Posted 24/08/2020 by Michael Klapdor
On 20 March and 20 September of each year, the rates of most social security payments are usually increased in order to maintain their real value over time—this process is known as indexation. Pensions, unlike other payments, can also be adjusted to maintain their rate relative to average earnings. On 20 September 2020, for the first time in more than 20 years, the rates of pensions and payments such as JobSeeker Payment will not increase (pp. 66–67). This is because some of the indices used to adjust these payments have declined.
The reason payment rates are not increasing is not due to a policy decision by the Government; it is due to the method for calculating payment adjustments set out in the Social Security Act 1991.
Why are payments indexed?
Payment rates are indexed to maintain their real value—so they have the same purchasing power as costs of living increase (p. 518). For most payments, this is done by adjusting payments in line with movements in the Consumer Price Index (CPI)—a measure of changes in the price of a fixed basket of goods and services.
Since 2009, pension rates have also been adjusted using a different measure: the Pensioner and Beneficiary Living Cost Index (PBLCI). The 2009 Harmer Pension Review had found the CPI, as a general measure of price changes, did not reflect cost of living changes for certain household categories (pp. 61–63). It recommended the use of an index which measured cost of living changes for pensioner households (p. 54). The PBLCI measures the effect of price changes on the out-of-pocket living expenses experienced by households whose main source of income is government payments.
Pensions are also adjusted to ensure rates do not fall behind community living standards. This is done through a benchmark—a minimum level for pension rates. The benchmark used since the Hawke Government is a percentage of Male Total Average Weekly Earnings (MTAWE).
Pension indexation
Currently, pensions (including the Age Pension, Service Pension, Disability Support Pension and Carer Payment) are adjusted on 20 March and 20 September by the greater of the movements in the CPI or the PBLCI over a six-month period. After this indexation occurs, the combined couple rate is benchmarked to 41.76% of MTAWE. The single rate of pension is set at 66.33% of the combined couple rate (which is equal to around 27.7% of MTAWE). If the combined couple rate is lower than 41.76% of MTAWE, the rates are increased to the benchmark level.
Indexation for other payments
JobSeeker Payment, Parenting Payment Partnered and Special Benefit rates are usually adjusted on 20 March and 20 September each year in line with CPI movements over the preceding six month period.
Youth Allowance and Austudy rates are only adjusted once a year, on 1 January, in line with CPI movements over a 12 month period.
Parenting Payment Single is adjusted in line with CPI movements in the same way as JobSeeker Payment but is also benchmarked to 25% of MTAWE (this was the same benchmark used for pension payments prior to changes in 2009).
No September increase for most payments
A CPI decline of 1.9 per cent and a similar fall in the PBLCI in the June 2020 quarter mean that the factors used to calculate payment adjustments on 20 September 2020 are below one. So that payments won’t decrease, the Social Security Act 1991 specifies that where an adjustment factor is below one, it is increased to one and rates are maintained.
MTAWE increased in the six months between November 2019 and May 2020, primarily as a result of those in lower paid jobs and industries losing work. However, current pension rates remain above the relevant MTAWE benchmark. This means that the CPI, PBLCI and MTAWE factors will not produce an increase in pension rates in September 2020.
The CPI decline also means that JobSeeker Payment, Parenting Payment Partnered and Special Benefit rates will not be increased on 20 September. Youth Allowance and Austudy rates will not increase on 1 January 2021 (with the next adjustment not due until 1 January 2022).
However, Parenting Payment Single will be increased by around $3 per fortnight due to the 25% of MTAWE benchmark (p. 67).
Unusual but not unprecedented
The last time pension rates were not increased through indexation was September 1997. The CPI declined between December 1996 and June 1997.
The CPI continued to decline and would have seen pension rates maintained at the March 1998 adjustment point. However, the Howard Government had legislated a 25% MTAWE benchmark in 1997 and pension rates were increased in March 1998 to the MTAWE benchmark.
The Newstart Allowance rate (as JobSeeker Payment was then known) remained the same for the September 1997 and March 1998 adjustment points. This means the last time the unemployment benefit rate was not increased through indexation was March 1998.
A complex and contentious policy area
Indexation is a complex and sometimes contentious policy area. For example, the different methods used for adjusting pensions and other payments have, over time, produced a significant disparity in payment rates leading to debate over the adequacy of JobSeeker Payment. In the 2014–15 Budget, the Abbott Government proposed CPI-only indexation for pensions and the removal of the MTAWE benchmark in order to reduce expenditure (a policy reversed in the 2015–16 Budget (pp. 169–170)).
Asked whether the lack of a rate increase for pensioners would be reviewed, Prime Minister Scott Morrison stated that ‘the Treasurer and I will work through the implications of what was not really a foreseen event when budgets were put together’. He noted pensioners had received two $750 Economic Support Payments as part of the Government’s economic response to COVID-19.
Non-pension payments such as JobSeeker Payment have also benefited from the COVID-19 response through the $550 per fortnight Coronavirus Supplement. The Government has proposed to extend this supplement until the end of year at a reduced rate of $250 per fortnight from 25 September 2020.