Appendix E: Indexation
This appendix provides a brief history of indexation arrangements and discusses the different indexation arrangements that apply to pension and allowance payments.
Brief history of indexation arrangements
Indexation arrangements have varied over the years. In general, until the mid-1970s pension rates were increased on an ad hoc basis, although there were brief periods when pension rates were indexed annually to price movements. Twice yearly indexation in line with CPI increases was in place between 1976 and 1978 and restored in 1979.
In 1972 the incoming government commenced implementing a commitment to increase the pension level until it reached 25 per cent of average weekly male earnings. This benchmark was met for the first time in 1990.
In 1997 legislation was passed to benchmark the maximum single pension rate to at least 25 per cent of the MTAWE. The figure used for this benchmark is the Original, All Males, Total Average Weekly Earnings figure produced by the ABS as part of its AWE series. This figure was chosen because it measures the level of male wages across the workforce, including full-time, part-time, casual and junior employees. This broad spread was seen as reflecting community differences in male wages.
The combination of CPI indexation and linking pensions to growth in wages has delivered real increases to pension rates. Since 1970, the real value of the maximum single rate of pension has increased by 203 per cent, from $7,303 to $14,826 a year. The real rate of pension for a pensioner couple has increased by almost 186 per cent, from $12,902 to $23,950 a year over the same period.
Different indexation arrangements for different payments
Indexation arrangements vary between income support payments, according to the type of payment. The same indexation arrangements apply to all pension-type payments (Age Pension, Disability Support Pension, Carer Payment, Wife Pension, Widow B Pension, Parenting Payment Single, and payments to veterans such as Service Pension, War Widows and Widowers Pension, Income Support Supplement and Disability Pension).
In 1972, legislation was introduced to provide for common rates for all pensions and allowances. The common rate structure took effect in March 1973, and remained in place for pensions and allowance until November 1975 when the single allowance for those under 18 without dependents was 'frozen' (until 1982). The single allowance for people without dependents (single allowance (without child)) was introduced in November 1978 when it was excluded from indexation and was instead to be reviewed each budget. By May 1978 the rate was only 80.2 per cent of the single pension (and single allowance (with child)). Ad hoc increases to the single allowance (without child) rate improved the relativity to 93.4 per cent of the single pension by November 1989. Other allowance recipients continued to receive allowance payments paid at pension rates (couples, singles with children and from June 1990 the singles aged over 60 in continuous receipt of income support for nine months or more).
In 1997 when the MTAWE benchmark was legislated for pensions, it was decided it should not include the single allowance (with child or aged 60 and over long term income support) and the couple allowance, which had been aligned with pension rates since 1973. Just prior to the legislation benchmarking single pension rates to MTAWE the single allowance (without child) was 92.4 per cent of the single pension.
Since September 1997 wages growth has increased the real value of pension rates by around 20 per cent. In contrast, over the same period, allowances have remained unchanged in real terms. At March 2008 to 19 September 2008 the single allowance (with child or aged over 60 and over long term income support) was 86.5 per cent of the single pension and the couple allowance was 86.3 per cent of the couple pension. The single allowance (without child) was 80.0 per cent of the single pension.
Current indexation process
Different components of the income support system have different indexation regimes with the base rate of pension currently having a dual process of indexation by the CPI and benchmarking to 25 per cent of the MTAWE. Other pension add-ons and thresholds for means testing are indexed by the CPI only and some of these at different times and with different frequency. For example, add-on payments indexed to the CPI include the Pension Supplement, Pharmaceutical Allowance, Utilities Allowance and, where applicable, Rent Assistance, Telephone Allowance and Remote Area Allowance.
Base pension rates and the Pension Supplement are indexed twice yearly, on 20 March and 20 September. The mechanism for this is:
(a) the base rate is indexed by the percentage increase in the CPI over the preceding six months (for the March indexation this is the six months from the previous July to the previous December, and for the September indexation this is the six months from the previous January to the previous June);
(b) the new maximum single base rate of pension is then compared with 25 per cent of the MTAWE and increased if necessary to ensure that benchmark is met.
Future increases are built on the previously increased amount.
Increases in the maximum single base rate of pension flow on to the maximum partnered base rate of pension proportionally (that is, the partnered rate is maintained at around 83 per cent of the single rate).
At the same time the Pension Supplement, which was introduced to compensate pensioners for the impact of the GST, is indexed in line with CPI increases. It is paid on top of the rate that meets the MTAWE commitment.
Indexation of family assistance
Formal indexation provisions for family assistance were introduced in 1990. The value of FTB rates and thresholds are maintained by annual indexation to the CPI each 1 July.
The maximum rates of FTB Part A for families with children aged under 13 and aged 13-15, are also linked to wages growth through a link with the combined pension couple (CPC) rate which is in turn benefits from the benchmarking of the single rate of pension to 25 per cent of the MTAWE. The CPI indexed maximum rates of FTB Part A are compared to 16.6 per cent of the CPC rate for the under 13 rate and 21.6 per cent of the CPC rate for the 13 to 15 rate and if they are below these percentages the rates are increased to meet these benchmarks.