HILDA proves why home must be in pension assets test

By Leith van Onselen

For years, MB has argued that one’s principal place of residence must be included in the assets test for the Aged Pension on both equity and Budget sustainability grounds.

The underlying need for further Aged Pension reform can be boiled down to: 1) the fact that the ratio of workers supporting retirees is set to decline for decades:

ScreenHunter_6106 Feb. 17 07.33

And 2) that the Aged Pension (currently $44.2 billion in 2015-16 and rising to $52 billion by 2019-20) is the largest and one of the fastest-growing Budget expenses.

These factors alone make it inevitable that Aged Pension reform will be required sooner or later.

The release today of the 2016 Household, Income and Labour Dynamics in Australia (HILDA) survey added further weight to this argument.

The HILDA survey showed a rapidly growing wealth divide, whereby median wealth increased by 61% among those aged 65 and over between 2002 and 2014, compared with just a 3.2% increase in wealth among those aged 25 to 34:

ScreenHunter_14107 Jul. 20 07.49

The HILDA survey also showed that while home ownership has collapsed for younger cohorts, those aged 65 and over have experienced stable ownership whereby roughly 75% own a home:

ScreenHunter_14108 Jul. 20 07.53

Meanwhile, those aged 65 and over have also experienced the biggest rise in median home equity, which stood at a whopping $461,867 as at December 2014:

ScreenHunter_14112 Jul. 20 10.21

So, Australia effectively finds itself in the perverse situation whereby relatively poorer younger Australians are heavily subsidising the retirements of their well-off parents and grandparents, whose biggest asset (their principal place of residence) is largely excluded from their ability to fund their own retirements.

This situation makes absolutely no sense from either a budgetary or an inter-generational equity perspective.

For these reasons, MB strongly supports the following reforms to the Aged Pension to better balance Budget sustainability and equity:

  1. 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.
  2. Once implemented, raise the overall assets test for the Aged Pension, and perhaps the base rate as well.
  3. 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 HELP-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 a regular income stream as they do now under the Aged Pension, but with less drain on the Budget and on younger taxpayers. Whereas poorer renting pensioners would receive greater financial assistance.

Without reform to the Aged Pension, the burden of Budget cuts/tax increases will fall entirely on the growing pool of younger (and renting) Australians. This situation is clearly unsustainable from a Budget perspective and inequitable from an inter-generation one.

Other notable analysts have similarly called for the family home to be included in the assets test for the Aged Pension, including The Productivity Commission, The Grattan Institute, The ACCI, and the The CIS.

Unfortunately, while the economics is straight forward, the political economy is not. Watch landed retirees continue to fight like wounded bulls against reform.

[email protected]

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

  1. The following quote from your article, Leith, is similar to the economic and sociological principles applied by Idi Amin when he sent thousands of non-ethnic Africans out of Uganda to improve the lot of native Ugandans. Instead of simply taking most of the savings and homes from older Australians you might like to adopt Idi’s method and ship all older Australians out of the county…perhaps you could put them in off-shore detention camps? What do you think?

    You wrote above:

    “For these reasons, MB strongly supports the following reforms to the Aged Pension to better balance Budget sustainability and equity:

    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.

    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 HELP-style liability that is recoverable from the person’s estate upon death, or upon sale of the person’s home (whichever comes first).”

    • That is one of the most ridiculous comments I’ve ever read. That quote has nothing to do with the policies of Idi Amin.

      That quote merely suggests that if you cannot afford the pension, the government will provide one. However if you are a wealthy asset owner and can afford to fund your own retirement, then you should not double-dip and receive a taxpayer-funded pension.

      The real asset stripping is squeezing tax from workers to pay people who are not working but have enough wealth to support themselves.

      Your warped perception on that issue is almost unbelievable.

      • It seems, Gral, that you would like to give all that you own to those who own less than you do. I suggest you make an immediate visit to St Vincent de Paul and give them all, or at least most, of what you own.

      • I prefer my suggestion where each person can choose when to give to charity, how much, and to to whom.

        In your dream scenario, the government takes money from workers, pays it to wealthy retirees and the workers have no say.

    • Ha ha ha ha! Dare consider touching Australia’s old rapacious asset rich, and suddenly you’re as bad as Idi Amin.

      I’m very glad to not be paying a cent in Australian tax. You’re not getting a cent of my income! Frankly, I prefer it be used to fund the US military.

      • And given that the IRS will now have its claws firmly into you, duddles, if you make the mistake of becoming a US citizen you will be funding the US military for the rest of your life. And beyond.

      • Apparently, LordDudley, you are an escapee. If we adopt Idi policies like those endorsed by Leith you might consider the needs of others, return home, be stripped of your assets and be shipped off shore again to a nice island based detention (retirement) camp.

      • The introduction of a broad-based nil-exemption land tax and the removal of ANY of the really damaging taxes currently imposed would confer profound benefits on all Australians – including retirees and those seduced to invest capital in residential letting..

      • I note you have avoided the facts again David and switched the subject to Land Tax.

        Land Tax is pernicious. as you know in your heart of hearts. David.

        A Land Tax is a great way to give governments access to more of your money. Look at how the tax keeps rising in Canberra and residents get to give more and more of their money to the ACT government.

        Also, all Australians, like David Collyer, who like to live in houses of ever decreasing sizes can enjoy a Land Tax which induces developers and buyers to race towards smaller and smaller allotments to save paying higher Land Taxes.

        As farmers go out of business because they cannot afford to pay the high Land Taxes on their farms all Australians who like to eat healthy fresh farm grown food will pay more for their food.

        Google and other similar businesses that use small office space for highly profitable businesses will thrive because they will pay proportionately less Land Tax than, say farmers due to their lesser need for Land.

        What sort of society will Land Tax produce in Australia. Certainly not a healthy one!

      • drsmithyMEMBER

        I note you have avoided the facts […]

        You keep using this word.

        I do not think it means what you think it means.

      • Even StevenMEMBER

        Naturaltrust:

        “… who like to live in houses of ever decreasing sizes can enjoy a Land Tax which induces developers and buyers to race towards smaller and smaller allotments to save paying higher Land Taxes.”

        And Stamp Duty induces developers and buyers to race towards poorer and poorer quality housing to save paying Stamp Duty.

        Hope you can come up with something better to bolster your argument.

    • Even StevenMEMBER

      Naturaltrust – I am probably one of the (relatively) silent majority who tend to just ignore your posts. However, I am genuinely astonished at the views you hold on this matter. They defy all reason. You have not presented any argument as to why means testing of primary place of residence is inappropriate. Please stop cluttering up this thread with nonsense.

      • Dear Even Steven,

        Facts: Stamp Duty is not based on the size of the land. Stamp Duty is based on the price of the property plus improvements; ie the purchase/selling price.

        Therefore Stamp Duty does not cause the same race to smaller and smaller allotments as does Stamp Duty.

        I note that you then choose to say that my comment is nonsense simply because you do not agree with it. That is why it is important for you, Leith and David Collyer to use facts instead of biased views backed up by verbal abuse.

      • Even StevenMEMBER

        Thank you for your response. So let me get this straight: Stamp Duty causes a race to BOTH smaller allotments and inferior quality housing. Gosh, that doesn’t sound too good.

      • drsmithyMEMBER

        Facts: Stamp Duty is not based on the size of the land. Stamp Duty is based on the price of the property plus improvements; ie the purchase/selling price.

        Therefore Stamp Duty does not cause the same race to smaller and smaller allotments as does Stamp Duty.

        Please show your working as to why Stamp Duty does not cause “a race to smaller and smaller allotments”.

        Reality is that “a race to smaller and smaller allotments” has been going on for decades under our Stamp Duty system.

  2. ceteris paribus

    Agree in principle that there could be some formula or algo where the value of the PPR is considered in the asset tests above a certain above median level.
    But the visuals would be atrocious. Those who feel forced or even pressured to move will be characterised, rightly or wrongly, as the victims of aged cleansing and displacement.
    An inheritance tax is a far more arguable alternative, which is somewhat akin to your suggestion about (mandatory) aged pension loan payments.
    On balance, I say don’t put pressure on people to disrupt their chosen living arrangements at that time of their life. Furthermore, I am not too sure how big the problem is. Most senior people with big property wealth are not going to stay in their mansion, just to live on the basics they would earn from the pension. And You certainly don’t want to surround the pension with assets barriers for people who have struggled during their working years to buy a house at a regional median value or 40% above.
    I am inclined to think that if we need more revenue to support decent community living standards, an inheritance levy is a more equitable and acceptable way to go in this particular area.
    The topic requires more genuine community consultation, preferably without Eric Abetz.

    • +1, Ceteris. We already do tax inheritances of unused superannuation balances at 17%, unless the heir is the surviving spouse or a genuine dependent. Such a tax would also pick up the upper income people who have been getting their (sometimes far more generous) welfare in the form of superannuation tax concessions rather than the aged pension.

      What UE is proposing amounts to touching the genuinely rich with a feather, while hammering middle and working class people who own little besides a modest home with pension repayments plus land tax plus compound interest. Even a debt at 5%, such as under the pensions loan scheme, will double in less than 14 years. The debt continues to build up even after people have fallen below the assets threshold for the full pension.

      Some elderly people will feel compelled to move out of the city and away from their family and friends to avoid being left destitute. That is what is meant by more effective use of the nation’s housing stock. There is good evidence that ill health and death rates go up when elderly people are forcibly relocated.

      http://scholarworks.wmich.edu/cgi/viewcontent.cgi?article=1926&context=jssw

      In other cases, there won’t be enough left for humane aged care, or the children are faced with what is effectively a confiscatory inheritance tax, while the children of the rich get everything free and clear.

      • Even StevenMEMBER

        Tania – I disagree with the thrust of your argument – that middle and working class people will in some manner be targeted. Will they be proportionally impacted more than the ultra rich? Sure. But you appear to miss the entire point of Leith’s post: it’s not about rich versus middle class, it’s about rich and middle class versus youth. From the youths’ perspective, the middle class who own a house ARE rich.

        When you’ve designed a wonderful and equitable mechanism for redistributing wealth from the rich to middle and lower, I will consider with interest.

        Until then, means testing incorporating primary place of residence is an excellent step in the right direction.

      • Even Steven,

        This is a class issue, not an intergenerational issue. Even if all of the retirees were as evil as some of you believe, they would be able to do no harm at all if they weren’t enable by the framework of laws and policies created by the politicians: urban development boundaries, abandonment of decentralisation, the highest rate of immigration in the developed world, negative gearing, capital gains tax exemptions, etc. The truth is that the politicians don’t give a rats about the average baby boomer, and the youth vote is helping to keep them in office. A third of retirees are living on less than half the median wage, and many of them do not own their own homes. Two thirds have the aged pension as their primary source of income.

        Ceteris and I support an inheritance tax that would include the primary place of residence, although I think that, as with the inheritance tax on super, the surviving spouse and any real dependants should be exempted. People would not be exempted simply because they are rich. Why is this less equitable than what UE has proposed.

      • Even StevenMEMBER

        Thanks Tania. Not less equitable perhaps, but easier to dodge. Just transfer your assets to your kids when you get old and frail. Maybe the ATO will collect on a few unexpected deaths but that’s about it.

        If the inheritance tax is small, the oldies might not bother, but anything significant – you bet they’ll be gifting to the kids years before.

      • This doesn’t seem to be a problem with the inheritance tax on superannuation (17%). Transferring ownership of a house under the radar of the government would be very difficult. For one thing, you need a certificate of title, and the government can easily check on the market value of the house. 17% of a million dollars is enough to make it worthwhile. Centrelink then counts this market value under the assets test, so you lose any pension entitlement anyway. You had better trust your children a lot.

      • Even StevenMEMBER

        “This doesn’t seem to be a problem with the inheritance tax on superannuation (17%).”

        That’s because super is such an attractive tax shelter that people leave it in there as long as possible. Take that incentive away and I suspect a very different result.

        On the inheritance tax on property – I agree, some oldies won’t be sufficiently trusting of the kids. But I still fail to see how this targets the rich. For the genuinely rich, their primary place of residence is not likely to be the majority of their assets. It seems the inheritance tax will have a similarly disproportionate impact on the ‘middle class’ over the rich.

        Again, I’m keen on wealth redistribution but feel means testing of PPP is harder to avoid than an inheritance tax and therefore better.

      • Countries that have inheritance taxes also have gift taxes to avoid the problem you are discussing. Any gifts worth more than a few thousand dollars and you have to pay tax. This is similar to the Centrelink provisions about people depriving themselves of assets, but is extended to everyone. Inheritance taxes don’t have to be restricted to super and the family home. While the rich are good at finding loopholes, it would be extremely difficult to transfer ownership of real estate under the radar of the government. Even if the tax couldn’t catch all assets, it would make such investments much less attractive, so that people trying to buy a home for their family would have a lot less competition from investors. That is what you want, isn’t it?

        The other issue with people giving away their assets is that they do not know how long they are going to live or what expensive problems that they will have along the way. Giving away all your assets is a very foolish move.

  3. Couldn’t agree more with your three proposals. When Grattan and the CIS agree you know it must be a good thing.

    But the politics will be a nightmare while the boomers still dominate politics.

  4. Hi Leith, Surely you cannot be serious when you think that $656,000 in median household wealth with equity in ones home of $462,000 is wealthy. It seems to make sense to me that it takes time to build wealth, so I would expect that the older one gets, the wealthier one would become. Have you ever thought that maybe the people over 55 are much more frugal than people under 55. Have you ever thought that it is not until a person is in their 50’s and their children have become adults and hopefully independent because we want them to have good lives, that cash flow improves for this group. Surely, you do not expect that people who in many cases have sacrificed to educate their children and raise them and also have contributed to society along the way, are then penalised when they get in a position where they can actually start to look after themselves. This conversation around home affordability appears to be very narrow. Have you considered what the emotional effects would be to an elderly person being forced out of their home where they may have lived for a long time and their social network and activities are based around that home. Society has changed a lot over the years and it appears to me from the work that I have completed in the financial services industry over 28 years, that many people both young and old live way above their means and that simply it may be time for everyone to take a breath and look inward, stop comparing themselves to everyone else and have a long hard look at how they are effecting the outcomes in their own lives and work out what they want to achieve with their life and then do it and not expect others to make a contribution to the outcomes they desire. Regards Rick Kennedy

    • “Have you considered what the emotional effects would be to an elderly person being forced out of their home where they may have lived for a long time and their social network and activities are based around that home. ”

      They don’t have to move out of their house. They can take a reverse mortgage.

      • Hi Jason, Yes they could do that. Have your considered the potential ramifications of taking out a reverse mortgage? Who pays the interest? If the individual pays it they now have extra costs each year, where does that extra cash flow come from? If they capitalise the interest, what happens when the interest payment is greater than the growth in the home? What happens when there is no more equity in their home? Can you predict how long people are going to live? I do not disagree that everyone should be self sufficient in their later years, however I cannot agree with forcing people to borrow money against their principal residence to avoid an age pension payment as a solution. This conversation started with a reference to the baby boomers having it better than the young people. If I look at it through my own rainbow colored eyes, it appears to me that I now have much more wealth now than I did when I was 18 or 25 or 30. When I started in the workforce my wife & I planned for her not working when we had our first child, there was no baby bonus, no maternity leave, no paternity leave,…etc. Generally, I think there are too many people who have their hand in the government’s till and there are probably only a couple of groups that we should look after and they are the aged and people with disabilities, noting that people between the ages of 24 & 65 should have enough insurance in place to protect themselves if something was to happen to them. It is really time that Australians started to ask what it is that they can do for our great country and not what the country can do for them. (to steal a line from JFK). Just in case you are wondering, I am 54 years of age and my wife & I are planning independent in the next phase of our lives. So whether the pension stays or not, I personally don’t care but I do care about a whole lot of Australians that are dependent on it. The recent and future changes do not allow the wealthy to get the age pension.

      • Obviously interest can be capitalised and then eventually the whole amount taken out of your estate.

        With real interest rates at about 1% you will never run out of money.

      • Even StevenMEMBER

        Kennedy – to respond to a number of your points:
        No, Leith did not suggest median wealth is ‘wealthy’ (I believe that Leith is suggesting that median wealth is ‘not poor’ and questions why poor (young) people should be subsidising pension payments of the ‘not poor’ when they are unlikely to receive the same or similar treatment when THEY are of age pension age.

        Yes I want means testing of primary place of residence.
        Yes I think interest can be capitalised.
        No, I don’t have a problem if the interest exceeds the growth in value of the house (why should it be a problem?).
        Yes, like you I will not be materially affected by changes in means testing – I have no personal stake in the matter.

        No, I do not advocate forcing older people to move. And with a properly calibrated reverse pension they should never need to do so. If they should make the decision to move (say because they feel a reverse mortgage will erode their equity and diminish an inheritance they wish to pass on); I say ‘that’s their choice’.

  5. who needs to read the article when the title says it all. homes must be put into the assets test.
    …all that free education and we’re sailing on a ship of fools…. eh skip…