Actuaries Institute declares war on young

The Actuaries Institute has published a discussion paper examining a range of options for overhauling Australia’s retirement income system, which includes as its central recommendation including the family home in the pension assets test, but conveniently not for the baby boomer generation. From The Australian:

Actuarial expert David Knox, former regulator Anthony Asher and public policy guru Michael Rice have labelled Australia’s superannuation, pension and retirement income systems as “complex, intrusive” and “sometimes unfair” in a lengthy paper that argues for radical reforms to how the country manages old age in a bid to end the “perverse incentives” of current policies…

“The current system, though world-leading in some respects, falls well short of that.”

While the experts said any changes to the retirement system should “not disadvantage those who have already retired”, they said the government should consider dumping the part-pension by requiring retirees to spend all their super savings and wealth before receiving the full pension.

Including the home in the pension assets test would also help ensure the pension was collected only by those who needed it, they said, noting that was continually recommended by government reviews.

The Grattan Institute found 40-year-olds contributed twice as much to support older Aus­tralians than the baby boomers did at age 40, after adjusting for inflation.

There is a nasty sting in the tale in the Actuaries Institute’s recommendations that should anger Australia’s younger generations, which is summarised in the below statement:

…the experts said any changes to the retirement system should “not disadvantage those who have already retired”, they said the government should consider dumping the part-pension by requiring retirees to spend all their super savings and wealth before receiving the full pension.

That’s right, the Actuaries Institute panel – dominated by baby boomers – has conveniently chosen to spare its own generation from wearing any Aged Pension cuts. Meanwhile, the younger generations – “generations rent” – will be required to bear the full burden of adjustment while their relatively well-off parents continue to enjoy their full entitlements while living in their expensive homes.

Genuine and equitable budgetary reform is about sharing the burden of adjustment. However, by excluding its own generation from cuts, the Actuaries Institute has failed, and in the process declared war on the younger generations.

A fairer solution, which I have espoused over many years, is to:

  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 2022), thus allowing current retirees and prospective retirees adequate time to make arrangements.
  2. Raise the overall pension asset test threshold as well as the base rate.
  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 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. Renting pensioners would also be made significantly better-off via the combination of a higher asset test threshold and a higher pension base rate.

The May 2018 Budget addressed the third point by extending the Pension Loans Scheme, but it did not touch the other two areas, which is vital if the system is to be made more neutral towards home owner retirees and renting retirees.

However, the younger generation must not bear all of the burden of adjustment. The wealthy older generations must also wear the pain.

Comments

  1. Hey, you thought that turning off neg gearing but grandfathering existing infestors would take the (speculative) bid out of the market.

    Why wouldn’t turning on pension asset test inclusion, but grandfathering existing retirees also not take the (pension arbitrage) bid out of the market?

  2. The pension is a ponzi-scheme – it only works if there are enough young people to support the old. It is also a huge liability.
    Your average 65 year old woman in 2018 will make it to 89. That’s 24 years on around $30,000 per year = $700,000
    Add to that the medicare costs and you’re talking almost a million per pensioner.

    These costs should be clawed back in the form of estate taxes when they die, rather than their children inheriting millions from the sale of the family home.

    • blindjusticeMEMBER

      unintended consequence……its another incentive for real estate prices to be in the clouds

    • “The pension is a ponzi-scheme – it only works if there are enough young people to support the old.”

      yes, but that’s probably another reason for the hyper-immigration we are experiencing – support pension-ponzi (and housing ponzi) with people ponzi.

      Ponzi-Stralia. 😉

    • Forrest GumpMEMBER

      These costs should be clawed back in the form of estate taxes when they die, rather than their children inheriting millions from the sale of the family home.

      The entire government tax system is predicated on ensuring tax payers remain in debt in housing.

      On that basis, the gov will ensure ALL policies PRO HOUSING.

      Polices such as those you noted above are anti Pro Housing. Which leads me to the second of the current policies.

      The assets test generously favors house owners over renters. That will never change.

      What the government is telling you to do, is to BUY A FURGKING HOUSE. IF you dont buy a house, you will be penalized for parking your money in the bank where you will pay tax on the interest.

      This will never change, as long as the FIRE industry has its hand on the Mantula of the LNP.

    • Very sensible comment. Why should a working class pensioner with a modest house end up giving all of it to the government or a bank through an extortionate reverse mortgage while a “self-funded” retiree in the top 10%, who has received an average of twice the actuarial value of the full pension in superannuation tax concessions, pass everything on without a penny going in taxes? Not to mention the inhumanity of “geriatric cleansing”, as frail, elderly pensioners sell up and move far away from their families and friends for fear of being left destitute.

      Forcing people to spend all of their assets before qualifying for the pension is a brilliant way to encourage people of all ages to save, unless, of course, they are in the top 10% and never would have qualified for the pension in any case.

      It would also be far better to address the way in which we tax superannuation. Genuine tax concessions for low and middle income earners in the accumulation phase, as proposed by MB, and fully tax withdrawals in the pension phase as normal income. This also deals with the problem of cash refunds of franking credits for high income earners.

      • Even StevenMEMBER

        Tania – if your opposition to reverse mortgages is ‘extortionate costs’ shouldn’t you be campaigning for lower costs. Problem solved?

      • That is actually a good solution for full pensioners who own their own homes but have little else. With the full pension, they will have enough for daily living expenses, but cannot accumulate a buffer for when something major goes wrong. Before urban land prices went crazy, there used to be articles in the newspapers about deterioration of the nation’s housing stock because pensioners could not afford maintenance.

        My objection to it otherwise is that it is very regressive compared to progressive or proportional taxation of the house when it is passed on, unless it is going to the surviving spouse or a dependant. The pensioners with the least lose the most, while self-funded retirees who have received several times as much as a full pensioner in superannuation tax concessions don’t have to pay back anything. They can build dynastic wealth while the pensioner’s children start at zero. Houses are very difficult to hide, and it isn’t hard to find out who the beneficial owners are.

  3. Why should we be surprised. Australia Governed by Boomers, for Boomers. Screw everyone else.

    • Not true, there are nowhere as many boomers as most people on this educated forum imagines. Secondly we have a gen X government now, check out this: https://en.wikipedia.org/wiki/Cabinet_of_Australia?sa=X&ved=0ahUKEwi21aPP5ZbkAhWNKlAKHcklDvwQ1i8ILDAg .
      Thirdly only a fraction more boomers and older people vote for LNP rather than the 100% that is also assumed in this forum Fourthly, the genX + Y component (each of which is bigger than the boomer population https://www.populationpyramid.net/australia/2019/ ) of the voting population is the dominant group by far and you might not believe it but far too many of them voted for Morrison and chums, just by sheer numbers even if only 55% of X+Y age group voted against LNP they would have been tossed out.
      Labor would have made massive inroads to the snout-in-the-trough of the 20% of the population that benefits from the handout largese however the dumbed down population, even the younger voters dont want their future ‘investment’ property dreams to be shattered by a fairer system. In fact most investment properties are held by people under 55 years old already and 10s of 1000s of aspirational 40 year olds are up to their necks in it.. As for the superanuation issue, it was bought in by Keating in order to boost pensions for normal people and curb excessive future costs to government but has been hijacked in the last 2.5 decades by the LNP’s preferred electorate (ie the richest 20% maybe) as a tax dodge with massive benefits.

  4. MountainGuinMEMBER

    Actuarially the greatest gains are from ensuring the current generation of retirees are also subject to any new crackdowns. Younger aussies will have superannuation for their entire career so won’t need much pension and due to discount rates, minor pension savings in 30 years are irrelevant esp as some workers won’t make it to retirement age.

    • Younger aussies will have superannuation for their entire career so won’t need much pension

      Ahahhahahahahahhahahahha. Yeah right. That $300k you accumulate in your superannuation account (earning 1%) will really last you in retirement.

      • Maybe Mountain is right? Young people will be working until they are 75, then die at 78, right?

        When I put it like that, $300k should be plenty, right? 😉