Veterans and war widows will continue to have their pensions raised by the same amount as all other pensioners after the government dropped its controversial plan to change the indexation formula.
Veterans Affairs Minister Michael Ronaldson said the government had noted strong views from the veteran and ex-service community.
"The government has listened and is acting on that feedback," he said in a statement on Thursday.
In reality the proposed changes, strongly opposed by aged and service pensioners alike, had little chance of passing the Senate.
The government a year ago proposed changing twice-yearly indexation so that pensions were only increased according to the consumer price index, the inflation rate.
Pensions are now indexed every March and September to the higher of three indexes - CPI, Pensioner and Beneficiary Living Cost Index or male total average weekly earnings. Mostly CPI is lowest, although not now.
By indexing only to CPI, the government could save $23 billion over 10 years, reining in some of the rising costs of an ageing community.
Had the government pressed ahead with its plan to index only by CPI, it would have found itself in a difficult position.
One of its first acts in government was to legislate so that payments from two old defence superannuation funds were indexed to the higher of CPI, MTAWE or PBLCI, rather than just CPI.
In opposition, Tony Abbott said indexing just to CPI was unfair for those who risked their lives for Australia.
Even this modest change increased the Commonwealth's unfunded superannuation liability by more than $5 billion.
A parliamentary library review said boosting benefits for those on military superannuation while lowering payments to service and disability pensioners appeared to be "grossly inconsistent and inequitable".
Senator Ronaldson said the need to reform the pension system remained.
To that end, well-off service pensioners will have pensions reduced under the same changes to asset limits and taper rates as will apply to Centrelink pensioners.
"The new changes will benefit veterans who do not have significant private wealth while continuing to make our system more sustainable," he said.
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