reintroduced in 1985. Currently both an assets and income test apply. The rate of pension payment is calculated under both tests and the test that results in the lower rate (or nil rate) will apply.

The government enacted laws in 1997 to set the level of the age pension at 25 percent of an average wage measure so the pension is now indexed to wages as a matter of course. Rates are indexed twice a year in March and September, to the greater of CPI or Male Total Average Weekly Earnings (MTAWE). The single rate is benchmarked to 25 percent of MTAWE and the combined rate is set so that the single rate is 60 percent of the combined rate. Thus, the combined rate amounts to 41.7 percent of the average wage. The pension is assessable for income tax purposes.

The income test operates so as to permit a full pension for those with limited income and reduce that pension by an amount of 40 cents for each dollar earned over and above the thresholds (refer Table 1). A single pensioner can retain the full pension and currently earn an additional $128 per fortnight. As the pensioner’s income increases the pension reduces by 40 cents for each additional dollar of other income but total income would increase. At the point where income reaches $1,445 per fortnight then the pension entitlement ceases. The threshold income for the clawback provision amounts to just over 6 percent of the average wage, while the age pension is eliminated when income reaches 69 percent of the average wage. The two threshold levels are higher for couples. The first corresponds to 11 percent of the average wage and the second to 115 percent. (Details of current test parameters are available on the Centrelink website.)

**<u>Table 1: Income Test Details (current as at March 2007)</u>**

|**Family situation**|**For full payment (per**|**For part payment (per**|
|---|---|---|
||**fortnight)***|**fortnight) up to+#**|
|Universalpension(singlerate)|$527 or 25% of AW||
|Universalpension(combinedrate)|$878 or 41.7% of AW||
|Average wage (AW)|$2108||
|Single rate|up to $128 or 6.1% of AW|$1,445.25 or 68.6% of AW|
|Combined rate (couples)|up to $228 or 10.8% of AW|$2,435.00 or 114.9% of AW|

* Income over these amounts reduces the rate of pension payable by 40 cents in the dollar (single), 20 cents in the dollar each (for couples).

**Source: FaCSIA**

The treatment of the income arising from various investments, including income stream products, has been an important influence on how Australians of pensionable age arrange their financial affairs. By making a particular product more or less favorably treated relative to other products, it is to be expected that the demand for such products will change. For example, at one point it was relatively attractive for pensioners to retain investments in low interest bearing accounts so as to maintain their access to pension benefits. This has been addressed by a combination of factors, including assessing some investments based on a ‘deemed’ income level rather than the actual level. This also seeks to prevent the perverse behavior of seeking lower returns on assets simply to receive a higher age pension, and encourages pensioners to invest at market-rates of interest.

The asset test applies against asset holdings instead of income receipts. People with substantial assets are expected to rearrange their affairs to provide for themselves in retirement (Centrelink 2007). This test reduces the pension according to separate 6