Wealthy home owners devour Aged Pension welfare

Late last year, The Australian’s Adam Creighton labelled the Aged Pension “an economically costly inheritance preservation scheme” given its largesse towards wealthy home owning retirees.

This claim came about after it was revealed by Creighton that elderly Australians living in $1m-plus homes are claiming $6.3 billion in pension payments:

Retirees living in $1m-plus homes are receiving more than $6.3bn a year in age pension payments, enough to fund income tax cuts that would supercharge economic growth.

More than 255,000 pensioners across the nation, mainly in elite pockets of Sydney and Melbourne, live on taxpayer-funded incomes while owning homes worth more than $1m — a more than twentyfold increase in a decade — according to analysis of social security data by ANU.

Almost 30,000 age pensioners lived in homes worth more than $2m this financial year — two-thirds of them in Sydney and a fifth in Melbourne — receiving $680m in pension payments annually, according to the analysis…

Ben Phillips, an associate professor at ANU, said such pension payments meant workers were paying higher rates of tax to protect sizeable inheritances…

Now, The AFR reports that baby boomers in Sydney and Melbourne are living in giant property nest eggs worth millions of dollars, which dwarfs their modest superannuation savings. And this has prompted calls for them to use reverse mortgages to fund their retirements:

Boomers in Melbourne and Sydney are potentially sitting on giant nest eggs because the homes they bought 40 years ago have compounded in value to be among the world’s most expensive residential property…

An estimated 4.5 million retirees have equity in their homes that is on average about four to five times their super savings, which for male Baby Boomers is about $150,000 and for females about $80,000…

“There is a huge unmet need for retirement funding,” said Josh Funder, Household Capital’s chief executive and founder, Rhodes scholar, venture capitalist and former business consultant, including for Boston Consulting Group…

“Most Australians can double their available funding at retirement through reverse mortgages”…

Nick Sherry, a former superannuation minister and chairman of Household Capital, said releasing home equity needs to be encouraged to top up modest retirement savings…

Reverse mortgages allow retirees to draw 15 per cent of household equity at 60 and increase withdrawals by 1 per cent a year for the next 20, or a cap of 35 per cent.

There’s no doubt that Australia’s retirement system is not functioning effectively, given younger Australians are facing the prospect of never owning a home (or being enslaved in mortgage debt), whilst also having to pay ever-rising taxes to subsidise retirees that are far better-off financially than they will ever be.

The obvious solution 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; and
  2. Significantly raise 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.

Unconventional Economist
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  1. Strange EconomicsMEMBER

    The bigger issue and is politically possible, and the better fix for renting pensioners though is raising the very low level of rent assistance – about 60 a week , when rent is 400 to 700 a week in any capital city, and 90 % of Australians live in the capitals. As well as benefit other low and no income people.

    They’ll get zero political support for fixing this with reverse mortgages – like franking credits removal the kids will be told to vote against it – lots of middle aged families with lots of debt can only hope their parents stay cashed up for a future inheritance.

    Its obvious that Homes in the asset tests should be valued at 500 to 600K (instead of about 30k) or an actual valuation by a valuer required with a cutoff.

    But Look at the politics , not gonna happen- eg Meanwhile the level of Newstart can’t be raised because “might blow the surplus”.
    Meanwhile a panicked ScoMo offers 2 billion+ off the plane from Hawaii for bushfires and says now forget the surplus.

    • Josh MoorreesMEMBER

      I think it will get through eventually but for ‘fairness’ would be exempted for anyone born before 1965 like most other changes to generous welfare etc.

  2. ErmingtonPlumbingMEMBER

    “There is a huge unmet need for retirement funding,” said Josh Funder, Household Capital’s chief executive and founder, Rhodes scholar, venture capitalist and former business consultant, including for Boston Consulting Group…”

    And this other bloke,
    “Nick Sherry, former superannuation minister and chairman of Household Capital, said releasing home equity needs to be encouraged”
    Are talking up their books.
    Fk those Cvnts! And all other financial services industry shills trying to gouge out a chunk of the Family Home.
    If this must be done in lieu of receiving a pension then have the Govie run it without any fees or interest levied.
    Fk those parasites, like Nick and Josh, in the financial services sector!

  3. So Leith you’re argument is that a benefit open to people who have paid taxes all their lives should be closed under some fanciful idea that the money will be re-directed by the Govt (who you now trust to do the right thing) to those who are more deserving? LOL. Or are you now supporting the financial services industry (who you would now trust to do the right thing) flogging reverse mortgages? Double LOL. Your whole premise and misguided notion of fairness and equality will be burnt on the altar of political expediency and vested interests.

    • Oh won’t someone think of the taxpayers! It is compulsory by the way. You don’t get a medal for doing what the law requires in case you haven’t noticed.

      This is one of the many government funded(indirect) distortions in the housing market. Welfare should be needs based and minimised whenever possible not given to people holding multi million dollar homes.

      Raiding the Treasury to buy votes with scams like these is not a practice of pollies with their country’s long term health in mind. Like all lollies it is now very hard to take away from baby once given. Political vandals screwing the future citizens. No end in sight. However, it is nice to dream.

    • I’ve paid tax all my life and will be paying it for longer than current pensioners. I look forward to my government funded pension.

  4. Fishing72MEMBER

    The problem isn’t with elderly people remaining in their family homes whilst they go on the aged pension , it’s the fact that the family home has been pushed into unfathomable valuations of price due to neoliberalism turning the real estate market into a globally utilised investment vehicle and its associated artificially maintained demand through unsustainable immigration policies.

    Don’t blame the innocent crew who bought and slaved for their shitbox at Bexley In the 70’s , blame the crew who decided that they should become globally exposed , independent operators in the border less free*
    market system .

    * Of course the neoliberal system would never perform its wealth concentrating function if the market was actually free , but that’s how the propaganda describes it.

    Blaming someone for remaining in their family home despite its unrealised value is like blaming a women for getting raped because her childhood legs developed into long , shapely pins which rapists can’t ignore.

    Those boomers with investment houses get punished, but those just existing in their family homes should be allowed to live apart from the vagaries of an international real estate market in which they don’t participate.

    • Well, yes, the answer from the outset was to never nurture a system in which such inflation could have occurred in the first instance. But never mind, I’m a lone voice banging the ‘sound money’ drum.

      The fiat money system which everyone loves so much is inflationary, by default, and the lion’s share of inflation has gone into property, beginning in the early ’80s which would be around the time most Boomers would have been getting into the market and thus sitting on untold ‘riches’ today. Those that barrack for the current money system have no right to complain of the economic inequality as a result of the housing boom.

        • The RBA are just useful idiots, a smokescreen for the fiat charade. Hard to say whether they actually believe in all the tripe they spout. In any event their power derives from the legislature in the first instance, so blame the gubbermint.

          It’s obviously more complicated than that as we are on the post-Bretton Woods monetary system right now, which is an international system but still, everyone is along for the ride and no one has complained, except perhaps the Russians and the Chinese.

        • Blottridesagain

          Blame the whole stupidity of the economic fraternity, Universities Banks etc etc, who dreamed up and had implemented the current madness of zero and negative interest rates. It is a policy that can only be maintained by ignoring fundamental economic truths and ALL reality.The economy is madly distorted by this BS. Yes, it was supercharged by capital gains tax exemptions etc however the capital gains would not be particularly relevant without the interest rate idiocy.

    • Is it a punishment now when you don’t get decades of pension absolutely free of charge despite your ability to pay some back? I feel pretty punished paying for this extravagance I’ll never get.

  5. Fishing72MEMBER

    Blaming an elderly couple for the current value of the family home which they’ve lived in for decades is like blaming a rape victim because the legs she had as a child have blossomed into sexy , long pins .

    People should not be penalised for the machinations of an artificially influenced real estate market which they have not participated in for decades.

    • Talk about hyperbole! No body is “blaming” anyone. They are simply point out that regardless of how the wealth came about, those individuals find themselves with significant financial assets, yet are afforded govt benefits as if they have not. The only reason it is even debated is because it’s a “house” the sacred cow of Australian assets.

      $2m in super & renting = no pension
      $2m in cash & renting = no pension
      $2m in shares & renting = no pension
      $2m in cars & renting = no pension
      $2m in artwork & renting = no pension
      $2m in land = no pension
      $200k in resi home and 200k in other assets = full pension
      $2m in resi home & 200k in other assets = full pension
      $5m in resi home $ 200k in other assets = full pension
      $1m home is rezoned into $20m development block = full pension

      So you worked all your life…… that (among other reasons) is why you have $2m+ house, great! but that doesn’t then entitle you to continue receiving a lifetime of income support on top of the asset you have built, ESPECIALLY if those with any other types of assets are excluded from that benefit. What of those who still live in a modestly valued home, “worked all their life” to build a business which they then sell at retirement for $1m…. NO pension for you, but hey! spend that $1m on a new home and the full pension is all yours…., because now you’re not self funded entrepreneurs, you are just “victims” of your own success.

      Scenario 2 is clearly ludicrous but the validity of scenario 1 is beyond question?

      Sure a house is also a home, so assign it a concessional value, but excluding it entirely from an assets test so you can fund 30+ years of pension payments only for that property to transfer tax free as inheritance…. come on?

      • ErmingtonPlumbingMEMBER

        We are not talking about a “Financial Asset” you douch!
        We are talking about family homes.
        Those who insist on turning everything into “Financial assets” need to be deported!

        • Grow up, we live in a world where they are already financial assets, no if, buts, maybes or room for alternative facts. Sure.. in a perfect world we would not have financialised them, BUT WE DID so we move on and structure policy for the way the world is, not the way you want to see it.

          On that basis, to refer to the largest pool of wealth in the country, totalling some 7 TRILLION dollars, which backs an equally staggering level of debt as “not a financial asset” is the very definition of a douche…..

          Lets see how your opinion changes next time you walk into a lender and they tell you, sorry mate, your house isn’t financial collateral, its just a “family home” so no leverage for you?

      • Yeah exactly. Boomers and their rorts can p!ss off. Poor lost little lambs who lucked into houses worth $2M plus and should never have to realise even a tiny fraction of that wealth. Nobody knew houses could go up in the 70s and 80s! All of society has to pay for this victimhood fantasy.

          • You make such a compelling case lol

            Arguing against welfare is socialism if it’s Boomer welfare 😂

          • Some of us can’t afford membership because we’re being crushed by 0% wage growth while we continue to pay taxes for pensions of people that own $2m homes. I’d probably not be bothered so much if I had a Workers Union with strong powers to lobby for me. Oh, that’s right, the selfish pensioners keep voting for LNP govt that destroy unions. The complaints and lack of social justice are endless, pretty hard to care about “the family home” of a “rich” pensioner or whether or not I’m entilted to a voice based on paid membership…..

  6. boomengineeringMEMBER

    Makes no difference to me either way, am eligible for $20/wk atm, if do decide to finally retire when I reach the goal of 120yo it will be a minus.
    Suppose until then will have to keep supporting the young’uns

  7. As someone who has a few ageing relatives I can tell you it is a standard piece of advice from accounting and financial planning types to tell people they should extract every last penny from the pension (and other forms of social welfare) they can get their hands on, and that they should structure their affairs to do so.

    The issue is not Mr and Mrs Bloggs who bought out at Boondocks West in 1973 and have lived in the same place all their lives and made the gardens all nice and watched the suburb evolve into an oasis of Australian pleasantry, and the property they once shelled out 40 thousand for is now worth 1.8 million, and who happen to expect a pension payment to supplement whatever super they get.

    The issue is the very large numbers of Australians who seek financial advice to structure their affairs and make sure they are financially as OK as possible as they set sail for senility and are told to (inter alia):-

    Slap their assets in a trust (which pays them a miserly income but happens to make sure lots of assets are available for use, or which provides grounds maintenance or automotive services at such rates that the trust loses money on the ‘contract’ and claims a tax offset)
    Slap their house in a trust and nominally rent from the trust (that’d get you rental assistance, and possibly energy assistance in winter, to go with your pension, if you can get your ‘income’ low enough).
    Legally separate from their spouse so that they can get the individual rate rather than married couple rate (I have a relative who investigates complex issues for HumanServices and she tells me this is disturbingly common – reflecting people who reach the sere and yellow and cant stand their significant other but cant afford to move away from them as well as some seriously affluent dudes who really do restructure everything to make sure they can suck the public teat quite clean)

    A lot of people get told this sort of stuff when they are thinking they will move into aged care (and discover the bonds and other payments involved). Others start asking around when sons/daughters (often beyond their 40s) start having divorces, career failures, health issues, financial misjudgements etc and get around to asking wealthier old relatives if they can get a handout.

    I sat in gobsmacked silence while a 75 year old relative – who was one of the genuine ‘I’ve worked all my life and never claimed a cent and I dont think it right to start now’ types, who had been part of a genuinely good super scheme, who owned his own house, who had paid his (and his wifes) funeral off years before needed, who had contributed to the upbringing of dependents well into their working lives – who actually genuinely believed the pension was for people that didnt have anything to fall back on and had worked all their lives, was told bluntly by his financial advisor ‘I think that’s a foolish approach’, ‘I think your family will bear the cost of that decision’, ‘you family may regret your generosity later on’ and (and he had inquired about the rightness of what was being proposed to him) ‘Most people in your situation would be more focused on ensuring that their situations and their families were the first priority!’

    The guilt trip which was laid on a man who was very much inclined to have absolutely no impost on the state in his final years was profound when thinking/wondering how many people were getting anything like the same advice.

    Like a lot of once great ideas the pension has changed to, as Creighton identified, an inheritance bequest preservation mechanism.

    And theres lot of soothing voices to reassure quite decent people that they arent taking until long after they’ve been taking the p1ss for a while

    • Every individual has the right and incentive to minimise their tax within the law. The scam here is the pollies that put these things in place knowing it is bad policy and future generations will pay.

      Anyone with any kind of engagement with financial advisors of aging people know this kind of thing is a kind of ‘close the door; we are both going to do something dirty but perfectly legal‘ kind of conversation. It is the culture we have diligently grown in this country over many years. Formerly a coterie of the elites only, wealthy middle class over 65 can now have these dirty conversations too! Difference is the group taking a pummelling is smaller and getting poorer.

      It is what it is. The irksome bit is the righteous BB still espousing their 1960-70s working class banter while actively screwing younger Australians. Hypocrisy is the greatest luxury. At least old elites used to laugh behind their hands and keep their rogering on the down low. The bigger bunch now s~it in your lounge room, point at it and tell you how disgusting and unsanitary you are.

      • Every individual has the right and incentive to minimise their tax within the law.

        Would you believe that was the opening line of the financial planning type in the discussion I referred to…….

        Sounds like you have the patter down pat.

        It is the reason I personally think every last taxpayer (and every last taxpaying entity) should have an entry on a publicly accessible database articulating (inter alia):-

        earnings – assets – corporate and legal relationships with taxpaying entities – public funded payments – taxes paid – taxation concessions – all leading to a net public/individual position

        And I think that we arent far from having the AI capable of swinging that too……

        The public has the right and incentive to identify and adjudge all claimants on the taxpayer and the worthiness of their claim, and to enact and change laws, regulations, and processes accordingly, to ensure that all such claims are an efficient and appropriate use of public funds

        • You’d be overturning hundreds of years of incrementally grown, deliberate tax opacity. Just in Oz look at the tax act; it is half the original (1939?) and half an attempted 90’s rewrite – in several volumes! If you get an honest teacher the first thing they say is “right… just to be clear, no one knows all the tax law”. It is deliberately confused and exploitable. It makes it MUCH better to be rich and well advised and much worse to be poor and clueless.

          You will not get your changes above… period… I’d settle for the eradication of non disclosed private ato undertakings for big wigs who don’t even suffer reputation damage when getting one of these after some seriously egregious and illegal tax avoidance. Why do these exist?

        • Blottridesagain

          Does that apply to everyone in all aspects of life? Does it apply to the artificial over-valuation of the A$ which effectively slashes the income of the productive tradeable sectors in favour of arse polishers – like lawyers, bankers and government?
          Of course not!

  8. boomengineeringMEMBER

    Thanks Gunna, not ready to retire but way old enough.
    That said finding it hard after first break in 30 years to restart so may put your message to my accountant soon.

    • Bingo, no need to involve banks in this problem at all, expand the pension loan scheme and offer an equity release linked to inflation, payable from the estate. Ensure that the LVR’s remain low so as to not burden future taxpayers with in the event of a future property bust.

      If tax payer loan scheme based on CPI interest costs is good enough for a 20 year old uni student it is good enough for a 65 year old retiree!

  9. This really is the lost ark of socialism. Most of the cvnts here don’t even pay membership or the maximum tax rate. I feel a bit like the Labour Party, now I’ve met you, what’s to like?

    • You are dead right! You (and I) are paying the top marginal rate so that the govt can redistribute those funds to someone else (socialism). In this case, those funds are being redistributed to people whom in many instances are WEALTHIER than the people from whom the funds were collected. That’s how you turn socialism into crony capitalism.

      The age pension is WELFARE. once we come to terms with the fact it is no different to any other Centrelink program, we may overcome the entitlement issue that is attached to it.

      • The age pension is WELFARE. once we come to terms with the fact it is no different to any other Centrelink program, we may overcome the entitlement issue that is attached to it.

        Your reasoning is arse about face.

        • What reasoning? It is very simple…. the age pension is a welfare payment, a social safety net, means tested and administered by the department of Human services, along with most other welfare programs. That program now operates counter to it’s original purpose and needs to be amended to account for substantial changes in the demographics, life expectancy and wealth of the population that funds it.

          The entitlement comment comes about as the aged pension is clearly the scared cow of welfare. Purely because of illogical arguments and the sheer size of the voting block that benefits from them.

          Simple stuff for those with basic financial literacy, policy literacy and preferably limited conflict in the opinions they offer.

          • Your reasoning that the Pension should be seen as welfare – like other social security – rather than an entitlement.

            All social security should be seen as an entitlement. You’re entitled to it because you’re Australian.

            That doesn’t mean it shouldn’t have rules around it, it just means that people shouldn’t be shamed for receiving it. Especially in today’s world that’s being run to a “those who fall behind, are left behind” philosophy.