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Budget 2009-10 - Pension Review Report

5. Payment design and administration

Overview and findings

The way that assistance is delivered and administered makes an important contribution to the financial security and wellbeing of pensioners. As noted in Chapter 2, needlessly complex payment designs and administration have the potential to impose high transaction costs on pensioners, generate poor outcomes for those who are not well placed to manage complexity, make different elements of the system unintentionally work against each other, and have consequences for other systems that interact with the income support system. All of these effects potentially undermine the capacity of the Age Pension, Disability Support Pension and Carer Payment to improve the financial circumstances and security of pensioners.

This chapter examines the current components of the financial assistance that is provided to Age Pension, Carer Payment and Disability Support Pension recipients. It looks at the balance between regular and one-off lump-sum and supplementary payments, and issues raised during the consultation process about the efficacy of lump sums as a way of addressing living costs. The chapter then examines arrangements that could improve flexibility and financial security for pensioners. It also considers ways in which the delivery of assistance could be simplified to reduce complexity for pension recipients and improve program efficiency and effectiveness. These considerations specifically address components of the pension system including the Pharmaceutical Benefits Scheme, Rent Assistance and payments to people of Age Pension age.

The Review has developed a number of findings to improve the financial security and wellbeing of pensioners, to improve the flexibility and to reduce the complexity of the income support system.

Although one-off lump sums may continue to have a role in the income support system, the Review found that they are not a particularly effective way of addressing the adequacy of pension in the long term.

Finding 12: The Review finds that one-off lump-sum payments are not particularly effective mechanisms for addressing the adequacy of the pension because they do not provide ongoing financial certainty for pensioners.

Finding 13: The Review finds that one-off payments may have a role in circumstances where pensioners may not otherwise gain from specific budgetary or economic changes, such as from changes to taxation arrangements, to compensate for policy changes, or where a fiscal stimulus is desired. (Section 5.3.1)

The Review found that there is considerable scope to simplify the current system of supplementary payments, to ensure that it does not undermine the single–couple relativities established in the base pension rates and to introduce additional flexibility into pension payments.

Finding 14: The Review finds that integrating supplementary payments (Pension GST Supplement, Pharmaceutical Allowance, Telephone Allowance and Utilities Allowance) into a single supplementary payment or absorbing them into the base rate of pension would simplify the structure of pensions. Integration with the base rate would maximise simplicity while a separate supplement would provide a platform for introducing flexibility around the frequency of the payment of a component of the total pension package.

Finding 15: The Review finds that, if paid separately, any supplementary payment should be paid to singles and couples in proportion to the rate of the base pension to ensure that the relative value of the pension package is maintained. (Section 5.3.2)

Finding 16: The Review finds that an integrated supplement would be an appropriate vehicle for delivering greater flexibility over the timing of payments and would permit pensioners to structure their receipt of income according to their budgetary priorities.

While caution should be exercised in applying a flexible approach to the base rate of pension an option of weekly payment cycles may be preferred by some pensioners.(Section 5.3.3)

In line with the findings in Chapter 3 on private renters and the analysis in Chapter 4 on fiscal drag, the Review found that there is scope to improve the targeting of Rent Assistance.

Finding 17: The Review finds that there would be merit in restructuring rent thresholds to target Rent Assistance to those who pay higher rents and addressing inequities that have arisen with the sharers rate of Rent Assistance. (Section 5.3.4)

The Review examined the Pension Bonus Scheme and concluded that alternative mechanisms to encourage workforce participation should be explored.

Finding 18: The Review finds that the Pension Bonus Scheme is not a particularly effective means of increasing workforce participation by older Australians and that this goal would be better pursued through the design of the pension means test to ensure that there are appropriate incentives for employment. (Section 5.3.5)

Finally, the Review identified the current situation, where a person above Age Pension age may be eligible for either the Age Pension, Disability Support Pension or Carer Payment, as a needless area of administrative complexity for both individuals and Centrelink that should be reformed.

Finding 19: The Review finds that the current situation where a person above Age Pension age may be eligible for either the Age Pension, Disability Support Pension or Carer Payment is unnecessarily complex, and that the Age Pension should be the appropriate payment for people over Age Pension age. As a first step to achieving this, there should be consistency of treatment across pension payments for those of Age Pension age to remove incentives for payment swapping.

In the longer term, making the Age Pension the payment for people over Age Pension age would focus the Disability Support Pension and Carer Payment on their role as working-age payments, with workforce participation encouraged. (Section 5.3.6)

5.1 Terms of reference

The chapter is primarily concerned with the second and third terms of reference:

In its considerations, the Review was concerned with the total package of assistance provided: base pension, regular fixed payments, one-off lump sums and supplementary payments. Chart 22 illustrates the scope of the payments under consideration.

5.1.1 Scope of income support payments considered by the Review

The Review’s discussion focuses on the Age Pension, Carer Payment and Disability Support Pension. The Review also covers closed (Wife Pension and Widow B Pension) and short-term (Bereavement Allowance) pension payments. These payments are subject to the same means test, rates and indexation arrangements and have generally received similar lump-sum payments as the major pension types covered by the Review.

Chart 22 Income support payment components and structure

Chart 22 Income support payment components and structure

The Review also covers some income support payments paid through the Department of Veterans’ Affairs (DVA). DVA Service Pensions are paid to veterans on the grounds of age or invalidity, and to eligible partners, widows and widowers. DVA Service Pensions are paid at the same maximum rates and subject to the same means-testing arrangements as Age Pension. Income Support Supplement provides additional assistance to War Widow/Widower pensioner recipients who are not in receipt of another income support payment. Income Support Supplement paid below the ceiling rate (that is, a means-tested rate) is calculated using the same rates and means-testing parameters as DVA Service Pension.

Another area of importance to some pensioners, especially those who have migrated from another country or worked extensively overseas, concerns the interaction between Australian pensions and those in other countries. This was raised in consultations and submissions. To overcome the gaps in social security coverage that may arise and enable countries to share the social security coverage of individuals who move between them, bilateral treaties in the form of International Social Security Agreements operate. Australia currently has 22 agreements that involve payments to just under 50,000 people. These agreements perform an important function in reflecting a person’s association with different countries and ensuring these countries share the responsibility for the pensions of these people. The Review supports the continued establishment of such agreements.

Relationship with other payments

While the terms of reference for the Review provide a clear demarcation of the scope of payments under consideration, there are a number of interactions between some policy components of these and other elements of the income support system.

Although also currently paid at the same pension rates and subject to the pension income test, but a different assets test, Parenting Payment Single is out of the scope of the Review. This payment shares many features with other income support payments for parents, such as Parenting Payment Partnered and Newstart Allowance, and is also a part of the wider system of assistance to families which includes Child Care Benefit and Family Tax Benefit. Any change to Parenting Payment Single needs to be carefully considered in the context of the relationship between it and these other working-age payments, as well as the wider system of support for families.

However, it is also important to note that a number of the supplementary payments to Age Pension, Carer Payment and Disability Support Pension recipients are also available to Parenting Payment Single and allowance recipients. This extends to allowees with a partial capacity to work, single principal carers, those aged 60 and over with at least nine months duration on income support and recipients of Partner and Widow Allowance. Hence, while Parenting Payment Single and allowees are not specifically covered in the terms of reference, their receipt of supplementary payments means that impacts on these payments needed to be considered at points by the Review. For example, reforming supplementary payments by integrating Utilities Allowance, Telephone Allowance and Pharmaceutical Allowance, or absorbing these into a base rate of pension, will have an impact on Parenting Payment Single and some allowance recipients.

5.1.2 Lump-sum payments

As discussed in the Background Paper, one-off lump-sum payments have become a feature of the income support system in recent times. These payments have increased the total amount provided to age pensioners, Carer Payment recipients, and more recently disability support pensioners, well above the base rate of payment. Appendix D outlines one-off lump-sum payments provided since 2004–05.

The provision of one-off lump-sum payments has been associated with:

The consultations confirmed that one-off lump-sum payments have enabled some pensioners to pay for large unexpected costs, or items they may have found it difficult to afford or budget for, such as the replacement of whitegoods or house maintenance. Lump-sum payments are not treated as income for the pension income test, are not considered assessable income for taxation purposes, have not generally been affected by their own separate income test, and are not treated as pension income for the purpose of public housing rent or nursing home charges.

5.1.3 Supplementary payments

In addition to the base rate of pension, a range of supplementary payments is available to pensioners and, in some cases, to holders of the Commonwealth Seniors Health Card on a regular basis.25 These supplementary entitlements are outlined in Appendix C.

Supplementary assistance generally aims to recognise that people in different circumstances have different costs and require different levels of assistance to achieve a similar standard of living. For example, the first supplementary payment, introduced in 1958, was ‘Supplementary Assistance’, a forerunner to the present-day Rent Assistance. The payment provided additional assistance to widowed, aged and invalid pensioners who were single, entirely dependent on the pension as their only source of income and living in rental accommodation (Kewley 1973). The payment was the first instance of the income support system recognising that some pensioners were in situations of greater need than others.

Currently, there are around 16 different supplementary payments available to income support recipients and they range in value from $6.00 a fortnight for Pharmaceutical Allowance to $110.20 a fortnight for Rent Assistance. These payments may be paid fortnightly, quarterly or annually, may be taxable or non-taxable, and may or may not be related to the existence of additional costs.

This chapter focuses on Carer Allowance, the Pension GST Supplement, Pharmaceutical Allowance, Telephone Allowance, Utilities Allowance, Seniors Concession Allowance, Rent Assistance and the Pension Bonus Scheme, the most significant supplementary payments in terms of coverage and monetary value.

The remaining supplementary payments are not covered as they are available to select groups of income support recipients for specific purposes, including many allowees, and are therefore considered beyond the scope of this Review. For example, the Remote Area Allowance is a supplementary payment available to income support recipients residing in remote areas of Australia who, because they do not pay tax, or pay very little tax, do not receive the full benefit of the tax zone rebate. The Remote Area Allowance provides a cash alternative to the tax rebate.

Carer Allowance

Carer Allowance is available to carers who provide daily care for a person with a severe disability, medical condition or who is frail aged either at home, or in the home of the person being cared for. The Carer Allowance was introduced in 1999, combining the payments of Child Disability Allowance and Domiciliary Nursing Care Benefit payments.

In contrast to the other payments, it is not income or assets tested and is paid to people on income support and others at the same flat rate. An assessment process operates to ensure specified levels of care are met. Carer Allowance is currently paid at $105.10 a fortnight. Although a reasonable number of age pensioners, disability support pensioners and Carer Payment recipients are in receipt of Carer Allowance, the supplement has broader coverage including wage earners and others.26

Carer Allowance is a payment made in recognition of the caring role. It is not an income support payment. While it is not intended to cover the costs of caring for someone with a disability, the consultations indicated that Carer Allowance is frequently used to meet the costs associated with the needs of the person being cared for. Given that Carer Allowance has important links to the service delivery system, it is also considered further in Chapter 6.

Pension GST Supplement

The Pension GST Supplement was introduced as part of the 1 July 2000 Tax Reform Package. The Pension GST Supplement is generally treated as part of the base rate of pension and, for this reason, is largely unrecognised as a stand-alone supplement. This lack of transparency may in part explain why a number of pensioners raised the question of the GST in the consultation process, generally claiming they had not been compensated for its introduction.

The Pension GST Supplement is indexed according to movements in the Consumer Price Index at the same time as the basic rate, can be reduced by the application of either the pension income or assets tests and, for taxation purposes, is treated in the same way as the pension with which it is paid. However, because it is paid as a supplementary amount, the Pension GST Supplement is not counted when determining the levels of certain fees and charges, such as Commonwealth-regulated residential aged care fees. The Pension GST Supplement is currently worth $19.30 a fortnight for a single person and $16.20 a fortnight for each member of a couple.

Pharmaceutical Allowance

Pharmaceutical Allowance, a payment provided to all pensioners on a fortnightly basis, was introduced in 1990 as part of a major restructure of the Pharmaceutical Benefits Scheme. The restructure resulted in pensioners, who had previously received free pharmaceuticals, paying a certain amount for each prescription. The Pharmaceutical Allowance offsets some of the costs of prescriptions, and the Pharmaceutical Benefits Scheme allows access to free pharmaceuticals once a specific number of prescription items have been reached in a calendar year (currently 60 items). Pharmaceutical Allowance is not paid to Commonwealth Seniors Health Card holders, although these people do have access to subsidised pharmaceuticals through the Pharmaceutical Benefits Scheme. The supplement provides $6.00 a fortnight and is paid at a half rate to each member of a couple. In some cases, allowance recipients are also able to obtain the supplement.

Telephone Allowance

Telephone Allowance was introduced in 1992 as a quarterly payment for telephone subscribers27 to replace the previous administratively cumbersome system of telephone rental concession vouchers. Provided the requirement of a telephone subscription is met, the supplement is available to all pensioners, selected allowance recipients and those eligible for the Commonwealth Seniors Health Card. The allowance provides $23.00 a quarter and is paid at a half rate to each member of a couple. A higher rate of $34.60 a quarter is available for those who subscribe to a home internet service.

Utilities Allowance and Seniors Concession Allowance

Utilities Allowance was introduced in 2005 as a biannual payment acknowledging that some older income support recipients may have difficulty in saving to meet their utility bills. The coverage of Utilities Allowance has broadened and it is now available to other income support recipients younger than Age Pension age and is paid on a quarterly basis.28 Utilities Allowance provides $128.50 a quarter and is paid at a half rate to each member of a couple.

A payment similar to the Utilities Allowance, the Seniors Concession Allowance, is available to those eligible for the Commonwealth Seniors Health Card. The Seniors Concession Allowance is paid quarterly at the same rate as the Utilities Allowance, but at a full rate to each Commonwealth Seniors Health Card holder regardless of their relationship status.

Rent Assistance

Rent Assistance is an important element of supplementary payments in the income support system, being of the highest value, but in contrast to the other components it is relatively highly targeted.

Rent Assistance is available once private rent reaches a certain amount each fortnight (rent threshold). The payment then provides assistance at the rate of 75 cents for each dollar of rent above the rent threshold, until the maximum rate of Rent Assistance is received. Table 4 indicates the amount of the rent threshold, the maximum payment of Rent Assistance and the level of rent at which the maximum payment of Rent Assistance is reached (rent ceiling).

Table 4 Rent Assistance, 1 January 2009
Household arrangement Maximum amount of Rent Assistance
($ a fortnight)		 Rent threshold
($ a fortnight)		 Rent ceiling
($ a fortnight)
Single 110.20 98.00 244.93
Sharer (each) 73.47 98.00 195.96
Couple (combined) 103.80 159.60 298.00

Notes: Higher amounts are available for families with children. Sharer rate does not apply to Disability Support Pension or Carer Payment.

At December 2008, Rent Assistance was received by around 11 per cent of age pensioners, 20 per cent of disability support pensioners and 21 per cent of Carer Payment recipients.

Pension Bonus Scheme

The Pension Bonus Scheme commenced on 1 July 1998 as a means to encourage older Australians who reach Age Pension age to remain in employment if they wished to do so. The scheme provides for the payment of a lump sum to people who would otherwise qualify for the Age Pension but delay claiming while they, or their partner, remain in employment. Under the scheme people are required to work at least 960 hours each year. The tax-free lump-sum bonus payment is made when the person eventually stops working and begins receiving the Age Pension. The amount of the pension bonus is based on the period of time a person deferred their receipt of Age Pension and the amount of Age Pension that is eventually received.

5.2 What the consultations told us

Many different aspects of payment structures were raised in the consultation process. While views varied, there was a general preference for regular fortnightly payments, although many made reference to the value of lump-sum payments in meeting irregular or unexpected expenses. There was also support for introducing more flexibility into the system to allow people to choose the frequency of payments.

The most frequently raised issues in relation to supplementary payments related to requests for increases to Pharmaceutical Allowance and Rent Assistance, although there was a general call in much of the feedback for all supplementary payments to be increased to meet increases in actual costs.

5.2.1 Consultations—frequency of payments

On balance, submissions and participants at the public forums showed a general preference to continue with current fortnightly payments (for day-to-day expenses) complemented by additional quarterly utility payments and an annual lump-sum bonus to assist with larger, more infrequent expenses, but this was far from unanimous.

Some submissions argued against the current payment structure suggesting that it is patronising and implies that pensioners are poor money managers who require this type of arrangement to ensure that they spend their pensions appropriately. Reflecting this, and a diversity of other views, some participants suggested that technological advances mean that government should be able to deliver payments in flexible ways that would allow pensioners to choose their own frequency of payment.

A range of more specific issues were considered by focus group participants, and while again a diverse set of responses was obtained, the overall perspective was that the frequency of payment had little impact on their standard of living. Many participants had come from paid employment where they received fortnightly payments. Some could see benefits in weekly payments as this might make budgeting easier, while others thought this might cost more to deliver (with the implication that this would reduce funds available for payments). The idea of a monthly payment was generally rejected; most agreed that it would complicate their budgeting arrangements, or provide the conditions for getting into difficulty for those who spent their payment all at once.

5.2.2 Consultations—supplementary payments

A central theme in consultations on supplementary payments was a view that these payments were insufficient for the actual cost of the items to which they relate. This is not surprising given that the payments were generally not designed to meet fully the specific cost (such as rent or utilities) but rather as a supplement to the base rate of pension.

Many submissions from organisations called for increases to the full range of supplementary payments, including Rent Assistance, Pharmaceutical Allowance, Utilities Allowance and Telephone Allowance. The most common proposals in written submissions from individuals were for increases in Pharmaceutical Allowance, to reflect the costs of those needing multiple medications (this is discussed further in Chapter 6); and in Rent Assistance, to address increasing housing costs.

5.2.3 Consultations—lump-sum payments and future payment options

Many pensioners indicated that one-off lump-sum payments were more useful than their fortnightly income for large, one-off costs that they found difficult to cover, such as repaying accrued debts, performing essential maintenance on their car or home, visiting the dentist, replacing an essential household appliance, visiting relatives, or simply spending on other basic needs such as food, clothing or utility bills.

Pensioners were divided over whether lump-sum payments should be paid regularly or rolled into the base rate of the pension. Among written submissions some 7 per cent of all individuals supported maintaining lump-sum payments, with a further 3 per cent wanting any additional increases to be paid as lump sums. This sentiment was somewhat stronger among organisations, with nearly 18 per cent of submissions supporting lump-sum payments and 8 per cent of submissions indicating they wanted any increases paid as lump sums. In the forums, many participants argued strongly against rolling the lump-sum bonus into the base rate of pension, fearing the value of the bonus would be reduced by increases in charges, such as public housing rents or nursing home fees, that are directly linked with the pension rate.

In contrast, 2 per cent of written submissions from individuals and 6 per cent of organisations argued for lump-sum payments to be rolled into fortnightly pension payments. Some participants in public forums argued that the provision of lump-sum payments on a regular basis was an indication that the government acknowledges that the pension on its own is insufficient. Others pointed out that pensioners currently receive the same level of lump-sum payment irrespective of any other income received or assets owned. These people suggested that the bonus might be better used to increase the base pension for those in greatest need.

When asked how they would like to receive any additional money, in the event that extra support could be made available, half of the participants in focus groups indicated a preference for an increase in the base rate of pension, while just over one-quarter indicated a preference for any additional money to be paid as a lump sum.

For those who preferred a lump-sum increase, the danger of it being ‘frittered away’ was balanced by the opportunity to create a buffer in case of unexpected expenses. The lack of funds to fall back on in difficult times contributed to a fear of the future, and was a source of insecurity for many participants.

There were calls for more flexibility in payment provisions. Submissions from organisations proposed allowing pensioners to have a choice in whether to receive supplements as an addition to their fortnightly base rate of pension or as occasional lump sums. In focus groups, some participants could see merit in their payments being structured around their specific needs. This included accumulating a portion of payment for release at specific times of the year, for example, to coincide with large bills, such as council rates, or times of high expense, like Christmas.

A number of submissions and participants in public forums also discussed the need to address inequity in eligibility for lump-sum payments (before the announcement of the government’s Economic Security Strategy in October 2008, Disability Support Pension recipients, unlike Carer Payment and Age Pension recipients, had not received one-off lump-sum payments).

5.3 Reform directions

The analysis of the Review and the balance of views expressed in the submissions indicate that reforms to one-off lump-sum payments, the frequency of payments, and supplementary amounts are warranted.

5.3.1 One-off lump-sum payments

The consultations showed that, for some, one-off lump-sum payments are operating as financial buffers to meet large fixed costs that for a range of reasons pensioners would otherwise find it more difficult to meet from fortnightly pension payments. It is, however, unclear to what extent this relates to the question of the adequacy of the base rate of pension excluding the value of the supplements or issues of budgeting for unexpected and ‘lumpy’ expenditures from a fixed income.

The experience of the Department of Families, Housing, Community Services and Indigenous Affairs in administering these one-off payments shows that many people are not satisfied with the administrative process. The simple administrative mechanisms by which one-off lump-sum payments are provided have given rise to a number of issues. For example, because eligibility is determined at a point in time, some people will not receive a one-off payment if they have lost their eligibility for the pension or the Commonwealth Seniors Health Card just before the ‘test day’.

The administrative arrangements for the payment of lump sums also mean that eligibility is generally tied to simple indicators, such as the type of pension or payment type received. For instance, around 85,500 age pensioners are in receipt of Carer Allowance as they care for a person with a disability, generally their partner. However, those receiving Carer Payment received a $1,000 lump sum, compared with the $500 lump sum received by age pensioners. Differentiating between the amounts of one-off lump sums on the basis of pension type can therefore have the unintended consequence of introducing incentives to access particular payment types.

However, it should be noted that the December 2008 Economic Security Strategy payments provided a level of assistance to pensioners based on relationship status (that is, single versus partnered amounts were paid), with additional assistance provided to carers through a bonus to Carer Allowance recipients.

The lump-sum payments that were a part of the Economic Security Strategy also provided payments to disability support pensioners for the first time. Among those pensioner groups that are part of this Review, disability support pensioners have generally been ineligible to receive the one-off lump-sum payments. Many communicated their dissatisfaction about this in the consultation process.

As discussed in Chapter 3, the Review considers that a common rate should be applied across the pensions under consideration. The Review notes that disability support pensioners share many of the characteristics of age pensioners and Carer Payment recipients that made a one-off lump-sum payment appropriate. The Review also notes that within the pensioner group, disability support pensioners are the most frequent users of advance payments29, suggesting that they experience particular financial pressure issues. Over the 12-month period of April 2007 to April 2008, advance payments were made to 32.3 per cent of disability support pensioners, compared to 5.4 per cent of age pensioners.

One-off payments may continue to have a role in the social security system, operating to:

However, the Review considers that one-off lump-sum payments are a poor way of improving the adequacy of basic income support payments, primarily because they are ad hoc and cannot deliver certainty. During the consultations some participants suggested that providing a one-off lump-sum payment confirmed that the pension on its own is insufficient. Moreover:

Therefore, while it is clear that one-off payments could continue to have a role, they are a poor way of addressing the adequacy of pension payments. The Review considers that reforms to address adequacy need to be designed and administered in a way that gives recipients of the Age Pension, Disability Support Pension and Carer Payment certainty over their total payments.

Finding 12: The Review finds that one-off lump-sum payments are not particularly effective mechanisms for addressing the adequacy of the pension because they do not provide ongoing financial certainty for pensioners.

Finding 13: The Review finds that one-off payments may have a role in circumstances where pensioners may not otherwise gain from specific budgetary or economic changes, such as from changes to taxation arrangements, to compensate for policy changes, or where a fiscal stimulus is desired.

5.3.2 Simplification of Pension GST Supplement, Pharmaceutical Allowance, Telephone Allowance and Utilities Allowance

While supplementary payments are intended to recognise that people in different circumstances have different needs and associated costs, over time the distinctions between the Pension GST Supplement, Pharmaceutical Allowance, Telephone Allowance and Utilities Allowance have become blurred as there is little to connect the payments to their original purpose. For example, the payments are commonly provided to pensioners universally despite individual cost differences and there is no restriction attached to their use. For all of the payments, the amounts provided are only a partial contribution to the costs. As indicated above, this aspect of the payments was rarely acknowledged in the consultation process. Instead, most pensioners considered that, since the supplements appeared to be specific to a particular type of expenditure, they should be adequate for the expenditure as a whole.

These features of the payments may largely account for the responses during the consultations, which expressed annoyance at the level of assistance provided by the individual supplementary payments. Two examples are summarised below.

Supplementary payments are also inconsistent in the treatment of singles and couples. For example, for Pharmaceutical Allowance, Telephone Allowance and Utilities Allowance, each member of a couple receives half the amount a single person receives. However, in the case of the Seniors Concession Allowance, which is paid to holders of a Commonwealth Seniors Health Card at the same rate as the Utilities Allowance ($128.50 a quarter), no distinction is made between singles and couples. Each eligible person receives the full amount of the Seniors Concession Allowance.

This inconsistent treatment can reflect the differing purposes of payments. For example, the Seniors Concession Allowance was introduced to recognise that Commonwealth Seniors Health Card holders could not access the same level of concessions available to Pensioner Concession Card holders and it was administratively simpler to pay each Commonwealth Seniors Health Card holder the same rate. The half rate of Pharmaceutical Allowance paid to members of a couple is compensated for in the operation of the Pharmaceutical Benefits Scheme safety net, which ensures that once 60 eligible medicines are purchased in a calendar year, all further eligible prescriptions in that year are obtained free. In the case of couples, the prescriptions of both partners count towards this threshold.

Nevertheless, the different relativities between singles and couples in the payment of supplementary amounts can mean that these payments inadvertently work against the single–couple relativities established in the base rate of pension payments, which are in turn based on total household expenditure, including specific aspects associated with supplementary payments. While the rationale of Telephone Allowance and Utilities Allowance rates is based on the premise that couples can share their living costs and achieve some economies of scale, a common argument is that a couple’s telephone and utilities costs are still greater than a single person’s costs.

Supplementary payments have been provided separately to the base rate of pension as a result of both the history behind the individual types of assistance and previous delivery mechanisms, such as changes to the Pharmaceutical Benefits Scheme resulting in pensioners having to purchase their pharmaceuticals in lieu of cash. However, the fact that these supplementary payments are nearly universal and only provide part compensation suggests that the base rate of pension may be a better support for a person’s basic costs of living than specific part payments like the Pension GST Supplement, Pharmaceutical Allowance, Telephone Allowance and Utilities Allowance.

Integrating the Pension GST Supplement, Pharmaceutical Allowance, Telephone Allowance and Utilities Allowance into a single supplementary payment, or absorbing some or all of these into the base rate, would go some way towards simplifying the system of payments and resolving specific issues. For example, as with the payment of lump sums, some supplementary payments, such as the quarterly payments of Telephone Allowance and Utilities Allowance, are based on eligibility on a specific ‘test day’. If a person loses eligibility on the day before the test day, they will not receive any amount of the supplement, despite the previous payment being provided almost three months earlier. Providing a single integrated supplement, or absorbing these payments into the base rate of pension, could set eligibility on the same basis as that applying to pensions. That is, if a person’s pension payment was cancelled part-way through a fortnight, a proportional amount of income support would be provided for that period. The integration of these supplements would also facilitate any move towards improving the flexibility of the frequency of payments discussed in Section 5.3.3.

It should be noted that the option of absorbing supplementary payments into the base rate of pension raises a number of issues:

However, either option for the integration of the Pension GST Supplement, Pharmaceutical Allowance, Telephone Allowance and Utilities Allowance would reduce the level of unnecessary complexity in the pension system.

Finding 14: The Review finds that integrating supplementary payments (Pension GST Supplement, Pharmaceutical Allowance, Telephone Allowance and Utilities Allowance) into a single supplementary payment or absorbing them into the base rate of pension would simplify the structure of pensions. Integration with the base rate would maximise simplicity while a separate supplement would provide a platform for introducing flexibility around the frequency of the payment of a component of the total pension package.

Finding 15: The Review finds that, if paid separately, any supplementary payment should be paid to singles and couples in proportion to the rate of the base pension to ensure that the relative value of the pension package is maintained.

5.3.3 Frequency of payments

One of the rationales for quarterly payments such as Telephone Allowance and Utilities Allowance is that these charges were historically based on quarterly billing cycles. However, quarterly billing cycles are now less common and rarely coincide with the payment cycle of the allowances. Customers can also choose alternative payment arrangements such as credit card billing or direct deductions from bank accounts.

The consultations indicated that many pensioners would much prefer a flexible approach that enables them to choose, and modify over time, the cycle of their payment arrangements. One approach to reform in this area would be to combine a number of the existing supplementary payments and provide pensioners with a choice over the timing of their receipt of this support.

While many of the written submissions were highly supportive of pensioners determining the frequency of their own payments, arguing that pensioners are very adept at managing their household budgets, for some, the merits of a reliable, regular payment in responding to the overall financial security of pensioners should not be underestimated. For this reason, extending any options around frequency of payments to the base rate of pension should be approached cautiously. These considerations mean that on balance an integrated supplement would be a better vehicle for delivering payment flexibility than the base rate of the pension. However, the Review notes as well that the option of weekly payment cycles may be of assistance to some pensioners. Weekly payment cycles are provided in some cases in the income support system to enable recipients who have difficulty budgeting to be able to manage their finances more effectively.

Finding 16: The Review finds that an integrated supplement would be an appropriate vehicle for delivering greater flexibility over the timing of payments and would permit pensioners to structure their receipt of income according to their budgetary priorities.

While caution should be exercised in applying a flexible approach to the base rate of pension an option of weekly payment cycles may be preferred by some pensioners.

The Review also notes that financial management counselling, financial information services and services that assist with the management of finances such as Centrepay, have an important role to play in assisting pensioners to manage their financial commitments.

5.3.4 Rent Assistance

Chapter 3, in considering the adequacy of the pension, found that pensioners who were renting privately experience particularly poor outcomes. It found that an immediate response to improve the circumstances of pensioners who rent privately could be achieved through an increase in Rent Assistance. Chapter 4 noted that the change in costs in private rents was not well reflected in the Consumer Price Index. This section considers some of the more detailed aspects of the structure of this payment.

The basic elements that determine the amount of Rent Assistance a person receives include:

As shown in Table 3 in Chapter 4, the value of the Rent Assistance threshold (the amount of private rent paid before Rent Assistance is available) has fallen as a proportion of the base rate of pension. This decline is even more marked when the whole package of assistance to pensioners is considered. A consequence of this is that some Rent Assistance is provided to pensioners who have relatively modest levels of rent, and the maximum rate of Rent Assistance is paid to households with both very high and medium rental costs.

This ‘fiscal drag’ effect on the targeting of Rent Assistance is exacerbated because, as highlighted in Chapter 4, rents have increased more quickly than the Consumer Price Index.

An increase in the threshold point for payment of Rent Assistance would remove access to Rent Assistance for those who pay low rent, allow for an increase in the rate for those with the highest housing costs, and thereby improve the targeting of the payment.

In addition, a more common approach across pensions would require consideration of the sharers rate of Rent Assistance that applies to the Age Pension but not to the Disability Support Pension or Carer Payment. Also, because Rent Assistance is paid to other income support and eligible Family Tax Benefit Part A recipients, consideration needs to be given to the implications of any change in the arrangements for these groups.

Finding 17: The Review finds that there would be merit in restructuring rent thresholds to target Rent Assistance to those who pay higher rents and addressing inequities that have arisen with the sharers rate of Rent Assistance.

5.3.5 Pension Bonus Scheme

The Pension Bonus Scheme was developed to provide support to those older Australians who, while eligible for the Age Pension, wish to defer their retirement. It was meant to encourage pensioners to undertake or continue some level of workforce participation where they have a desire, capacity and opportunity to do so. The scheme provides a one-off tax-free lump-sum payment to those who would otherwise qualify, but defer claiming the Age Pension and remain working for at least 960 hours a year. The amount of the pension bonus is based on the length of time a person deferred their receipt of Age Pension and the amount of Age Pension that is eventually received.

However, the Review considers that in practice the program has been less successful than anticipated in achieving its objectives, and that the goal of improving labour market participation by older, pension eligible, Australians can be done more efficiently, effectively and equitably by alternative approaches. Of particular note in the analysis were the complexity of the program and the extent to which changes in other aspects of the retirement income system have very much diminished the potential role of the program.

As with Carer Allowance, the Pension Bonus Scheme is not essentially income support. The focus of the Pension Bonus Scheme on voluntary deferral of pension receipt is also a very limited focus for supporting higher levels of participation, in that it establishes an ‘either-or’ contrast between employment and retirement which is increasingly at odds with a focus on transitions into retirement which seek to establish a pathway between these two status.

Administrative data from 1999–2000 to 2006–07 show that of those who received a pension bonus payment, time spent in the scheme was fairly evenly distributed between one and five years. This suggests that working beyond Age Pension age is often of relatively short duration and other factors (other than the bonus amount) influence individuals’ decisions to work beyond Age Pension age. This is consistent with anecdotal reports that suggest that to a large degree the bonus is flowing to individuals who would have continued employment (and not claimed the pension) even in its absence, with the bonus coming as a windfall gain rather than working as an incentive.

Because of the objectives of the program and the need to balance a range of different and often unknown future patterns of participation and to establish theoretical eligibility, the program has complex rules. These make it difficult for people to understand the program, and in particular to make a decision as to whether or not they would be better off using the program or simply receiving a part-rate pension. The rate of payment varies because of numerous factors, such as the length of time in the scheme, including whether or not this was for part- or full-year periods, the single or partnered status of the person over the accrual period and when they claim, and the amount of the Age Pension when it is eventually received.

Aspects of the program may also inadvertently penalise people. Some older workers miss out on being eligible for the program because they simply continued to support themselves in employment after reaching the Age Pension age and hence never pre-registered for the bonus. In other cases the requirement that a person not claim income support creates difficulties for a person on the program who may experience a short period of unemployment or reduced employment.

Other factors that have affected the program have been the introduction of a range of generous tax offsets for older people,30 which have significantly improved returns from work for seniors, reducing the need for a policy lever like the Pension Bonus Scheme to encourage workforce participation.

Changes to superannuation have improved work incentives for older people. The superannuation changes introduced in 2007 mean that superannuation from a taxed sourced is tax-free for people over 60 years. Eligible people now pay lower tax on any income from employment, and retain more of their superannuation payments. Further workforce incentives are provided through the ‘Transition to Retirement’ measure, which allows people who have reached their superannuation preservation age to access superannuation savings as a non-commutable income stream while continuing to work.

Modelling by the Review has highlighted the impact of these changes, and the complex interactions that a person needs to know to determine whether or not they are better off by applying for the Pension Bonus Scheme or simply moving onto a pension. This can be seen, for example, in the case of a single person who wishes to continue working part-time in a job with earnings of $14,138 a year (around half the 2008 federal minimum wage). If this person registers for the Pension Bonus Scheme and defers the Age Pension for five years, on claiming the pension, they would receive the maximum Age Pension, along with a lump-sum pension bonus of $34,344.30 (the maximum amount of pension bonus for five years’ deferral by a single person). However, if this person had chosen to claim Age Pension while continuing to work, a part-rate pension and employment income of around $25,341 each year would have been payable—a total of $121,833 over five years. That is the person would be $22,422 better off by claiming the Age Pension while working instead of registering for the Pension Bonus Scheme.

Because of these interactions, those who may benefit from the Pension Bonus Scheme are a small group who have sufficiently high income from employment that would either disqualify them for any pension during the deferral period or return only a small amount of pension, but have low levels of other income and assets when they exit the scheme (thereby qualifying for a high bonus payment).

Taking these factors into account, the Review considers that the Pension Bonus Scheme is a cumbersome and inefficient mechanism to achieve higher levels of workforce participation. It is a program that was developed in a different program and retirement income environment and is no longer effectively serving the role it was established for. Chapter 7 discusses alternative approaches to supporting workforce participation by older Australians, including the important question of incentives and the operation of the means test.

Finding 18: The Review finds that the Pension Bonus Scheme is not a particularly effective means of increasing workforce participation by older Australians and that this goal would be better pursued through the design of the pension means test to ensure that there are appropriate incentives for employment.

5.3.6 A common ‘Age Pension’

Currently there are some 13,800 disability support pensioners and 12,300 Carer Payment recipients above Age Pension age. There are a number of differences in the entitlements between these payments and the Age Pension. While in some cases a person of Age Pension age is on these payments as a result of not being residentially qualified for the Age Pension but eligible for one of these other pensions, in other cases it is a matter of choice. For example, a person who is already on Disability Support Pension when they reach Age Pension age is eligible to continue on that payment, and age pensioners are permitted to apply for Carer Payment. In contrast to these choices, a person who has reached Age Pension age is ineligible to apply for Disability Support Pension even if they otherwise meet the criteria.

Current differences between these pensioners include:

In considering the appropriateness of the maintenance of these three pension types for people over Age Pension age the Review identified three specific concerns:

Complexity

The provisions of the three payments vary. A person who is eligible for two or more of these payments must make a decision on which payment is the most beneficial for them. This complexity imposes transaction costs on individuals and increased administrative costs on Centrelink when implementing assessment and review criteria. While the assessment for the Age Pension is simply based on age, assessment for the Disability Support Pension and for Carer Payment involves consideration of eligibility based on labour force capacity. The additional costs do not appear warranted for people who are simply already identified as eligible for a pension based on their age.

Equity concerns

There are associated risks of inequitable treatment of pensioners. These arrangements can produce less favourable treatment for those whose circumstances change or who are not aware of the benefits offered by another payment for which they may be eligible. Similarly, a pensioner who is not willing to deal with the complexities of seeking to establish eligibility for another payment may be disadvantaged relative to one who is more willing to deal with these issues.

Very clearly the different conditions of the payments will result in pensioners in the same position being treated differently; for example:

While the current arrangements offer ‘choice’, such choice is limited once a pensioner has passed Age Pension age. For example, while a pre-existing disability support pensioner can choose to continue on this payment past Age Pension age, an age pensioner who develops the same disability—but does so once they are past Age Pension age, or did so while they were on Carer Payment prior to taking up the Age Pension but at that time did not move onto Disability Support Pension—no longer has the choice to move onto Disability Support Pension. That is, the relative treatment of these pensioners is less dependent on their current circumstances than on the pathway by which they entered the pension system.

Participation objectives

The clear demarcation between the Age Pension and the Carer Payment and Disability Support Pension relates to the fact that the latter two payments are contingent on the person continuing to be unable to support themselves in the labour market due to their disability or caring responsibilities. This is reflected in the specific provisions and criteria of the Disability Support Pension and Carer Payment:

While the circumstances of many recipients of these payments are unlikely to change, labour force capacity needs to be tested regularly to ensure that where a change occurs the person does not inappropriately remain on the payment and is provided with incentives and support to enable them to enter or re-enter employment. This is a reasonable administrative overhead for those of workforce age, but not for those over Age Pension age.

The different approaches of these payments to workforce participation is also seen in the mechanisms they use to support this. In common with the other working age payments, recipients of Disability Support Pension and Carer Payment are eligible for ‘working credits’ which allow them to more effectively benefit from undertaking irregular employment and build up such credits to assist in a transition into employment. In contrast the focus of the Pension Bonus Scheme is on voluntary deferral of a potential entitlement.

Summary

The current situation where a person above Age Pension age may be eligible for either the Age Pension, Disability Support Pension or Carer Payment, appears to have little merit.

It introduces additional administrative complexity both for individuals and Centrelink, and can result in people in similar situations being treated differently depending on which pension they are on.

Of most concern to the Review is that, because they encompass a population both above and below Age Pension age, there is a risk that focus of the Disability Support Pension and Carer Payment on labour market participation is obscured.

Finding 19: The Review finds that the current situation where a person above Age Pension age may be eligible for either the Age Pension, Disability Support Pension or Carer Payment is unnecessarily complex, and that the Age Pension should be the appropriate payment for people over Age Pension age. As a first step to achieving this, there should be consistency of treatment across pension payments for those of Age Pension age to remove incentives for payment swapping.

In the longer term, making the Age Pension the payment for people over Age Pension age would focus the Disability Support Pension and Carer Payment on their role as working-age payments, with workforce participation encouraged.

5.3.7 Grandfathering

The final source of complexity in the pension system considered by the Review is the ‘grandfathering’ or ‘savings’ provisions that are sometimes introduced to preserve the entitlements of existing recipients when policy settings are changed.

The main grandfathering arrangements in the current system include the ‘closing’ of payments to new entrants as an alternative to abolishing payments and the application of new eligibility rules to new entrants only, with existing customers retaining entitlement based on previous eligibility rules.

There are a number of grandfathered payments in the current income support system.

There are clear grounds for limiting the adverse consequences of program changes on individuals, especially where they may be poorly placed to change their behaviour (such as their pattern of earlier labour force participation or savings). However, grandfathering is a source of considerable complexity in the income support system, and its benefits needs to be balanced with treating people in similar circumstances equitably, and in achieving outcomes consistent with new policy directions.

For these reasons, when such provisions are used, they should operate over a relatively short period to serve as a transition path to the new program arrangements. Arrangements that would assist this may include:

  1. 25 The Commonwealth Seniors Health Card provides assistance to self-funded retirees of Age Pension age with incomes above the amounts that enable access to a pension. The card recognises that these retirees have provided for their own retirement and do not receive concessions from state and territory governments. Card holders are also able to claim Telephone Allowance and the Seniors Concession Allowance. In December 2008, the Commonwealth Seniors Health Card was held by around 284,300 people.
  2. 26 At December 2008, there were 443,800 people in receipt of Carer Allowance. This included 85,400 age pensioners, 19,400 disability support pensioners and 120,500 Carer Payment recipients, as well as 136,200 people in receipt of other payments. Although not all Carer Payment recipients also receive Carer Allowance, the development of a single assessment process for these two payments was announced in the 2008–09 Budget. While ensuring concurrent coverage for those on Carer Payment, Carer Allowance will continue to be a payment available across the population as a whole.
  3. 27 A telephone subscriber also includes a person who is a subscriber to a mobile phone service in Australia.
  4. 28 Utilities Allowance is available to recipients of Disability Support Pension, Carer Payment, Partner Allowance, Widow Allowance, Widow B Pension, Wife Pension and Bereavement Allowance.
  5. 29 An 'advance payment is an amount of up to $500 of a person’s income support payment that can be requested as an advance, and then paid back through a reduced pension rate over the next 13 fortnights.
  6. 30 Tax offsets include:
    • the Mature Age Worker’s Tax Offset is aimed at encouraging older workers to remain working or rejoin the workforce. The offset is available to workers aged 55 years and over who have net income from working of less than $63,000. The maximum offset in 2007-08 was $500.
    • the Senior Australians’ Tax Offset, when combined with the low income tax offset, ensured that eligible single older Australians could have income up to $25,867 in 2007-08 without paying income tax or the Medicare levy.
    • the Low Income Tax Offset, is designed to reduce the tax paid by Australian low and middle –income earners. In 2007-08 the maximum value was $750.
    • the Pensioner Tax Offset is available to taxpayers who are not entitled to the senior Australians tax offset and who receive certain pension payments. The effect of the offset is to ensure that no tax is paid by a person whose assessable income consists of the full pension and, in some cases, a small amount of non-pension income. In 2007-08 the maximum Tax Offset was $2,129 for those with net income below $20,194.
  7. 31 Incentive Allowance was ‘closed’ in November 1991, when Disability Support Pension was introduced. The allowance remains payable at the rate applicable in 1991 to those who qualified for the disability payment at that time. The rates are $62.00 a fortnight for recipients without dependants, $72.40 a fortnight for recipients with one or two dependent children and $82.70 a fortnight for recipients with three or more dependent children.

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