IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1611.08330.html
   My bibliography  Save this paper

The 2015-2017 policy changes to the means-tests of Australian Age Pension: implication to decisions in retirement

Author

Listed:
  • Johan G. Andreasson
  • Pavel V. Shevchenko

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.

Suggested Citation

  • Johan G. Andreasson & Pavel V. Shevchenko, 2016. "The 2015-2017 policy changes to the means-tests of Australian Age Pension: implication to decisions in retirement," Papers 1611.08330, arXiv.org.
  • Handle: RePEc:arx:papers:1611.08330
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1611.08330
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lee M. Lockwood, 2018. "Incidental Bequests and the Choice to Self-Insure Late-Life Risks," American Economic Review, American Economic Association, vol. 108(9), pages 2513-2550, September.
    2. Fedor Iskhakov & Susan Thorp & Hazel Bateman, 2015. "Optimal Annuity Purchases for Australian Retirees," The Economic Record, The Economic Society of Australia, vol. 91(293), pages 139-154, June.
    3. Blake, David & Wright, Douglas & Zhang, Yumeng, 2014. "Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 105-124.
    4. Hardy Hulley & Rebecca Mckibbin & Andreas Pedersen & Susan Thorp, 2013. "Means-Tested Public Pensions, Portfolio Choice and Decumulation in Retirement," The Economic Record, The Economic Society of Australia, vol. 89(284), pages 31-51, March.
    5. Ding, Jie & Kingston, Geoffrey & Purcal, Sachi, 2014. "Dynamic asset allocation when bequests are luxury goods," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 65-71.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Johan G. Andréasson & Pavel V. Shevchenko, 2017. "Assessment of Policy Changes to Means-Tested Age Pension Using the Expected Utility Model: Implication for Decisions in Retirement," Risks, MDPI, Open Access Journal, vol. 5(3), pages 1-21, September.
    2. Johan G. Andreasson & Pavel V. Shevchenko & Alex Novikov, 2016. "Optimal Consumption, Investment and Housing with Means-tested Public Pension in Retirement," Papers 1606.08984, arXiv.org.
    3. Andréasson, Johan G. & Shevchenko, Pavel V. & Novikov, Alex, 2017. "Optimal consumption, investment and housing with means-tested public pension in retirement," Insurance: Mathematics and Economics, Elsevier, vol. 75(C), pages 32-47.
    4. Jinhui Zhang & Sachi Purcal & Jiaqin Wei, 2017. "Optimal Time to Enter a Retirement Village," Risks, MDPI, Open Access Journal, vol. 5(1), pages 1-20, March.
    5. Geoffrey Kingston & Susan Thorp, 2019. "Superannuation in Australia: A Survey of the Literature," The Economic Record, The Economic Society of Australia, vol. 95(308), pages 141-160, March.
    6. Adam Butt & Gaurav Khemka & Geoffrey J. Warren, 2019. "What Dividend Imputation Means for Retirement Savers," The Economic Record, The Economic Society of Australia, vol. 95(309), pages 181-199, June.
    7. Geoffrey Kingston & Lance Fisher, 2014. "Down the Retirement Risk Zone with Gun and Camera," Economic Papers, The Economic Society of Australia, vol. 33(2), pages 153-162, June.
    8. Fedor Iskhakov & Susan Thorp & Hazel Bateman, 2015. "Optimal Annuity Purchases for Australian Retirees," The Economic Record, The Economic Society of Australia, vol. 91(293), pages 139-154, June.
    9. Anthony Asher & Ramona Meyricke & Susan Thorp & Shang Wu, 2017. "Age pensioner decumulation: Responses to incentives, uncertainty and family need," Australian Journal of Management, Australian School of Business, vol. 42(4), pages 583-607, November.
    10. Choi, Sungsub & Kim, Sungjun & Shim, Gyoocheol, 2016. "Effect of lifetime uncertainty on consumption/investment with luxury bequest motives," Finance Research Letters, Elsevier, vol. 17(C), pages 275-279.
    11. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2016, November.
    12. Butt, Adam & Khemka, Gaurav, 2015. "The effect of objective formulation on retirement decision making," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 385-395.
    13. Martin Boyer & Philippe De Donder & Claude-Denys Fluet & Marie-Louise Leroux & Pierre-Carl Michaud, 2018. "A Canadian Parlor Room-Type Approach to the Long-Term Care Insurance Puzzle," Cahiers de recherche 1806, Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques.
    14. Dong, Yinghui & Zheng, Harry, 2019. "Optimal investment of DC pension plan under short-selling constraints and portfolio insurance," Insurance: Mathematics and Economics, Elsevier, vol. 85(C), pages 47-59.
    15. Svetlana Pashchenko & Ponpoje (Poe) Porapakkarm & Mariacristina De Nardi, 2017. "The Lifetime Costs of Bad Health," 2017 Meeting Papers 533, Society for Economic Dynamics.
    16. Mariacristina De Nardi & Eric French & John Bailey Jones, 2016. "Medicaid Insurance in Old Age," American Economic Review, American Economic Association, vol. 106(11), pages 3480-3520, November.
    17. Groneck, Max & Ludwig, Alexander & Zimper, Alexander, 2016. "A life-cycle model with ambiguous survival beliefs," Journal of Economic Theory, Elsevier, vol. 162(C), pages 137-180.
    18. Hero Ashman & Seth Neumuller, 2020. "Can Income Differences Explain the Racial Wealth Gap: A Quantitative Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 220-239, January.
    19. Margherita Borella & Mariacristina De Nardi & Eric French, 2018. "Who Receives Medicaid in Old Age? Rules and Reality," Fiscal Studies, John Wiley & Sons, vol. 39(1), pages 65-93, March.
    20. Daniel Gottlieb & Olivia S. Mitchell, 2020. "Narrow Framing and Long‐Term Care Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(4), pages 861-893, December.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1611.08330. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators). General contact details of provider: http://arxiv.org/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.