Paul Howes has joined the attack on aged entitlements, questioning why asset rich home owning pensioners should be eligible for the Aged Pension by virtue of the owner-occupied residence being excluded from means testing. From the AFR:
The major parties’ unity ticket – that the age pension be taken off the table in reviewing Australia’s welfare budget – is a farce. The age pension is the single most expensive item in the federal budget at $36 billion a year, 9 per cent of all public expenditure.
And while it is asset-tested, that test does not apply to the principal residence…
In effect that means some $18 billion – 4.5 per cent of the total budget – is being handed out each year to people who are worth over half a million dollars.
This is unsustainable and it is unfair. Welfare should only go to those who need it…
By refusing to even consider acknowledging that wealth here is the deal the major parties are asking working Australians to swallow: We want you to pay significantly more tax so we can give it to retirees who are either well-off or, in many cases, actually millionaires.
For younger working Australians the deal’s even more insulting: We need to tax you to pay people who, thanks to home ownership, have the kind of wealth you may never attain, largely because you can’t afford a house.
That the biggest asset most households retiree with – one’s principle place of residence – is essentially excluded from their capacity to fund their retirement makes little ethical or budgetary sense. It is especially unfair to expect younger generations, who are struggling under the weight of the high mortgage debt legacy they inherited, to bare the full cost of their parents’ retirement.
On a related matter, it is also inappropriate for the Government to only focus welfare cuts on the working-aged population, whilst ignoring the swathes of wealthy retirees receiving government support. Such an approach is not only inequitable and inconsistent, but also places the Budget in a precarious position as the population ages.
Howes’ solutions to the aged entitlement dilemma are not so clear-cut. He cites the Productivity Commission’s 2011 Caring for Older Australians report, which recommended:
- a Government-backed reverse mortgage scheme whereby elderly homeowners can “flexibly draw against for their care co-contribution and other aged care accommodation costs up to a specified limit”; and
- allowing the aged to sell their home without triggering the pensions assets test by investing the proceeds in an Australian Age Pensioners Savings Account.
A Government-backed reverse mortgage scheme could mean even more government support for the housing market. Instead of encouraging retirees to downsize homes that better suit their needs (freeing-up stock for younger, growing families), they would be encouraged to stay put, helping to keep home prices inflated and potentially resulting in less efficient usage than is currently the case.
It could also worsen inter-generational equity, unless the funds received from the reverse mortgage are counted in the financial assets test for the aged pension. For example, if a pensioner couple receiving $1,133 per fortnight from the Government reverse mortgaged half of their $1 million home for $350,000, would they still be entitled to the full pension under the Productivity Commission’s plan? If yes, then it would worsen outcomes for younger Australians, who would still be called upon to subsidise oldies that are well placed to look after themselves. If not, then the plan has some merit.
Allowing the aged to sell their homes without triggering the pensions assets test is equally questionable. While it would help to free-up the housing stock (a big positive), it would do nothing to free the Budget from the aged claw if these funds are not counted in the pension assets test – wealthy retirees would still receive welfare, only now their wealth would be converted into financial assets from housing.
Ultimately, the main issues working to make Australia’s retirement system both inequitable and unsustainable are: 1) the 15% flat tax on superannuation, which provides the lion’s share of concessions to those who need them least (i.e. upper income earners); and 2) exempting one’s principal place of residence from the assets test for the pension (resulting in wealthy retirees receiving benefits at the expense of the young).
A better way of addressing these distortions is to simply: 1) make concessions on salary sacrificing into super the same for everyone; and 2) means testing all of one’s assets (including the principle place of residence) when working out who receives the pension.
