The Australian’s Adam Creighton has joined me in decrying the Turnbull Government’s proposed housing gimmick of allowing retirees to downsize from their large family homes without affecting the assets test for the Aged Pension or their superannuation caps:
A new piece of feel-good idiocy is about to emerge, it seems. The May budget reportedly will include measures to allow older people to sell their homes without losing their age pension…
The thinking is many older people live in large, valuable homes and may downsize to cheaper, smaller ones if they can keep their pension.
Quite aside from the efficacy of such a change, the mechanics of policing it are mind-boggling.…this policy would increase house prices. The proposal, perversely, would make houses yet more attractive because it would expand the range of options of people who own them. That is, the family home would become a more valuable asset relative to other types of assets because its, and only its, sale would not threaten loss of a welfare payment.
If the federal government genuinely wanted to help it would do three things…
First, put the home in the pension asset test. The government’s proposal might have some value if it focused attention on how so-called “asset-rich, cash-poor” Australians are kept in style by the income taxes of the “asset poor, cash poor”…
No one would even have to move or lose their pension; the government could, for instance, keep paying the pension and reimburse itself from the proceeds of the home’s ultimate sale. A $3 million inheritance might become, say, $2.8m.
Second, it should replace capital gains with land tax based on local governments’ valuations of the unimproved value of land… The exemption of the principal residence from capital gains tax is a distortion in favour of housing over other assets…
Third, the government should instruct the banking regulator, the Australian Prudential Regulation Authority, to withdraw Australia from a pernicious global agreement that encourages banks to issue mortgages rather than lend to businesses. This is because banks are required to put about four times more of their own money, called capital, which is expensive for them, on the line when they lend to businesses…
As I noted on Monday, there would likely be a significant cost to the Budget from the Turnbull Government’s proposal, which means that younger people’s taxes would need to rise in order to pay for the bloated entitlements of those who had the good fortune of purchasing their homes cheaply before they skyrocketed in value.
A better and fairer solution would be to instead:
- Include one’s principal place of residence in the assets test for the Aged Pension at some point in the future (e.g. 1 July 2020), thus allowing current retirees and prospective retirees adequate time to make arrangements.
- Raise the overall pension asset test threshold as well as the base rate.
- Extend the existing state sponsored reverse mortgage scheme, the Pension Loans Scheme, to all people of retirement age so that asset (house) rich retirees can continue to receive a regular income stream in exchange for a HECS-style liability that is recoverable from the person’s estate upon death, or upon sale of the person’s home (whichever comes first).
Under such a plan, asset rich pensioners choosing to remain in place could continue to receive an income stream as they do now under the Aged Pension, but with less drain on the Budget and on younger taxpayers. But they would similarly be incentivised to move as the family home would no longer be viewed as a tax free shelter. Poorer ‘houseless’ pensioners would also be made better-off via the combination of a higher asset test threshold and a higher pension base rate.
Another alternative is to provide financial incentives to the states to replace stamp duties with a broad-based land tax, subject to transitional measures that enable retirees to ‘age in place’ by deferring their land tax bill until after death or sale of the property. Such a policy would similarly incentivise both buyers and sellers to move to homes that better suit their needs. It would also significantly improve tax efficiency as well as equity. Creighton’s proposal to replace capital gains with a federal land tax has similar merits.
There’s a wide range of groups that believe one’s principal place of residence should be included in the assets test for the Aged Pension, including the Productivity Commission, The Grattan Institute, The ACCI, The CIS, and the Australian Centre for Financial Studies’ Professor Kevin Davis. MB has, of course, also lobbied hard for reform of the pension assets test over the past three years.
Unfortunately, while the arguments are strong, the politics is fraught. Hence, daft solution’s like the Coalition’s latest baby boomer bribe are what we are likely to get instead.
