The 2015-2017 Policy Changes to the Means-Tests of Australian Age Pension: Implication to Decisions in Retirement
18 Pages Posted: 28 Nov 2016
Date Written: November 25, 2016
The Australian Government uses the means-test as a way of managing the pension budget. Changes in Age Pension policy impose difficulties in retirement modelling due to policy risk, but any major changes tend to be ‘grandfathered’ meaning that current retirees are exempt from the new changes. In 2015, two important changes were made in regards to allocated pension accounts – the income means-test is now based on deemed income rather than account withdrawals, and the income-test deduction no longer applies. We examine the implications of the new changes in regards to optimal decisions for consumption, investment, and housing. We account for regulatory minimum withdrawal rules that are imposed by regulations on allocated pension accounts, as well as the 2017 asset-test rebalancing. The new policy changes are modelled in a utility maximizing lifecycle model and solved as an optimal stochastic control problem. We find that the new rules decrease the benefits from planning the consumption in relation to the means-test, while the housing allocation increases slightly in order to receive additional Age Pension. The difference in optimal drawdown between the old and new policy are only noticeable early in retirement until regulatory minimum withdrawal rates are enforced. However, the amount of extra Age Pension received for many households is now significantly different due to the new deeming income rules, which benefit slightly wealthier households who previously would receive no Age Pension due to the income-test and minimum withdrawals.
Keywords: Dynamic Programming, Stochastic Control, Optimal Policy, Retirement, Means-Tested Age Pension, Defined Contribution Pension
JEL Classification: D14, D91, G11, C61
Suggested Citation: Suggested Citation