More than half a million retirees could benefit from a review of how their aged pension is calculated after being hit by a further reduction in interest rates this week.
Treasurer Josh Frydenberg has told the Australian Financial Review the federal government has accepted the argument that the deeming rate, which is used work out a pensioner's financial assets, is too high.
Deeming rates for the pension, which are as high as 3.25 per cent depending on individual's circumstances, were last set in March 2015.
Since then, the Reserve Bank has cut the official cash rate five times, hitting a new record low of just one per cent after this week's central bank board meeting.
"Since the deeming rates were last changed ... interest rates have come down by more than a per cent and this is now a good time to look at the issue," the treasurer told the AFR.
However, Mr Frydenberg said any cut to the deeming rate would not directly follow the falling cash rate because retirees not only invested their savings in term deposits, but also managed funds, shares and superannuation accounts that had far higher rates of return than bank accounts.
"It's not a straight line equation, you know, that the interest rate comes down, which affects the bank deposit rate, which therefore should affect the deeming rate, it's not linear," he said.
The five-year average rate of return on ASX 200 shares had been more than 12 per cent and about 6.9 per cent for superannuation income, whereas a $5000 term deposit over six months was paying between 1.75 per cent and 2.45 per cent.
At the moment, for singles, the first $51,800 of financial assets is subject to a deeming rate of 1.75 per cent and anything over $51,800 is deemed to earn 3.25 per cent.
For a couple of which at least one receives a pension, the first $86,200 of combined financial assets has a deeming rate of 1.75 per cent and anything over $86,200 is deemed to earn 3.25 per cent.
While Mr Frydenberg declined to nominate the size of any potential reduction in deeming rates, he said a change would hit the budget bottom line, although not to the extent to jeopardise a return to surplus this financial year.
In 2015 deeming rates were reduced by 0.25 percentage points, which cost the budget $200 million a year and gave part-pensioners an extra $83 a year.
