About one million Australians will receive up to $804 more a year when the government moves to change its income test for pensioners.
Treasurer Josh Frydenberg says the decision to cut deeming rates will cost about $600 million and help about 630,000 pensioners.
"We're strengthening the arm of around one million welfare recipients," he told ABC's Insiders program on Sunday.
Deeming rates are used to estimate how much some pensioners earn on their financial investments, including pensioners and nearly 350,000 people receiving other income-tested payments.
The deeming rate on the first $51,800 of a single pensioner's financial investments - and the first $86,200 of a couple's - will drop from 1.75 per cent to 1 per cent.
The deeming rate for balances above those amounts will go from 3.25 per cent down to 3 per cent.
Mr Frydenberg said the rate applied to bank deposits, superannuation returns and to yields on stocks.
Families and Social Services Minister Anne Ruston said affected pensioners would receive up to $40.50 extra per fortnight for couples and $31 for singles.
"It will mean more money in the pockets of older Australians," Senator Ruston said in a statement.
The payments will start from the end of September, but will be backdated to July 1.
The decision has been welcomed by the peak body for older Australians, calling it a "reasonable, balanced response to a complex issue".
Council on the Ageing's Ian Yates said the move was needed as interest paid on savings and term deposits have been hurt by the central bank's decision to cut the cash rate.
"We look forward to further discussions on how the deeming rate might be set in the future to remove the current level of uncertainty," he said in a statement.
Mr Yates also pointed out that deeming rates did not affect 75 per cent of pensioners.
Deputy Labor leader Richard Marles said the decision was "far too little, far too late" for older Australians.
"The truth, is what this really means is the government continues to have its hands in the pockets of pensioners, and at the same time pensioners today can feel like this decision is a slap in their face," he told Sky News.
"This is a government which is attempting to balance its books on the back of pensioners and it's simply not good enough."
The move also affects people on the disability support pension, carer payment, the parenting payment and Newstart.
"The decision shows the Morrison government has listened to and acted on the concerns expressed by older Australians who receive a part pension," Senator Ruston said.
Australian Associated Press