So how is the Age Pension indexed, and what were the announced changes?
Age Pension Indexation
Indexing the Age Pension is a multi-step process, involving three numbers:
- CPI: Consumer Price Index
- PBLCI: Pensioner and Beneficiary Living Cost Index
- MTAWE: Male Total Average Weekly Earnings
The Age Pension is currently indexed twice a year, on 20 March and 20 September. In short the Age Pension is indexed to the higher of the change in the CPI or the PBLCI, and then compared to the MTAWE.
The Age Pension rate if first indexed to the higher of the CPI or PBLICI. This new amount is then benchmarked against 41.76% of the MTAWE. If the new amount is less than the benchmark amount the pension rate is increased to the benchmark, otherwise it remains at the old rate plus CPI or PBLICI.
Note that 41.76% is the rate for combined couples, other rates are derived from this rate.
Previously proposed changes to age pension indexation
In the 2014/15 Federal Budget the Government announced the intention to change the indexation of the Age Pension so it was only indexed to CPI, not the higher of CPI or PBLICI.
According to the Parliamentary Library:
Removing the PBLCI from the indexation formula is also likely to reduce the rate of increase considering the PBCLI has driven three of the ten pension increases since it came into use (six were driven by MTAWE and the most recent by CPI).
However it appears this policy has been dropped, in favour of other changes to the pension. Minister for Social Services Scott Morrison had said that “if a measure was to come off the table like CPI indexation for the pension then new measures would have to go on.”
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