Retirement Affordability Index December 2017 by YourLifeChoices

ISSUE 4

DECEMBER 2017

Retirement Affordability Index December 2017

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Contents

Published by: Indigo Arch Pty Ltd Publisher: Kaye Fallick Editor: Janelle Ward Copy Editors: Olga Galacho, Ben Hocking Writers: Matt Grudnoff, Olga Galacho, Janelle Ward, Gerard Brody Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9885 4935 All rights reserved, no parts of this book may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, recording or otherwise, without the permission in writing from the publisher, with the exception of short extractions for review purposes. IMPORTANT DISCLAIMER No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor. Copyright Indigo Arch Pty Ltd 2017

How the retirement tribes were created The history of the concept and a summary of the key voices in this issue

Where are the biggest cost-of-living increases? Here’s how much each tribe spends in pivotal areas and the quarterly rises

Track your household spending We help you to calculate where your money is going

4 6

The challenges – real stories from real people 10 What you told us: the reality, the fears, what’s gone wrong and how to fix it How to make the Age Pension work for all The Australia Institute senior economist Matt Grudnoff has a solution

Is there a problem with the Age Pension? No, says the Social Services Minister; yes, says The Benevolent Society

Asset-rich but still cash poor? Olga Galacho explains the pros and cons of using your home to generate an income

Has your credit card gone into meltdown? 18 Ways to get your credit card debt under control and keep it there Government update What’s changed, what’s about to change

10 16 18

YourLifeChoices Retirement Affordability Index™ December 2017

Critics line up to lambast Age Pension system Your Life Choices’ Retirement Affordability Index™ maintains the heat on a system that many claim is broken.

here is a problem. At least that is what an overwhelming number of retirees say when asked about the adequacy and fairness of the Age Pension. It’s an opinion shared by The Australia Institute’s (TAI) senior economist Matt Grudnoff, who says that the Age Pension system is both “inadequate and hugely complex”. But Federal Social Services Minister Christian Porter has a totally different view. He says the “arrangements” in place “ensure pension rates are more responsive to pensioners’ actual living cost increases and keep pace with community living standards as measured by wages.” YourLifeChoices member Lorraine Cobcroft speaks for many cash-strapped retirees when she says: “Our pension system is unfair in the extreme – discriminatory, inadequate in supporting the neediest and complex to administer. It encourages manipulation and cheating and harshly punishes endeavour and responsible planning.”

Fuel and power were the main drivers of the increase in the cost of living for all tribes except one (Affluent Couples). YourLifeChoices, in association with TAI, has turned up the heat on the Federal Government through the Retirement Affordability Index™, a quarterly analysis that exposes the true living conditions of Australia’s retirees. To establish the index, we required special household expenditure data from the Australian Bureau of Statistics (ABS) to segment the population into six categories according to their home ownership, relationship status and form of income. These retirement tribes are: Affluent Couples and Singles, Constrained Couples and Singles and Cash-Strapped Couples and Singles. Next, the Consumer Price Index (CPI) across 12 categories of expenditure was applied, showing how 4

the cost of living has risen much faster for the CashStrapped (retired renters) and at a slower rate for the Affluents (retired homeowners). Additionally, YourLifeChoices conducted a survey of its 250,000 members to ask about their experience of retirement affordability. Our aims are: to encourage more realistic researchbased debate on the policy aspects of retirement income and affordability, to prompt deeper questions about the current rules and to help individual YourLifeChoices members who are trying to navigate the confusion of changing rules and regulations. In the December quarter we found: • Fuel and power were the main drivers of the increase in the cost of living for all tribes except one (Affluent Couples). • Affluent and Constrained Couples saw the lowest increase in their cost of living (0.4%) while Constrained and Cash-Strapped Singles saw the largest increase (0.6%). • The increase in the cost of living was offset slightly by a drop in the price of food and non-alcoholic beverages, driven mainly by a fall in vegetable prices due to a favourable growing season. • While recreational costs were the second largest increase for home-owners (except Affluent Couples where it was the biggest increase), the second biggest increase for renters (after power price increases) was housing costs. The increase in housing costs for renters made up about onethird of their increased cost of living. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ December 2017

What you spend and how you fund your retirement A ffluent Couples are spending the biggest portion of their retirement income – 20 per cent – on recreation. Cash-Strapped Singles, meanwhile, are spending the biggest chunk of their income – 36 per cent – on housing and only seven per cent on recreation.

These are the findings of the Retirement Affordability Index™ for the December quarter.

The lifestyles afforded the haves and the have-nots are poles apart and continue to move in opposite directions.

The table below shows key areas of spending for all six retirement tribes and, for Affluent Singles and Couples, the nest eggs required to support their lifestyle.

Domestic fuel and power costs continued to rise, but as a percentage of income, were an extra burden only to Cash-Strapped Singles.

Affluent Couple

Constrained Couple

CashStrapped Couple

Affluent Single

Constrained Single

CashStrapped Single

18%

23%

11%

29%

14%

Weekly

$1,419

$814

$687

$812

$452

$432

Monthly

$6,150

$3,529

$2,977

$3,519

$1,959

$1,871

Annual

$73,795

$42,344 Food & nonalcoholic beverages 20%

$35,726

$42,226

$23,511

$22,454

Housing - 29%

Recreation 17%

% of retiree population Spending

Highest spending category % Spend on housing % Spend on domestic fuel and power % Spend on communication Nest egg needed to achieve this annual income

Recreation – 20%

Housing - 20% Housing - 36%

13%

29%

15%

20%

36%

$1,596,971*

Funded by full Funded by full or part Age Age Pension Pension and and Rent private savings Assistance

$913,798*

Funded by full Funded by full or part Age Age Pension Pension and and Rent private savings Assistance

Couple on an Age Pension

Single on an Age Pension

The maximum fortnightly pension for couples living together is $674.20 each. This consists of a base payment of $613.60 plus a Pension Supplement of $50 and an Energy Supplement of $10.60. A maximum rent assistance payment of $125.40 per fortnight may apply.

The maximum fortnightly pension for singles is $894.40. The base rate is $814, the maximum Pension Supplement is $66.30 and the Energy Supplement $14.10. A maximum rent assistance payment of $133 per fortnight may apply.

These rates are valid until indexation takes place on 20 March, 2018. *Calculated using Industry SuperFunds Retirement Needs Calculator. Assuming a life expectancy of 22 years after retirement at 65, with investment returns of 4.2% and inflation @ 2.5%. #Additional funds required over and above a full Age Pension, calculated as above. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ December 2017

Energy costs again the culprits in cost-of-living increases

ore than three million Australian retirees are living on a fixed income and a growing proportion is finding it increasingly difficult to make ends meet. Energy costs are exacerbating their plight, with fuel and power continuing to drive up the cost of living for all tribes – apart from the affluent couples – in the September quarter. Electricity prices rose across all households during the quarter by 8.9 per cent while gas prices rose by

Weekly expenditure for retirees aged 54+ Expenditure items Housing As a percentage of expenditure Domestic fuel & power As a percentage of expenditure Food & non-alcoholic beverages As a percentage of expenditure Alcoholic beverages & tobacco products As a percentage of expenditure Clothing and footwear As a percentage of expenditure Household furnishings & equipment As a percentage of expenditure Household services & operation As a percentage of expenditure Medical & health care As a percentage of expenditure Transport As a percentage of expenditure Communication As a percentage of expenditure Recreation As a percentage of expenditure Education As a percentage of expenditure Personal care As a percentage of expenditure Miscellaneous goods & services As a percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure 6

Affluent Couples

5.2 per cent, according to the Australian Bureau of Statistics (ABS). The Paris-based International Energy Agency says in its annual summary that Australian households have the 11th most expensive electricity prices in the OECD, with South Australia being the most expensive state. Below are the latest costs – in weekly, monthly and annual format – to help you review, compare and plan your household expenditure.

Constrained Couples

CashStrapped Couples

Affluent Singles

Constrained Singles

CashStrapped Singles

Couple Couple Single Single Single who Couple who homeowners homeowners homeowner homeowner rents on Age rent on Age with private on Age with private on Age Pension Pension income Pension income Pension 178.52 105.51 199.83 119.95 88.53 157.43 13% 13% 29% 15% 20% 36% 44.59 33.49 35.35 32.25 28.87 24.50 3% 4% 5% 4% 6% 6% 231.01 162.71 147.12 116.06 81.58 73.11 16% 20% 21% 14% 18% 17% 49.59 24.36 39.41 24.07 13.57 18.40 3% 3% 6% 3% 3% 4% 30.94 17.56 9.29 20.58 8.93 7.36 2% 2% 1% 3% 2% 2% 74.56 32.35 19.68 40.80 18.94 15.11 5% 4% 3% 5% 4% 3% 41.64 29.46 15.91 37.56 21.23 11.28 3% 4% 2% 5% 5% 3% 138.49 98.71 34.18 79.52 35.22 20.84 10% 12% 5% 10% 8% 5% 183.36 119.03 56.59 97.13 49.54 33.41 13% 15% 8% 12% 11% 8% 38.62 27.37 29.61 37.37 19.29 15.05 3% 3% 4% 5% 4% 3% 290.66 98.71 64.18 135.38 50.93 30.73 20% 12% 9% 17% 11% 7% 0.57 0.21 0.00 0.12 0.11 0.01 0% 0% 0% 0% 0% 0% 29.20 17.72 12.32 18.19 9.59 8.50 2% 2% 2% 2% 2% 2% 87.39 47.13 23.57 53.04 25.81 16.08 6% 6% 3% 7% 6% 4% 1,419.14 814.31 687.04 812.04 452.13 431.82 6,149.60 3,528.66 2,977.19 3,518.83 1,959.25 1,871.21 73,795.25 42,343.93 35,726.24 42,225.91 23,510.98 22,454.49

YourLifeChoices Retirement Affordability Index™ December 2017

How does your spending compare? Expenditure items

Affluent Couples

Constrained Couples

CashStrapped Couples

Affluent Singles

Constrained Singles

Single Single Couple Couple Couple who homeowner homeowner homeowners homeowners rent on Age with private on Age with private on Age Pension income Pension income Pension

CashStrapped Singles Single who rents on Age Pension

Housing Rent, interest, home repairs and maintenance & body corporate fees As percentage of expenditure Domestic fuel & power Electricity, gas & oil As percentage of expenditure Food & non-alcoholic beverages Includes meals in restaurants As percentage of expenditure Alcoholic beverages & tobacco products Alcohol consumed at licensed premises As percentage of expenditure Clothing and footwear Dry cleaning, repairs & alterations As percentage of expenditure Household furnishings & equipment Outdoor furniture, floor and window coverings, linen and bedding, appliances, glassware, tableware and cutlery, tools & mobile phones As percentage of expenditure Household services & operation Cleaning and garden products, phone charges (including mobile), pest control & home cleaning services As percentage of expenditure Medical & health care Health insurance, doctor and dental fees, medicines and pharmaceutical products, prescriptions & hospital and nursing home charges As percentage of expenditure Transport Purchase, maintenance and insurance of vehicles, fuel & public transport fares As percentage of expenditure Communication Spending on telephone (including fixed line and mobile) Spending in internet services As percentage of expenditure Recreation AV equipment including TVs and pay TV, books, newspapers and magazines, camping and fishing equipment, sports equipment, internet charges, holidays & animal expenses As percentage of expenditure Education Primary and Secondary school fees (including school sport fees) TAFE and University fees (including HELP) Fees to all other private education institutions As percentage of expenditure Personal care Toiletries, cosmetics & hairdressing As percentage of expenditure Miscellaneous goods & services Stationery, watches and jewellery, interest payments on credit cards and all loans (excluding home loans), education, rates and charges on investment properties, accountant and tax fees & cash gifts As percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure

YourLifeChoices Retirement Affordability Indexâ&#x201E;˘ December 2017

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YourLifeChoices Retirement Affordability Indexâ&#x201E;˘ December 2017

Retirees share their journey and ponder what the future holds We asked for your stories if you were finding life as a retiree challenging. Here are two. Pat explains her fears, while Lorraine offers a solution. ‘I wonder what I will do if costs keep rising’ Pat Isaacs, 73, Peregian Beach, Queensland

This year I will need surgery on my feet and knee and I have a hernia which needs repairing. There is no chance of getting that done in the public health system any time soon. I can’t afford the private health cover premiums or the gap payment of thousands of dollars.

It is definitely getting harder to survive. My only income is the Age Pension. I have no super, or income from anywhere else.

Despite all this, I have a good life. I have friends and, at 73, I still have much to offer. I am active in my community, working with homeless people, refugees and caring for the environment. I still have a lot to give, as long as my health doesn’t break down.

My house was 30 years old and I was still paying a mortgage, wondering where I would get the finances to do essential repairs to my home. Or should I put it on the market? Then where would I live? I certainly couldn’t afford to pay rent out of my pension.

I would like to see the Age Pension increased to enable people to have a better quality of life.

Eventually I secured a reverse mortgage, paid what was owing on my housing loan and did some repairs. But I will run out of money before I can get much more done. I can possibly draw down more, but the interest is piling up in the meantime. I do find it easier to survive not having the mortgage payments, but the way everything is increasing in price means I won’t be ahead for too long, I fear. By the time I’ve paid rates, body corporate fees, phone, internet, electricity, insurances, fuel and other car expenses, there is not a great deal left for food, and other essentials. Meals out almost never happen. Entertainment is usually beyond me. I do wonder what I will do if costs keep rising, and whether there will be anything left for my family when I am gone. I had hoped to travel in my retirement years, but this is becoming less likely. 10

‘Our pension system is unfair in the extreme’ Lorraine Cobcroft, Pottsville, NSW I’m not doing it tough now, but I did for nearly three decades, and many of my friends are struggling. What concerns me is that our inefficient and excessively expensive retirement funding system is failing the neediest, and the Government keeps applying Band-aids instead of overhauling the entire system to fix its flaws. Our pension system is unfair in the extreme – discriminatory, inadequate in supporting the neediest and complex to administer. It encourages manipulation and cheating and harshly punishes endeavour and responsible planning, driving many to arrange their affairs to draw higher pensions than should be necessary.

YourLifeChoices Retirement Affordability Index™ December 2017

What you said

To reach retirement age and yet be totally reliant on welfare smacks of irresponsibility bordering on stupidity. Anybody who finds him or herself in just such a situation is in no wise position to be placing further demands on the public purse. Suzanne within to live d e t c e e is be exp their incom of n a c y s Nobod means when d the price he n a r ok at t thei o nant L g . a g t n s eti thin lly virtua are skyrock ess “live wi ff ts o I gu ials essent electricity. urn the ligh er? t f t o ns ea h price s” mea h in cold w n a e m your o deat y eeze t Raine and fr

I have no idea ho w anyone manages on a pe nsion. It’s fine un til you need more th an just food and clothing, i.e. the roof gets a leak or the oven breaks down etc. Then yo u need to step into the real current world of tradesm en who seem to charge phenomen al wages for thei r time. Rosret

Why is n’t f instead inancial liter ac Or Sha of cooking or y taught at s kespea c re’s pla jewellery ma hool indepe ndent k y ing. s? Tha ret reach 6 t 0 and r irement start is where an s. Not ealise we hav when w e no m oney. S e tof Good financial management skills need to be instilled as early as possible. If you wait until you start working, you have left it too late. If you wait until you stop working, you have little chance of success. Ex PS

tem en sys k o r b ast The ve is f he we ha dt ing an no s p a l l e co ht hav far rig to fix the ow ave idea h they h r e t s a dis d. Rae create

I hate to think what the future two generations will suffer as we go forward. The world changes so much now and the governments have not taken strong enough steps to make sure all are okay. John * Comments from YourLifeChoices’ members.

Rather than tweak the system to falsely claim cost reductions while hurting hundreds of thousands and discouraging saving and planning, the Government should be conducting the full review and overhaul of the system that the Greens sought when they, foolishly, agreed to an assets test that assumes a 7.8 per cent-plus investment return rate in a five per cent average return rate environment. We pay generous pensions and concessions to retirees with multimillion-dollar homes, retirees who gifted generously to their families before turning 65, retirees who spent up big cruising the world and partying, retirees who earn over $70,000 a year, and retirees with younger partners with huge superannuation balances. The system incentivises marriage break-ups and unofficial co-habitation, by discriminating against couples. It pays absolutely no regard to the age of a retiree who may need hard-won savings to last another 30-plus years; to health and care needs that may impose high living costs, or to the effort and sacrifice that might have resulted in a savings nest-egg that now delivers little or no advantage – or even disadvantages the saver over those who have half as much.

The retirement ‘sweet spot’ invites retirees to lash out on expensive world cruises or unnecessary home extensions. It encourages workers to minimise their superannuation contributions unless they can achieve over $1.5 million, aided by some $37 billion annually in superannuation tax concessions that enrich the well-off and do little or nothing to assist strugglers to build their retirement nest-egg. A universal Age Pension has often been proposed as the solution to this mess. I’d like to suggest an alternative that may be more affordable and acceptable to taxpayers. Include the family home in an assessment of assets, but assess assets only to fix a deemed income, determining pension entitlement based solely on the higher of each individual’s actual or deemed income in excess of a generous threshold. This removes disincentives to save, eliminates benefits of manipulating, improves fairness across the board and simplifies administration. Over time, it will result in huge savings over a system that dis-incentivises saving, enabling increases in the basic Age Pension rate to relieve aged poverty. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ December 2017

How to fix the Age Pension Retirees are hurting with one in four now living in poverty in Australia. Matt Grudnoff, a senior economist at The Australia Institute, has the solution.

ising electricity prices and housing costs are hurting many retirees. I’ll repeat those words – hurting many retirees. The stark reality is that one in four retirees is living in poverty. There is considerable government and community focus on how rising costs are affecting young people, but retirees who rent are bearing the brunt of the price increases.

The Retirement Affordability Index™ was established by YourLifeChoices and The Australia Institute to shine a light on exactly these issues. The index for the December quarter shows that the cost of living is rising fastest for retirees who rent, the tribes on the lowest incomes who can least afford soaring electricity bills. The problems highlighted by our index are particularly stark when viewed in an international context. The OECD ranks Australia as the third worst for rates of poverty among retired people in the 35 developed nations – behind Korea and Latvia.

The idea that the Age Pension is unsustainable … is simply wrong. Reform does not need to break the budget. Disturbingly, the organisation estimates that a quarter of retired Australians live in poverty. which is twice the OECD average of 12.5 per cent. Australia’s retirement income system must be made simpler and the amount of money paid via the Age Pension must be increased to permit retired people to live in dignity. What can we do about this problem? Are there solutions? At the heart of the problem is an Age Pension system that is both inadequate and hugely complex. But there is a solution – a Universal Age Pension. There are two parts to government support for incomes in retirement: the Age Pension and superannuation tax concessions. The means-tested 12

Age Pension provides income support directly for those who qualify and superannuation tax concessions increase the value of workers’ super over their lifetime, making more funds available in retirement. The means testing of the Age Pension results in pension payments being focused mainly on lower income retirees, while the far less means-tested superannuation tax concessions mean that the majority of the tax concessions go to high-income earners. The Government likes to tell us that the Age Pension is unsustainable. However, over the past three years, spending on the Age Pension has grown by an average of four per cent a year, while superannuation tax concessions have grown by an average of 10 per cent per year. And Treasury predicts the concessions will grow by that same amount for the next three years. This year, the combined cost of the Age Pension and superannuation tax concessions will be $80 billion. The problem is not that too little is being spent to support incomes in retirement, it is that too much of it is being spent providing a subsidy to those with multimillion-dollar super accounts, while many retired people continue to live in poverty. A solution is to combine the two parts of the retiree income support into a Universal Age Pension. A Universal Age Pension would be a payment made to anyone over the age of 67, regardless of their income or assets. A similar system operates in New Zealand, which has a poverty rate of one in 10 compared with our one in four. The main advantage of a Universal Age Pension is that the whole system becomes simpler. It reduces the cost of administration to both the Government and to retirees. No more having to work out if you’re eligible for a pension or part-pension. No more asset or income tests. The rate of a Universal Age Pension would also need to be increased to tackle the scandalous rates of poverty among Australia’s retirees. The Universal Age Pension would be increased from the current 30 per cent of total male earnings to 37.5 per

YourLifeChoices Retirement Affordability Index™ December 2017

cent of total male earnings. The single pension base rate would rise from $814 per fortnight to $1063 per fortnight and the couple rate by a commensurate amount. This would be funded through the abolition of superannuation tax concessions. If this occurred, not only would the Universal Age Pension be fully funded but the Government would also have change left over to the tune of about $15 billion per year. The reason for this is that the cost of superannuation tax concessions has been rising rapidly and in the next few years is likely to be more costly than the Age Pension. These costs are shown in Figure 1.

Without superannuation tax concessions, super balances would be lower, particularly for high-wealth individuals, but super would become a top-up to the Universal Age Pension. The idea is that the Age Pension would be universally available and sufficient to sustain people in retirement. It would end the situation where the inequality in people’s working life is magnified by superannuation in retirement. The Universal Age Pension would also improve older people’s participation in the workforce. The choice to work even a few hours has meant possibly having your pension reduced. With a Universal Age Pension, additional work will not change the amount received. New Zealand, with its Universal Age Pension, has higher work participation rates for older workers than Australia.

$60b $50b

The $15 billion per year that this policy change would save could be used to increase public housing stocks for retirees who don’t own their own home. This would further strengthen the safety net for retirees who rent.

$40b $30b $20b

2019-20

2018-19

2017-18

2016-17

2015-16

2014-15

2013-14

2012-13

2011-12

$10b

Super tax concessions Age Pension

Figure 1: Cost of Age Pension and superannuation tax concessions

The superannuation guarantee – the compulsory 9.5 per cent of workers’ income that employers pay into employee super accounts – would continue.

The idea that the Age Pension is unsustainable and that we need to accept the high rates of poverty facing retired people is simply wrong. Reform does not need to break the budget. We just need to more efficiently and fairly distribute the money already being used to boost retirement incomes. A system with integrity and fairness at its core should reflect the underlying purpose of having a pension in the first place: Every Australian should be able to live in retirement with dignity. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ December 2017

Two sides of the retirement income story Cash-strapped retirees can tap into existing assistance measures, says the Government, as the Opposition argues for Age Pension protection measures and a key welfare agency is adamant that more help is needed. The question The current Age Pension, with supplements, for singles is $894.40 per fortnight. The YourLifeChoices Retirement Affordability Index™ has found that fortnightly expenditure for the cashstrapped single – i.e. a single who rents – is $863.64. The situation for cash-strapped couples (those who rent) is worse – a fortnightly pension each of $674.20 (with supplements) and fortnightly expenditure each of $687.04. The drivers for the latest cost-of-living increase are fuel and power. Even with the modest rent assistance supplied, these retirees are living on the edge. What is the solution?

The responses Spokesperson for Christian Porter, Attorney-General and former Federal Minister for Social Services* The Australian Government appreciates the important economic and social contribution that senior Australians make to our community and is keen to ensure that all pensioners’ living standards are safeguarded by the Age Pension system. Pensions increase regularly. Base pensions are indexed twice a year – in March and September – to the higher of the increase in the Consumer Price Index and the increase in the Pensioner and Beneficiary Living Cost Index (PBLCI). PBLCI was introduced to ensure pension indexation better reflects changes to pensioners’ costs of living. It takes into account the goods and services pensioners buy – not what the rest of the community buys. The PBLCI basket of goods and services is weighted to recognise that pensioners spend more of their income on essentials, including food, health, clothing, telephone calls and postage.

After indexing to price increases, base pension rates are then benchmarked to 41.76 per cent of Male Total Average Weekly Earnings for pensioner couples combined. The single rate of pension is two-thirds of the combined couple rate. These arrangements ensure pension rates are more responsive to pensioners’ actual living cost increases and keep pace with community living standards as measured by wages. From 20 September, 2017, maximum pension rates are: • $894.40 a fortnight or $23,254.40 a year for singles; • $1348.40 a fortnight or $35,058.40 a year for pensioner couples combined. The YourLifeChoices Retirement Affordability Index™ has found that fortnightly expenditure for a single pensioner who rents is $863.64 and fortnightly expenditure for pensioner couples who rent is $687.04. The question compares these amounts to the fortnightly pension rates listed above. However, pensioners who rent in the private rental market can also receive Rent Assistance. Single pensioners who live alone may be eligible for Rent Assistance of up to $133 a fortnight, while couples may be eligible for Rent Assistance of $125.40 a fortnight. The question also mentions increases in costs of fuel and power. Where the costs of goods and services purchased by pensioners increase, these increases are reflected in the CPI and PBLCI, which are used to index pensions. The Government provided a one-off Energy Assistance Payment to recipients of the Age Pension, Disability Support Pension or Parenting Payment Single and to veterans and their partners paid the Service Pension, the Income Support Supplement or relevant compensation payment. The payment provided one-off assistance to those who have been impacted by recent increases in energy prices and who have limited ability to earn extra income to cover the additional costs while other energy reforms take effect. The rate of payment was $75 for singles and $62.50 for each eligible

*On 19 December, Christian Porter was appointed Attorney-General. Dan Tehan became the Social Services Minister.

YourLifeChoices Retirement Affordability Index™ December 2017

member of a couple and was received by the majority of recipients by 30 June, 2017. The payment is nontaxable and does not count as income. For people who are struggling financially, Centrelink has social workers who can assist in several ways, including helping with claims for payments and providing information about, or referring customers to community support services including the Commonwealth Financial Counselling Program.

Deeming rates are supposed to reflect returns across a range of investment choices available in the market, but the Turnbull Government has failed to act by lowering deeming rates. It is well past time that he acted, and brought them into line with real rates of return. Labor understands that in today’s low-interest rate environment, pensioners find it very difficult to get a reasonable rate of return on their savings.

The program provides confidential financial counselling services free of charge to people in low-income groups experiencing financial difficulty.

The Turnbull Government should do the right thing by lowering the deeming rates to provide some relief to Australian pensioners.

An appointment to see a social worker can be arranged by phoning Centrelink on 13 2850 for the cost of a local call. Calls made from mobile phones may incur additional costs.

Joel Pringle, Advocacy Campaigner, The Benevolent Society

Jenny Macklin, Shadow Minister for Families and Social Services

Recent research by The Benevolent Society shows that people on the Age Pension who are renting are increasingly forced to choose between mashingfood instead of seeing a dentist, or turning off the hot water system and dealing with the health consequences later. This is how people manage when the basic costs-of-living exceed their income.

We can’t allow the Government to make any further cuts to the Age Pension. Prime Minister Malcolm Turnbull and Treasurer Scott Morrison proposed axing the Energy Supplement in the 2016 Budget, but haven’t been able to get this through the Senate. Axing the supplement would cost new single pensioners $14.10 a fortnight or $365 a year. Couple pensioners would be $21.20 a fortnight or around $550 a year worse off. We also need to ensure we maintain the link between wages growth and pension indexation. In the 2014 Budget, the Abbott Government tried to cut pension indexation by $23 billion over a decade. It would have seen the pension cut by $80 a week after 10 years. On the issue of deeming rates, it has been nearly three years since the rates were adjusted. Interest rates have fallen from 2.25 per cent in February 2015 to 1.50 per cent today, yet Mr Turnbull has done nothing.

Utilities are one factor in cost increases, but the running down of Commonwealth Rent assistance and social housing stocks are the greatest factors causing hardship in private rent. Other factors that result in people doing it tough on the pension include illness and being or becoming single. In response, we hear governments blaming people for their circumstances to shift responsibility from the fact that government decisions create the economies and society that we live in. Addressing poverty and hardship are a priority. Instead of tax cuts, the Government could choose to bolster Rent Assistance or subsidise dental care as is the situation with the rest of the health system. Governments have politicised the Age Pension over many years, and the solution is to hold them accountable for it. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ December 2017

Cashing in on your property: the pros and cons There are several ways homeowners can put extra money in the bank, in superannuation or even in their wallets. Olga Galacho explains the options.

sset-rich, cash-poor – it’s a refrain that is on the lips of many older Australians who either partly or fully own their homes. But they don’t have to choose between a roof over their head or the cash. There are ways that both can be had. In 2015, a majority of people aged over 60 preferred to remain in the family home for as long as possible rather than downsize, according to the Productivity Commission survey, Housing Decisions of Older Australians.

There are pros and cons to each.

Option 1: Reverse mortgage Deloitte’s 2015 Reverse Mortgage Report estimated that Australian retirees had amassed $500 billion in home equity. About 40,000 had taken out around $3.6 billion in reverse mortgages to create a cash flow to fund their needs. The typical reverse mortgage was for around $92,000 and the average age of the borrower was 75.

A more recent survey of YourLifeChoices members found that if they were ever forced to downsize, most would choose a smaller home on their existing block of land.

These types of mortgages, which are available only to those aged 65 and over, are a loan against your home with proceeds able to be taken as a lump sum, income stream or line of credit.

Given the choice, 56 per cent of members said they would still want a detached home, according to the October survey conducted in partnership with Ellivo Architects.

While interest is charged, neither that nor the principal amount borrowed needs to be repaid while you (and whoever else is named on the home’s title) live in the property.

It’s not yet clear if the suggested superannuation incentives in the May 2017 Budget might persuade older Australians to change their attitudes to downsizing. These proposals would give retirees the opportunity to avoid paying tax on a non-concessional contribution into their super funds of up to $300,000, if they sold their home to buy a smaller one. However, what may emerge is that an increasing number of older Australians who find themselves cash-strapped may not benefit a great deal from such an incentive, depending on the size of any mortgage. The YourLifeChoices survey found that 17 per cent of respondents still owed money on a home loan. That is a steep jump from 2011 when 10 per cent of people aged over 65 had mortgages, according to the Australian Bureau of Statistics. In the earlier Productivity Commission survey, 12 per cent said if they were desperate for money, they would dip into their property’s equity. There are a number of ways to tap into the value of a family home, from subdividing a block and building a second house on it to reverse mortgages and home reversion schemes. 16

The typical reverse mortgage was for around $92,000 and the average age of the borrower was 75. As tempting as this may sound as a way of cashing up, the Australian Securities and Investments Commission’s (ASIC) MoneySmart website warns that because the interest compounds, you may find that over time there is little left after the loan is paid out. Negative equity protection laws on reverse mortgage contracts prevent a borrower from owing the lender more than their home is worth. However, whatever balance you are left with could reduce your options if you need to move into an aged care facility. MoneySmart calculated that under some terms, a loan of $50,000 would grow to $232,000 over 15 years, and to more than $1 million across 30 years. And, borrowing on your home will likely have an effect on whether you can claim the full Age Pension.

YourLifeChoices Retirement Affordability Index™ December 2017

Option 2: Home reversion scheme Under a home reversion scheme, you sell a portion of your property to a lender for cash. But this option is limited to just one provider, Homesafe Wealth Release, which offers the Bendigo Bank-backed scheme only in parts of Sydney and Melbourne where home prices are unusually high. No repayments are expected under the scheme. Instead, you sell a proportion of your property. For example, you may opt to sell half of your $650,000 home to the lender for a handout worth up to two-thirds of the 50 per cent stake – or around $215,000. If you decide to sell your property later and it has increased in value by 20 per cent to $780,000 for example, the provider pockets $390,000, which is half the value of the property. MoneySmart warns that the scheme is difficult to understand and price. Further, lump sums received and how you spend them could compromise your eligibility for a full Age Pension.

Option 3: Building on your property With housing prices stronger than ever in some parts of Australia, if you have sufficient land, it may seem attractive to subdivide your house block and build a second residence to sell.

Property expert and financial adviser Bruce Brammall, of Bruce Brammall Financial, says a growing number of building companies are catering to this trend. In some states, a few builders claim to be able to keep the construction cost of a small unit below $200,000. With median prices for units ranging from $615,000 in Sydney to $250,000 in Hobart, according to CoreLogic, the opportunity to potentially cash in may look compelling. Mr Brammall warns, however, that retirees should not be too dazzled by the potential flashing dollar signs. “First, you need to have a big back yard and be able to put a driveway through to the second home. Plus, be aware of any council planning requirements that could make the project too expensive,” Mr Brammall told YourLifeChoices. “Second, think carefully about taking the easy way out and just selling the empty portion of your newly subdivided plot. If you do this, you may have no control over what your new neighbours will build.” As with other forms of accessing equity in your home, your Age Pension entitlements might be affected if you redevelop your property. Retirees are urged to do their research and seek professional advice before attempting to access the equity in their home. YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ December 2017

How to get your credit card debt under control Did your credit card run hot over the Christmas-New Year period? Consumer Action Law Centre chief executive Gerard Brody offers advice on how to get out of debt.

t can be very tempting to overindulge during the festive season – and we aren’t just talking about pudding.

Christmas is one of the most expensive times of the year, and when your credit card statement arrives in January, you may be in for a big shock. The Australian Securities and Investment Commission (ASIC) MoneySmart debt calculator showed that Australians owed about $32 billion on their credit cards towards the end of 2017 – an average of about $4200 per card-holder. And the average card-holder was paying around $700 in interest per year if their interest rate was between 15 and 20 per cent. If your New Year’s resolution was to get your credit card spending under control, how do you ensure you will achieve that goal?

1. U nderstand how your credit card works Credit cards are actually quite complex products, so it is not surprising that many people find them difficult to understand. Thankfully, there are reforms on the way that will simplify how interest is charged, and will improve the affordability checks done by the banks. In the meantime, we explain some of the more confusing aspects of credit cards, so that you can avoid sneaky interest charges and fees.

Minimum repayment amounts

Interest rates on cash withdrawals If you withdraw money from an ATM using your credit card, you will be charged interest immediately on the amount you have withdrawn and that could give you a nasty surprise at the end of the month.

Balance transfer deals and rewards points Banks generally advertise credit card zero or low interest balance transfer deals to attract new customers. However, these cards often have very high interest rates once the balance transfer period ends, sometimes more than 20 per cent per annum. New purchases on balance transfer credit cards can also attract interest charges immediately. This means that if you want to make new purchases, or if you can’t repay your entire balance within the specified transfer period, then a balance transfer deal probably isn’t the right option for you. Banks also often advertise “bonus” reward points for new customers, but it’s important to check the fees and charges associated with the card to see if it really offers you value for money. A basic lowinterest credit card might be a better option.

When you read your monthly credit card statement, the most prominent figure will generally be the “minimum repayment amount”. This is a relatively small amount compared to the total balance owed on the card.

You must pay the total balance owing every month if you want to avoid interest charges. If you simply pay the minimum repayment amount on your credit card statement, you will pay significant interest charges on the remainder of your outstanding balance. If possible, limit your spending so that you can pay off the full balance owing every month. Credit cards can be a useful way to manage household finances 18

– provided they are paid off every month and not used as a type of long-term debt.

2. Ways to control credit card debt It’s very tempting to overspend during the festive season and worry about the consequences later, so it’s not uncommon for people to end up in financial trouble in the new year. Senior financial counsellor at the National Debt Helpline, Shungu Patsika, says that it’s important to set spending limits for gifts and other festivities over Christmas. “Post-Christmas is our busiest time of year because people have often overspent over Christmas, usually on their credit cards,” Shungu says. If you find you are having trouble with your bills, don’t be afraid to ask for help from your bank or a financial counsellor. We recommend seeking help

YourLifeChoices Retirement Affordability Index™ December 2017

early; leaving it too long may limit your options and might mean you drag credit card debt issues further into your retirement. “Speak to your credit card provider to see if you can get some hardship assistance, or speak to a financial counsellor about your options,” Shungu suggests. You can speak to a financial counsellor by calling the National Debt Helpline on 1800 007 007. Financial counsellors at the National Debt Helpline offer confidential, independent and free advice. While you may be worried about speaking to someone about your debts, our financial counsellors

Damage control 1. The ultimate solution – cut up your credit card. 2. Contact your bank and reduce the spending limit on your card. 3. Leave your credit card at home more often. 4. Nominate particular months of the year to reduce your expenditure – a bit like FebFast, when participants cut their alcohol consumption. 5. Say why before you buy. 6. Reduce your spending by: • Limiting how many coffees you buy in a week. Try replacing two of these with your own plunger or instant coffee. Possible saving: $416 per year. •R educing your restaurant or takeaway meals by one per month. Possible saving: $720 per year.

deal with these issues all the time and are not judgmental about your circumstances. Money problems can happen to anyone, and our financial counsellors are well equipped to give you advice about options to help get you back on your feet. Our financial counsellors can give you advice about creating budgets, concessions, refinancing, early access to your superannuation, financial hardship assistance and negotiating with creditors. The Consumer Action Law Centre is an independent, not-for-profit, campaign focused, casework and policy organisation. YourLifeChoices disclaimer

• Going grocery shopping with a list and buying only items on the list. Possible saving: $480 per year. • Buying petrol at the bottom of the price cycle and using your shopper dockets. Possible saving: $120 per year. • Considering a house swap for your next holiday. Possible saving: $1000. • Going to the movies only on discount days and nights. Possible saving: $80 per year. • Buying gifts ahead of time when sales are on, not at the last minute. Possible saving: $200 per year. Total possible savings in a year: $3016 Written with the assistance of Get a new life: how to change the way you live written by YourLifeChoices publisher Kaye Fallick.

YourLifeChoices Retirement Affordability Index™ December 2017

Government update Part of making retirement affordable requires fully understanding your entitlements and rule changes. So here’s the latest government update to help clarify.

Short-term vehicle registration now an option If you live in Victoria and your registration is due for renewal after 1 January, 2018, you will have the option to pay a short-term registration fee – either three or six months. There will be a fee of $2.45 charged for each renewal and if you have a concession card, you will still be able to receive the concession rate. Vicroads.vic.gov.au

Changes to Pension Supplement overseas Although still subject to the passage of legislation, those who travel overseas from 1 January, 2018, for a period of six weeks or more, can expect to have their Pension Supplement stopped after six weeks. For those who are leaving Australia permanently, your Pension Supplement will cease the day you depart. Humanservices.gov.au

Assistance with income review requests Centrelink is contacting some customers to request more details about their reported income from 20

previous years. While the letter you receive will ask you to provide the information within 28 days, you can have more time if needed. Centrelink has several online guides to help you understand the process of your review. Humanservices.gov.au

Support for those affected by data breach All Centrepay deductions to Amazing Rentals have been cancelled following a possible data breach and if your payment has been affected, you should have received notice. If you think you’ve been affected by the possible Amazing Rentals data breach, Human Services is offering assistance through its Identity Support and Response Team. Humanservices.gov.au

Indexation of Carer Allowance Indexation of the Carer Allowance has taken place on 1 January, 2018. It may be only a few dollars, but it could well help with those after-Christmas expenses. Humanservices.gov.au YourLifeChoices disclaimer

YourLifeChoices Retirement Affordability Index™ December 2017