the repeal of the legislation.
The 2015 Budget measure known as the 10% Cap came into effect on 1 January 2016.
The measure reduced from 50% to 10% the amount of tax-free income that defined benefit pensioners can exclude from the age Pension income test. The only justification that has ever been provided by the Government has been based on pensioners’ pre-30 June 1983 service.
The then-Minister for Social Services, Mr Morrison, gave, as his one example, that it is possible for a retiree couple on a defined benefit pension of $120,000 pa to receive a (very small) part Age pension. To their credit, on 25 June 2015, the Australian Greens, in the Senate debate on the measure, expressed misgivings about the likely actual effects of the 10% Cap, and promised to review the matter if their misgivings proved justified.
On 9 March 2016, after the effects of the 10% Cap would have become clear, ACPSRO wrote to the Minister for Human Services, requesting simple data about its impact on various levels of retirees’ income and, in particular, how many of those affected had no pre-30 June 1983 service at all.
Eventually, after attempts by the Office of the Minister for Social Services to avoid answering, eg claiming the Caretaker Convention, the Department of Social Services responded on 18 May 2016. In the second paragraph of the second page, the Department advised that it does not hold “administrative data” about who has, or has not, any pre-30 June 1983 service. The subsequent data provided in that letter, however, demonstrated that the financial effect of the 10% Cap measure has fallen predominantly on defined benefit pensioners on quite modest retirement incomes. Almost none of the data appears to to match Mr Morrison’s May 2015 example of a retiree couple with a defined benefit pension of $120,000 who had been receiving a part Age pension.
On 13 July 2016, after the General Election, ACPSRO wrote to the Minister for Social Services, pointing out the inconsistency of the data with the original claimed intention of the 10% Cap measure, and requesting corrective measures be taken.
On 16 August 2016, a departmental officer responded on behalf of the Minister, maintaining the original official line on the justification for the 10% Cap. ACPSRO responded on 26 August 2016, pointing out why the original concern about pre-30 June 1983 service is misconceived and, more pertinently, that imposing the 10% cap measure on retirees with no pre-30 June 1983 service is quite unjust.
In the same late-August period, ACPSRO wrote to the Australian Greens, requesting them to make good on their 25 June 2015 promise to have the matter reviewed if experience demonstrated unintended consequences, and sent letters to the Senate cross-bench, for example to Senator Xenophon, providing them with the background if the matter comes up for discussion.
On 9 December 2016, the Government’s “answers” to a number of Greens’ Questions on Notice that had been asked in Senate Estimates hearings were published here. Readers can see that most of the questions were not answered and ACPSRO released a media statement on 16 December 2017 which concludes:
“We are approaching the anniversary of the implementation of the 10% cap policy. Its history is replete with prevarication, prejudice and now more evasion. As they reflect on the cuts to their own retirement incomes, many far from affluent defined benefit retirees feel bitter contemplating the tax cuts and pork-barreling which the Government has felt able to provide to others this Christmas“.
ACPSRO is not aware of any subsequent action by politicians of any party to query or seek further advice on the Government’s non-answers on the 10% cap.
At that point (i.e. December 2016), strident public protests commenced about changes to the age pension assets test, which were to apply from 1 January 2017. One saving grace for those pensioners was that at least that 2017 assets test measure did not affect part-age pensioners with smaller asset levels. That is in contrast to the 2016 10% cap, which reduced the age pensions of even low-income defined benefit pensioners if more than 10% of their benefit defined pension was tax-free income derived from the retirees’ own contributions.
In early 2017, outcry about both those issues – the 10% cap and the assets test changes – was swamped by even wider public concern and ridicule about Centrelink’s attempts at automated data-matching to recover claimed over payments of all forms of pensions and allowances. The public furore obviously won’t help defined benefit pensioners who were affected by the 10% cap but it may give them some satisfaction to watch the Government’s continuing discomfort.
ACPSRO recommends that member organisations bring this compendium of documentation to the attention of affected retirees so that they may raise the matter with politicians.
On an associated matter, ACPSRO has made a submission to a Senate inquiry into legislation which attempts to define the objective of superannuation. Readers will see that the thrust of ACPSRO’s submission is that any consideration of the objective of superannuation must include how to maintain real world purchasing power of all forms of superannuation income.
The above quoted documents are also available in the table below.