The 2015-2017 Policy Changes to the Means-Tests of Australian Age Pension: Implication to Decisions in Retirement

18 Pages Posted: 28 Nov 2016

See all articles by Johan Andreasson

Johan Andreasson

University of Technology Sydney (UTS); CSIRO Australia

Pavel V. Shevchenko

Macquarie University; Macquarie University, Macquarie Business School

Date Written: November 25, 2016

Abstract

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

Andreasson, Johan and Shevchenko, Pavel V., The 2015-2017 Policy Changes to the Means-Tests of Australian Age Pension: Implication to Decisions in Retirement (November 25, 2016). Available at SSRN: https://ssrn.com/abstract=2875551 or http://dx.doi.org/10.2139/ssrn.2875551

Johan Andreasson (Contact Author)

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

CSIRO Australia ( email )

41 Boggo Rd
Dutton Park, Queensland
Australia

Pavel V. Shevchenko

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

HOME PAGE: http://www.businessandeconomics.mq.edu.au/contact_the_faculty/all_fbe_staff/pavel_shevchenko

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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