Abstract
Means-tested pension policies are typical for many countries and are very important to the pension system. These policies are specific for each country, and the assessment of policy changes is critical for policy makers. In this paper we consider the Australian means-tested Age Pension. 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 regard 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 regard 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 maximising lifecycle model 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 risky asset allocation becomes more sensitive to the asset-test and the housing allocation increases slightly in order to receive additional Age Pension. The difference in optimal drawdown between the old and new policy is 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 higher due to the new deeming income rules, which benefit slightly wealthier households who previously would not have received Age Pension due to the income-test and minimum withdrawals.
Highlights
Means-tested pension policies become more important globally, as the general population ages and the life expectancy improves
Only Pre-January 2015 (PRE2015) is subject to the size of the drawdown in the income test, while the other policies depend on liquid wealth only
Under the PRE2015 policy, the relatively high drawdown for the retiree would most often lead to no Age Pension due to the income-test, while under the deeming rate-based policies, the retiree would receive a significant amount of Age Pension throughout retirement
Summary
Means-tested pension policies become more important globally, as the general population ages and the life expectancy improves. Account-based pensions (such as Allocated Pension accounts) are accounts that have been purchased with superannuation and generate an income stream throughout retirement Such an account does not have tax on investment earnings and is subject to regulatory minimum withdrawal rates each year, which increase with age. We adapt the model previously developed in Andreasson et al (2017) to examine the impact of this policy change on an individual retiree This model captures retirement behaviour in the decumulation phase of Australian retirees subject to consumption, housing, investment, bequest and government-provided means-tested Age Pension and is an extension with stochastic factors (mortality, risky investments and sequential family status) to what was originally presented in Ding (2014); Ding et al (2014). The state variables W and H are discretized on a grid, and the Gaussian quadrature method is used for integration between periods; for details, see Andreasson et al (2017)
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