Social Security Chapter 14 PowerPoint presentation by Lindsay Cowling Holmesglen Institute ©2011 John Wiley & Sons Australia, Ltd

Introduction The purpose of social security is to care for those in need Over time benefits had been expanded but are now being rationalised Social security accounts 33% of Govt. budgeted revenue Social security benefits include unemployment benefits aged pension disability benefits

The Purpose of Social Security Social security provides support for a basic level of living standards Before 1900 voluntary charitable organisations accepted care of destitute Legislation enacted in early 1900s to create an age pension New social security initiatives introduced in 1945 to meet different social needs Over the past 10 years there has been a rationalisation of specific benefits in favour of more generally applicable benefits

Rationale Underlying the Provision of Social Security Reasons for providing social security benefits include: Altruism Humanitarian Utilitarian Economic Reduction in crime

Centrelink First established in 1997. Centrelink is responsible for integrated service delivery to Australian public. Virtually the sole provider of social security programs. Part of a broader shift to use of market-like mechanisms in the running of public programs.

Centerlink continued Table 13.1 Social Security payment ($ billion), 1998-99 to 2011-12 Type of assistance to: 1998–99 Budget 2009–10 Budget 2010–11 Estimates 2011–12 Estimates The aged 15.6 40.7 44.0 46.9 Veterans and dependants 4.6 6.9 6.8 People with disabilities 6.7 18.0 20.3 21.4 Families with children 14.8 30.1 30.4 31.4 Unemployed and sick 5.9 7.0 7.2 Other programs and administration 6.3 6.1 Overall total 53.5 109.7 114.9 119.8 Source: Data derived from Treasury 1998, 2010

The Range of Social Security Benefits For aged people For people raising children For people who are ill, injured or disabled For people who are unemployed For people caring for others For students Concession cards

The Rate of Payment for the Majority of Government Pensions Maximum pension entitlements (effective from 1 July 2010) Source: Centrelink 2010. Status Maximum payment per fortnight Single Couple (each) $644.20 + $56.90 maximum pension supplement $485.60 + $42.90 maximum pension supplement

The Rate of Payment for the Majority of Government Allowances Includes Newstart allowance, sickness allowance and widow allowance (effective from 1 July 2010) Source: Centrelink 2010. Status Maximum payment per fortnight Single, no children $462.80 Single, with children $500.70 Single, aged 60 and over, after 9 months on allowance $506.70 (includes pharmaceutical allowance) Couple (each) $417.70

Pension and Allowance Benefit Eligibility Rules Means testing of a persons assts and their income – eligibility is based on the test that produces the lowest payment Residence requirements – to qualify a person must be a permanent resident An Australian resident living outside Australia, but within a country with which Australia has an Agreement may still be eligible – see: http://www.fahcsia.gov.au/sa/seniors/payments/Pages/AgePension.aspx

Assistance Provided to Retirees Age pension available to those who satisfy criteria Paid fortnightly and reviewed in March and September each year to keep in line with eth greater of CPI or MTAWE Now indexed against MTAWE at 27.7% for singles and 41.76% for couples

Age Test Eligibility Eligibility Age Requirements Men born before 1 July 1952 are eligible at age 65. Women born before 31 December 1945 have reached pension age.  For women born between 1 January 1946 and 30 June 1952, see table below. Date Pension Age Applies to Women Born: 1 July 2009: 64 years - from 1 January 1946 to 30 June 1947 1 July 2011: 64.5 years -from 1 July 1947 to 31 December 1948 1 July 2013: 65 years - from 1 January 1949 to 30 June 1952

Age Test Eligibility continued For both men and women born on or after 1 July 1952 the pension age is progressively increasing from 65 to 67, starting on 1 July 2017, and will reach 67 in 2023 - see table below. Date Pension age Applies to people born 1 July 2017 65.5 years - from 1 July 1952 to 31 December 1953 1 July 2019 66 years - from 1 January 1954 to 30 June 1955 1 July 2021 66.5 years – from 1 July 1955 to 31 December 1956 1 July 2023 67 years - from 1 January 1957

Means Testing A means testing system is used to determine eligibility and the rate of payment Entitlements are based on the test that produces the lowest payment Assets test for pensions Assessable assets must be within set limits. Income test for pensions Actual income received Deemed income from ‘financial assets’ Rates of payment Set fortnightly rates for singles and couples.

Asset Test Limits for Allowances and Full Pensions (effective April 2011)

Asset Test Limits for Allowances and Part Pensions (effective April 2011)

Assessable Assets include: Bank deposits Shares, managed funds Loans, bonds, debentures Loans to family Household contents and vehicles Superannuation assets (after reaching age pension age.)

Assets Test – Exemptions include: Family home – and up to 2 hectares of land on a single title. Rural applicants may have a greater exemption based on “effective use of land” test Gifts up to $10,000 in a financial year and up to $30,000 over a five year period (excess amount counted as asset for 5 years) Prepaid funerals up to $10,750

Assets Value of Income Streams under the Assets Test The Asset Test value of income streams depends on: Commutable income streams (assets tested) Non-commutable (asset test exempt) Generally, income stream investments which ensure a steady drawdown of income and capital of person’s lifetime, allowing no access to capital, gain the benefit of an asset test exemption.

Income Test The Income Test imposes a limit on the allowable income for full or part benefits. Income Test differs between pensions and allowances. Reduction factor applies when income level exceeds a threshold.

Income Test (effective April 2011)

Income Test continued Extra allowable income for each child $24.60 Pensions payable are reduced by 50 or 25 cents per fortnight for every dollar of income in excess of the full pension limit for a single or couple respectively Assessable income includes the usual concepts of income plus deemed income…

Income Exempt under the Income Test Lump sums received from a home equity conversion loan Capital gain from sale of assets Rent subsidies and other government assistance Emergency relief payments Medical benefits

Deeming Rules Income from financial assets (eg. bank deposits, shares, managed funds) is assessed by a deemed rate of return and not by the actual return Example: March 2011 for a single person / couple the first $43,200 / $72,000 is assessed at 3.5% pa; the amount above the limit is assessed at 4.5% pa.

Excluded Income Life insurance policies Rental properties Long term income stream products Superannuation balances for those aged under pension age

Gifting Rules Allow an applicant to give away A maximum of $10,000 annually and A maximum of $30,000 over a 5 financial year rolling period

The Assessment of Income Streams Retirement income-stream products, covering both pensions and annuities, fall under one of the following three categories for purposes of the assets and income tests: 1. Asset-test-exempt income streams — income streams commutable (ability to withdraw a lump sum) only in limited circumstances and have a nil residual value 2. Asset-tested income streams — long-term (more than 5-year) income streams which are assessable on the account balance (such as account-based pensions) 3. Asset-tested income streams — short-term (less than 5-year) income streams which are assessable on the account balance (such as short-term annuities)

The Assessment of Income Streams continued For asset-test purposes, income-stream products are generally assessed based on the account balance however, some income streams are exempt under the assets test Those that may be exempt include lifetime or life expectancy pensions and annuities and term-allocated pensions acquired as follows: 100% exempt if purchased before 20 September 2004 50% exempt if purchased on or after 20 September 2004 and up to 19 September 2007 (Most income-stream products acquired from 20 September 2007 are fully assessable)

The Assessment of Income Streams continued For pensions and annuities for which there is no account balance, such as a lifetime pension or annuity, the value of the asset is calculated under the original purchase price depletion method This calculates the value of the asset based on the original purchase price reduced periodically for income payments made by the product provider

Work Bonus From 20 Sept 2009, those eligible to receive an age pension may be entitled to disregard some of their employment income under the income test The bonus allows those eligible to receive an age pension to disregard half of the first $500 of fortnightly employment income from the income test; that is, a maximum amount of $250 can be disregarded. The work bonus replaced the pension bonus scheme which was closed to new entrants from 20 Sept 2009. Those registered with the pension bonus scheme prior to 20 Sept 2009 continue to receive this bonus payment

Pension Bonus Scheme Offered tax-free lump sum for deferring pension or continuing working Features: Voluntary Must register at appropriate time Could not register after receiving pension Amount of bonus depended on whether single or couple, years worked, pension entitlement.

Means Testing of Allowances Allowance recipients use the same assets test thresholds as for pensions, however, unlike pension payments, no allowance is paid where the level of assets exceeds the lower threshold The income test for the payment of allowances is slightly more complicated Fortnightly income in excess of $62 and up to $250 reduces the payable benefit by 50 cents per dollar, and income above $250 reduces the benefit by 60 cents in the dollar

Threshold Rates for Allowances Threshold and upper-limit rates for a number of allowances including the Newstart, Widow, Partner and Sickness allowances

Assistance Provided to Families Raising Children Centrelink provides assistance to families through a range of benefits Chief benefits are family tax benefit part A, family tax benefit part B, baby bonus, maternity immunisation allowance, child care rebate and parenting payment Administered through the Family Assistance Office

Adjusted Taxable Income For the purposes of satisfying an income test for eligibility to a number of family benefits, including family tax benefits, child care benefit and baby bonus, an income test based on adjusted taxable income (ATI) is used An individual’s ATI is made up of: taxable income the value of any adjusted fringe benefits (total reportable fringe benefit amounts multiplied by 0.535) target foreign income total net investment losses tax free pension or benefit and reportable superannuation contributions

Assistance for Families Raising Children Family tax benefit A Assistance to low and middle income families. Family tax benefit B Assistance to single income families.\ Baby bonus Assists parents with the costs associated with the birth (including the stillbirth) or adoption of a child Child care benefit Paid to parents who use approved child care.

Disability Support Pension Provides a level of income for people who have a physical, intellectual or psychiatric impairment assessed under impairment tables To qualify for a disability support pension, a person must: be over 16 but less than age-pension age be unable to work for 15 hours or more per week for the next 2 years as a result of the impairment meet the requirements for Australian residency and the income and assets tests for pensions be unable to undertake a training activity due to the impairment which would equip the person for work within the next 2 years, or be permanently blind

Sickness Allowance The sickness allowance is paid to eligible claimants over 21 years but under age-pension age who are temporarily incapacitated for work or full-time study They must have a job or student place to which they can return when well Illness must be verified by medical certificate Applicants must be Australian residents and have been in Australia for at least 2 years The allowance is paid at Newstart allowance rates and is means tested as an allowance

Carer Payment Payable to eligible carers who provide daily care for either an adult or child who is being nursed at home Paid at the same rate as the age pension The cared-for person must be: assessed as having a high level of physical, intellectual or psychiatric disability receiving income support payments from Centrelink an Australian resident The carer must: be an Australian resident or have equivalent permanent-resident status qualify under the income and assets tests for pensions

Austudy Provides income support to students aged 25 years or over undertaking qualifying study or a full-time Australian apprenticeship Courses approved for Austudy payment include secondary education, undergraduate courses, graduate courses (excluding most Masters and all Doctorates), TAFE courses and Associate Diplomas Full-time students under the age of 25 may be eligible for the youth allowance Subject to assets and income means test

Youth Allowance The youth allowance is payable to full-time students and Australian apprentices aged between 16 and 24 and job seekers under 21 years, either looking for work or combining part-time study with job search, or undertaking other approved activity or temporarily incapacitated for work or study Those aged 25 and over may also qualify if they were receiving the youth allowance immediately before turning 21 Subject to an income and assets test

Taxation of Pensions and Allowances Complex area with some being taxable and others non-taxable. Refer to Table 13.17 Generally, benefits are taxable if provide Substitution of employment income. Financial assistance for special reasons. Rebates are non-taxable.

Pensioner Tax Offset Enables pension recipients to earn a little income in addition to their pension without paying any tax Eligibility for the pensioner tax offset applies to those pensioners in receipt of any taxable Subject to an income test based on ‘rebate income’

Senior Australians Tax Offset Payable to persons of age-pension age who are self-funded retirees The offset provides a tax concession for those retirees on a low income who satisfy eligibility for an Australian government pension but who do not qualify because of the application of the means test

Publicly Provided Residential Aged Care When an elderly person is in need of care and aged –care assessment team (ACAT) decides on whether the person requires low level (hostel) care or high level (nursing) care. Decision based on the person’s ability to cope with daily living, clinical needs, physical hygiene, communication and emotional support structures.

Hostel Accommodation Costs- Residents pay: An accommodation bond based on assets Daily fees Income tested fee Social Security implications- Home exempt for Asset Test for 2 years. If home is rented, rent counted under Income Test Accommodation bond not counted for Income Test but counted for Asset Test

Residence in Nursing Homes Costs- No accommodation bond required. Accommodation charge – depends on assets. Charge is capped and paid for maximum of 5 years. Social Security implications- Home exempt for Asset Test for 2 years. If home is rented, rent counted under Income Test

Summary A wide range of benefits are provided to meet community needs. Measures have been taken to ensure only those in need are assisted. Social security is an ever-changing area with many rules and eligibility criteria.