Both the Australian Chamber of Commerce and Industry (ACCI) and the Grattan Institute have called on the Government to include one’s principal place of residence in the assets test for the Aged Pension. From The Australian:
…the Australian Chamber of Commerce and Industry’s budget submission calls on the government to curb “runaway” government spending, including by considering debiting pension payments to elderly homeowners against their property, then recovering it when the property is sold.
…ACCI chief executive Kate Carnell yesterday said pensioners would be able to keep a “generous” amount of equity in their homes…
Grattan Institute head John Daley said pension reform was needed, even though it would be “very difficult” to win political support.
Because owner-occupied housing was not included in pension means testing, it was in effect a taxpayer-funded inheritance subsidy scheme, Mr Daley said…
The institute has previously estimated that such a proposal would improve the budget bottom line by about $7 billion a year.
Regular readers will know my views on this issue.
With the ratio of workers supporting retirees set to decline for decades, reforming the Aged Pension system will become inevitable, so better to achieve reform by targeting cuts at wealthier pensioners while helping the poorer ones.
Last year, the National Centre of Social and Economic Modelling (NATSEM) showed that around 260,000 Australian households have a net worth of more than $3m and yet are enjoying welfare payments of about $800 million a year:
Within the group of Australian households worth more than $3m, those of pension age are receiving about $3700 a year in cash payments, NATSEM found…
This shows starkly the ease with which retirees can qualify for the Age Pension — the federal government’s biggest and among the fastest-growing expense…
Ben Phillips, a principal researcher at NATSEM, confirmed the main cash payment going to high-wealth retiree households was the Age Pension..
As I noted late last year, around 80% of retired Australians own their homes of which $926 billion in equity is locked up. Meanwhile, the Aged Pension (currently $43 billion per year) is the largest and one of the fastest-growing Budget expenses. This makes reform an absolute priority. My solution is:
- For one’s principal place of residence to be included 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.
- Replacing stamp duties for everyone with a broad-based land values tax.
- 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 this plan, house-rich pensioners 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. The stamp duty to land tax switch would also deliver more efficient use of the housing stock.
While the economics is simple, unfortunately the political economy is not. Watch retirees fight like wounded bulls against reform, just like National Seniors chief executive, Michael O’Neill, did the last time this issue emerged:
National Seniors chief executive Michael O’Neill said he did not believe either the current government or the opposition would favour the suggestion of including the family home in the pension assets test…
“The family home is sacrosanct. It very much defines who we are and what we aspire to as a nation”…
“Australians would fiercely resist any government that forced them to take up reverse mortgages in retirement,” he said.
The sub-text of which is: young people should bear the full burden of balancing the Budget.