Aged Pension: “an economically costly inheritance preservation scheme”

The Australian’s Adam Creighton has continued his war against the Aged Pension’s largesse towards wealthy retirees, labelling it “an economically costly inheritance preservation scheme”:

Last week figures emerged showing about 255,000 pensioners lived in homes worth more than $1m, costing taxpayers an estimated $6.3bn a year — enough to reduce the top marginal tax rate dramatically, for instance. The Australian National University report found almost 30,000 pensioners were in homes worth more than $2m. The biggest asset most people own is excluded from the eligibility test for the Age Pension.

No one begrudges success but the government needs to prioritise who receives scarce tax dollars. The 707 pensioners in Perth’s Dalkeith (median dwelling value $1.5m) or 429 in Sydney’s Vaucluse (median $2.7m) should be lower down the list than families struggling to buy a home facing marginal tax rates of 39c in the dollar.

These well-off people have about triple the wealth of the median household. Pensioners are allowed to have financial assets up to $864,000 before they lose the part-pension, and the array of medical and transport discounts that goes with it.

The biggest red herring is that people would have to move out of their homes if their net wealth were counted in the eligibility test for the Age Pension. That is nonsense, however rhetorically convenient. Financial products called reverse mortgages exist that allow retirees with significant equity in their homes to remain there in comfort without drawing on taxpayers…

The Henry tax review sensibly recommended starting to withdraw Age Pension payments once recipients’ principal residence exceeded $1.2m in value. The Commission of Audit suggested $750,000. Every dispassionate analysis comes to the same conclusion. It’s hard not to.

Perhaps the silliest argument against including the principal residence is that retirees can’t help it if the values rose. Oh, what a burden…

We’ve ended up with a system that taxes labour income at high rates while asset speculation is taxed lightly or not at all.

Adam Creighton is right of course. It’s ridiculous that younger Australians facing the prospect of never owning a home (or being enslaved in mortgage debt) are being called upon to pay ever-rising taxes to subsidise retirees that are far better-off financially than they will ever be.

The policy solution that MB advocates is to:

  1. Including 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; and
  2. Significantly raising the overall pension asset test threshold as well as the base rate.

Under this solution, house-rich pensioners choosing to remain in place could continue to receive an income stream as they do now under the Aged Pension via the Pension Loans Scheme (the federal government’s official reverse mortgage scheme), 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 a tax free shelter.

Poorer retirees that do not own a dwelling would also be made better-off via the increase in the overall assets test (thus allowing greater financial assets to be held without cutting-off access to the pension), as well as the increase in the base rate.

It’s a solution that would greatly improve equity and ensure that Australia’s welfare system is better targeted towards those in genuine need.

It would also ensure that the pension system evolves alongside the structural reduction in home ownership rates, by making the system more neutral towards property ownership and financial assets.

Leith van Onselen

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