Gotti summons rich pensioner rage

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By Leith van Onselen

Robert Gottliebsen (“Gotti”) has penned a warped piece today slamming upcoming changes that wind back eligibility to the Aged Pension to retirees with significant assets, but raises it for poorer pensioners. From The Australian:

In mid-December, some 313,000 middle class Australian savers will be told that their government pensions are to be savaged and that they will have to adopt a completely new financial plan.

Let’s assume that each one of those Australians has two close family members or friends, so, there will be at least one million Australians white hot with anger…

The legislation to savage pension entitlements was actually made by the Abbott government in 2015 with the backing of Nick Xenophon and the Greens who were motivated by the fact that those without savings got greater pensions as part of the trade-off. They felt as though they were modern day Robin Hoods. So let’s look at what the “Robin Hoods” actually did.

From January 1, 2017, the asset threshold that allows the full pension will be increased and so 166,000 people will get some extra money albeit not a lot.
But the penalty for exceeding the threshold will be doubled from $1.50 to $3 for every $1,000 in assets over the assets test maximum and that change savages far more people than those gaining extra pensions…

Many financial planners will be telling their clients to go off and have some cruises and let the government increase their pension…

And, so, while the current government will save some money in the short term, over the long term, the pension bill will skyrocket because people are being encouraged to lower their self-reliance. In effect, the government is deliberately discouraging savings for millions of Australians — exactly the stunt they tried on superannuation.

Gotti’s criticism of the pension reforms does not pass scrutiny.

To recap, the 2015 Budget announced that the thresholds for the Aged Pension would be adjusted so that those with financial assets (in addition to the family home) of $547,000 for singles ($823,000 for couples) will no longer qualify for the part-pension (see below table).

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According to these changes, financial assets above $375,000 for a couple will lose access to the Aged Pension at the rate of $3 per $1,000 in assets, up from $1.50 currently, restoring the system back to its pre-2007 state.

However, while access to the part pension was curtailed, the assets threshold has also been increased, thus benefiting those retirees with fewer assets (see below table).

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Thus, the pension changes agreed by the Abbott Government and the Greens will make the system more equitable. As such, they are supported by the Australian Council of Social Services, which noted the following after their passage:

“The changes to the Pension assets test passed by the Parliament last night help ensure that the Pension is going to people who need it, including improving the adequacy for people who have limited assets. The tightening of the assets test to pre-2007 levels reinforces the role of the pension as a safety net payment to prevent poverty,” said Dr Cassandra Goldie.

“ACOSS also welcomes passage of legislation abolishing the Seniors Supplement. This Supplement is very poorly targeted, going to older people who are not eligible for the Age Pension due to their substantial assets”.

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What Gotti also fails to mention is that 75% of retirees own their own homes, most outright, which are of course largely excluded from the assets test to qualify for the Aged Pension (see next chart).

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These retirees have also enjoyed massive windfall gains in wealth, thanks to the mammoth surge in Australian home values over the past 20 years (see next chart).

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And this surge in retiree housing wealth has come at the direct expense of their grand children, whose wealth has barely increased, and who are now either locked-out of housing altogether (see above chart), or are required to undergo a lifetime of debt servitude in order to afford a home.

How exactly is it fair that these same mega-mortgaged younger Australians are being expected to fund the retirements of older home owners, who are in many cases far wealthier than they are?

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If Gotti cared about equity, he would instead argue to have the family home included in the assets test for the Aged Pension, with part of the money saved redirected to significantly increasing the base rate of the pension as well as the assets test threshold. This way, welfare would be far better targeted and those pensioners without any significant assets – either financial or non-financial – who would be made far better-off.

Meanwhile, home owning retirees that miss out on the pension could maintain their income levels by taking out a reverse mortgage through the government’s Pension Loans Scheme – a state-run reverse mortgage scheme that allows eligible retirees to borrow against their homes to receive payments from the government equivalent to the full Aged Pension.

The interest rate through the Pension Loans Scheme is only around 5%, repayable upon their estate or sale, and these home-owning retirees could continue to live in their home as they do now. For all intents and purposes, they would experience no change in their living standards, but with far less drain on the Budget over the longer-term.

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With the Aged Pension costing the Budget some $44.2 billion in 2015-16 and rising to $52 billion by 2019-20, and the ratio of workers supporting the elderly shrinking (see next chart), the system as it currently stands is not sustainable and inequitable from an inter-generational perspective.

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Again, it makes absolutely no sense that the biggest asset that most retirees own – their principal place of residence – is largely excluded from their eligibility for the Aged Pension, particularly given the massive increase in housing wealth they have enjoyed.

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It makes even less sense to expect younger Australians, many of whom will never be fortunate enough to own their own homes, to continue subsidising oldies with significant assets.

If only commentators like Gotti would acknowledge these truths rather than running a campaign against any and all pension reform.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.