It’s time retirees ate their house

Adam Creighton has called for wealthy retirees to access their immense home equity if they want more money in retirement:

On average, retirees aged over 75 have just under $1m in equity in their homes plus other financial assets, according to the Grattan Institute, dwarfing their $127,000 still in super.

Why shouldn’t “eating your house”, or at least having a nibble using a reverse mortgage, be a reasonable option for retirees who run out of super or want a higher living standard than the fallback Age Pension can provide? “Withdrawing $5000 a year would mean that retirees still have about three-quarters of the value of their home at age 92, for a house worth $500,000 at retirement,” the review says…

Too right. The latest Household, Income and Labour Dynamics in Australia (HILDA) report showed that Australians aged 65-plus enjoyed by far the biggest increase in wealth between 2002 and 2018:

Prior to 2010, the median wealth of people aged 65 to 74 was less than that of those aged 45 to 54, but by 2010 the median wealth of the 65 to 74 age group had overtaken the median wealth of those aged 45 to 54. This reflects the very strong growth in median wealth between 2002 and 2018 for the 65 to 74 age group, with the median increasing by 98.1%. Growth was also strong for the oldest age group, increasing by 83.4% between 2002 and 2018.

Meanwhile, Treasury’s 600-page Retirement Income Review took direct aim at pensioners’ houses, questioning why housing was excluded from the assets test to qualify for the aged pension:

The Pension Loans Scheme is an effective option for accessing equity in the home for both age pensioners and self-funded retirees. The current exemption of the principal residence from the Age Pension assets test is a disincentive to using the equity in the home to support retirement incomes…

Using relatively small portions of home equity through the Pension Loans Scheme or similar equity release products can substantially improve retirement incomes for many people… This is effectively a reverse mortgage for age pensioners and self-funded retirees, where income from the scheme is not assessable in the Age Pension means test…

Use of the Pension Loans Scheme is limited. Between 1 July 2018 and 17 January 2020, more than 9,000 people made downsizer contributions…

Releasing home equity can boost retirement incomes with a modest impact on debt. Withdrawing $5,000 a year would mean that retirees still have about three-quarters of the value of their home at age 92, for a house worth $500,000 at retirement. Retirees with higher value homes would maintain even higher proportions of home equity while still benefiting from significant improvements in replacement rates…

At present, the majority of age pensioners are home owners, so removing the assets test exemption for housing could have a significant impact on the adequacy of retirement outcomes…

Including the full value of the home in the Age Pension assets test would remove the inequities between renters and home owners and remove the incentive to invest in housing due to the exemption. However, it would have significant adequacy impacts on retirees. Channels to mitigate this impact include changes to the rate of Age Pension or providing increased access to equity release (e.g. the Pension Loans Scheme)…

Given the exemption of the principal residence reduces their assets assessable under the Age Pension assets test, a large number of home owners are relying on the Age Pension (Chart 3C-3)…

Around 63 per cent of home owners receiving the Age Pension have assessable assets below the full-rate threshold. The median value of assessable assets does not seem to vary proportionately with the value of the retiree’s principal residence (Chart 3C-4).

One logical policy solution that MB has espoused 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, 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 pension 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.

It’s time that wealthy retirees ate their house.

Unconventional Economist
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Comments

  1. Trying to get in before Tania….

    Creighton to his credit has been saying this – which is against the interests of a bunch of his readership – for a while.

    The most urgent and lowest hanging fruit would be for the government to benchmark the PLS rate to some variable rate rather than change it whenever the Treasurer of the day could be bothered.

  2. C’mon … after a lifetime as a Gen Xer of being squeezed by Baby Boomers who never leave and Gen Y who want to squeeze us out in record time … give me a break.
    This kind of story simply encourages the Boomers to consume more of their wealth, as if they need any encouragement to live out their retirement entitlement that following generations have no chance whatsoever to emulate. They inherited from their parents when they died, and then in turn they gift long suffering Xers only the memories from a lifetime of disappointment, held back and then passed over, without the consolation of unearned monies to keep us warm in our dotage.
    The only positive is that the Grey Army are still around in such numbers that it would be political suicide for anyone to actually try this on.

    • Im just waiting for the day when the Government arrests you for not owning a house.
      We seem to be getting closer and closer to this reality by the day.

      ‘Right Wing Terrorist’ seems to be the new name for anyone who disagrees with High Levels of Migration.
      Anyone who speaks out about the levels of Australian Migration is automatically guilty.

      There’s only two places for Australias Young. Either paying down debt or they all belong in Jail.
      The message Australia is sending couldnt be anymore clearer.

      Its no wonder todays Australians are losing trust and removing themselves from Society.

      • we get it, you’re upset about the kid getting arrested, stop trying to find tricky ways to fit it into comments that are sort of on topic and just wait for arvo links and then go nuts.

    • Agreed – as a Gen Xer this policy blows. But if you are going to do it – do it now. The one good thing about property being sacrosanct in Aus is that I doubt any govt goes for this – even though it makes policy sense. It would also be terrible for me as I have now paid off my home where I’d like to live until I can no longer use stairs …

  3. Totally agree that we should be punishing the legacy Australians who’ve worked their entire life to pay off a hefty mortgage and rewarding those relatively newly arrived immigrants who’ve been here long enough to qualify for a pension but not long enough to have a bit of equity in their real estate . Stick it to the Australians who wanted to raise their kids with a backyard and financially reward the sky rise dog box owners . Great idea !

    Wait…that’s what you’re saying, isn’t it ?

    • Ailart SuaMEMBER

      Spot on Fishing72!
      A complete ban on any form of political donation would solve a lot of issues in one big hit. Simply use printed money to fund election campaigns. It’s governments under the control of elite donors that have caused all the issues – not retirees. But we’re so piss-weak and susceptible to the old ‘divide and conquer’. Every generation blames the one before, eh?

    • “pay off a hefty mortgage”

      Heh, the generation who bought houses for 3 times wages were not compelled to repay ‘hefty mortgages”, they repaid the smallest mortgages possible.

      No, what is being said here is;
      i) Welfare is for the needy
      ii) If you have $1 million in assets, you’re not needy enough to deserve welfare

  4. A lot of elderly people certainly didn’t ask for nosebleed level valuations of their house and they just want to remain in their house until they get carted off to a nursing home. This issue only arose because of the housing/migration/debt ponzis that were no fault of theirs. Don’t know what the answer is.

    • Woe betide the poor boomers who got money for jam just because they bought a house when it was affordable, eh? The poor darlings!

      • His point is they didn’t get money for jam. They paid for their house, now just want to live in it. Prices could have gone up 10 fold, NONE of that is in their pocket. And if their desire is to pass the home to their children – and so on, that gain will never be realised.
        So you’re essentially punishing them for wanting to live in their own home, and keep it in their family.
        It really is disgusting and it is very much the way cities/suburbs end up in foreign hands.

        • Even StevenMEMBER

          Leith has outlined that reverse mortgages are available. No one is being kicked from their home. It is simply reflecting their relative level of wealth in society.

    • Jumping jack flash

      Agree and agree.
      Thinking of my parents who have never had a mortgage because they never needed one, this probably wouldn’t be good for them.

      The fact is that debt is absolutely essential now. The answer is to make debt readily available to those who need it, not to those who dont.

      This article promotes “taxing” the debt-free elderly by asking them to take on debt in the name of the country’s finances.

      Tax the banks to pay for the pensions.

    • It isn’t punitive. It’ snot payback for those that ‘deserve it’.

      Welfare is for the needy, those that can’t look after themselves.

      When you’ve got a $1 million in assets, you’re not in need of welfare

  5. Boomers are so used to having their houses and eating ’em too, government welfare for rich Boomer home owners is their God-given right isn’t it? Like an entitlement of sorts, cause they worked hard all their life! They just want what’s theirs

    • In a typical example, a pensioner is living in a crummy little workingman’s cottage that he bought many years ago when they were going for 3-4 times the median wage. It is much the worse for wear and would be worth very little in any rational economic system. (Pensioners living in mansions is an urban myth, except perhaps for very minimal part-pensioners.) The land under the house may now be very valuable, thanks to government policies on immigration, urban planning, tax concessions for property investors, etc. None of this benefits the pensioners unless they sell up and move to some place where housing is cheap. Elderly people mostly just want to stay in their houses, near their families, friends, and local community, until they die or have to enter a nursing home.The government could easily deal with the windfall profit element and recover money spent on pensions by taxing the house when the pensioners die. We already do this with some unused superannuation balances. It is brutally inhumane and completely unnecessary to starve people out of their homes or force them to bequeath their houses to the bank or to the government via an extortionate reverse mortgage, leaving their children with nothing.

      If young people want affordable housing, perhaps most of them should stop voting for neoliberal politicians. Younger voters outnumber the baby boomers by more than two to one, so this would produce quick results. See Figure 4.4

      https://australianelectionstudy.org/wp-content/uploads/The-2019-Australian-Federal-Election-Results-from-the-Australian-Election-Study.pdf

      • It’s a tiny fraction of a very big number to help them live more comfortably, in their own home for as long as they see fit. It takes the burden off the age pension because they have a large, valuable but very illiquid asset which is assessed as part of the asset pool. You don’t “earn” capital gains on houses, it’s merely a function of time and the components you mentioned (planning, immigration etc). The growth on the asset base would also far outweigh any reverse mortgage payments if the last 10 years are anything to go by. If you reverse mortgage $5k but the land has gone up $20k, the inheritance pool has still gone up $15k. Hardly a sufferance for the aged pensioner or the family that will inherit it. Ideally this system also improves the quality of life for the pensioner with more money but also allowing government to allocate greater funds to those who genuinely have no assets.

        It’s a good policy and not one any logical person would sell their house over.

        • Gareth,

          You are assuming that the population Ponzi and housing price boom can go on indefinitely, despite stagnant wages and the strains that it is creating in our society. Look at European house prices over the last 10 years. Many have gone up relatively little and some have even gone down.

          https://www.globalpropertyguide.com/Europe/price-change-10-years

          My idea of an estate tax on the house would only consider what the house is worth at the time the owner dies.

          • Jumping jack flash

            Stagnant wages are the problem, and that is caused by wage theft, and wage theft is required because the debt isnt growing fast enough. Without wage theft we would have measurable deflation.

            The solution is to kick start the debt growth.

            This will cause inflation which will cause wage inflation after a while, which will create more debt.

            Its totally sustainable, you simply need controlled and coordinated global hyperinflation. Should be a doddle. Its been working pretty good so far for the past 20 years or so.

      • That’s a real tear jerker that is, but I know many boomers, who, at approach to retirement age, shuffle all their assets under the guidance of a boomer financial advisor, give away what they can to their kids, buy a bigger house to soak up an even greater proportion of their net wealth, all in the name of qualifying for the holy grail – you guessed it, a commonwealth aged pension! Gaming the system to ensure their get what’s theirs! their entitlement

        Where else can a wealthy individual, who owns an asset potentially worth millions, be eligible for a life long welfare hand-out from the commonwealth, courtesy of a gullible youth wage earner/ tax-payer!?? you just couldn’t make this sh1t up if you tried!!! fcking unbelievable! #Eat your Young

        • It is no news that there are some nasty people in the top few percent and a lot of rorts that benefit them (most notably, excessively generous superannuation tax concessions, far outstripping any unfairly claimed pension). In order to catch the rorters, however, you want to punish the great majority of very ordinary people, who have never exploited anyone and never had the capacity to save enough to fund their retirement. They simply want to live out their days in peace. If there has been an enormous windfall profit on the land under a pensioner’s house, the government can (and should) tax it when the pensioners have died.

          • It’s interesting reading your, and @bendy wire’s comments that we’re not discussing the underlying fundamental root cause. That residential property has shifted to being an asset class from being a home (cue The Castle references).

            If residential property is a home, then it’s time to cut negative gearing and other tax rorts that see people shuffle money into property as per bendy wire’s comment. We need to crash prices to make homes more affordable without loading the young with crushing levels of debt.

            If property is an asset class, or one sees it as an investment (ie: if the price went down one would have a massive sook) then you sell that asset when you’re dry on liquidity. As a tax payer I am offended that people who are sitting on $1+ million dollar properties are getting a pension (and I support the Aged Pension as the welfare measure it is).

            There is no middle ground. The Boomers made their bed, time to lie in it.

          • The best course of action is to get rid of the rorts and treat houses as homes, not ways to get rich quick. The only way to do this is to get rid of the neoliberal politicians, instead of making life hard for working class pensioners. Young people have the vote and should use it. I have been putting those [email protected]$%% last for decades and am disgusted with all the sheep-like people who are taken in by television advertising.

          • > The best course of action is to get rid of the rorts and treat houses as homes, not ways to get rich quick.

            I agree.

  6. When you inhibit the passing down of the family house..(by making a lien on it necessary) in an environment where young kids might not ever get into their own home..(priced out by cashed up foreigners), you are effectively setting up Australians to be a disenfranchised slave caste.
    NO.NO.NO.

  7. Wrong, the 5000 each year accrues interest. If you are retired for 20 years without an income the accrued interest under this approach is a recipe for losing your house.

    • Reverse mortgages have far higher interest rates than normal mortgages. Get out of your house and move somewhere far away, if you are a pensioner, or the accrued interest on your reverse mortgage will see to it that the bank or the government inherits your house when you die and leaves your children with nothing. On the other hand, the retirees in the top 10% have received an average of twice the actuarial value of the full pension in superannuation tax concessions. They shouldn’t have to pay back a cent.

      • Even StevenMEMBER

        Tania – you make some great points. You deny being an actuary (from memory) but you think like one. However, I still mostly disagree with you.

        Yes, I agree reverse mortgage interest rates seem too high. But the PRINCIPLE of the reverse mortgage is sound.

        A 70 year old with $1m in cash or a 70 year old with $1m in a property. Same circumstances, same wealth, but Sally is in an industry superfu… oops, those ads are so catchy!!

        Property = wealth. Enough said. Reverse mortgage enables release of that wealth without disruptive consequences.

        Are there other inequities in our super, tax, welfare systems? For sure. But let not two wrongs make a right.

        • Why not just tax the house when the occupants die? The government takes a set percentage of the valuation at that time, so there is no issue with accrued interest devouring the house if people live too long or house prices crash, and “self-funded” retirees get to pay, too.

          • Even StevenMEMBER

            Interesting proposal, Tania. That might work.

            Possible concerns:
            House prices dip at time of death, tax is insufficient relative to level of welfare/pension provided over the years
            Limited incentive to maintain the condition of house or property (if fixed % tax) which can be detriment to community

            But let not the perfect be the enemy of the good – sure. Why not. It’s definitely better than the present system.

      • A friend took out a reverse mortgage on his property, used the funds to make trips to europe to see his german citizen partner who had to leave Australia when she developed althimerze. She could not access Medical in Aus.
        The result is my friend is now a renter, his landlord is his bank.

  8. ErmingtonPlumbingMEMBER

    “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, 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.”

    Grubby Neoliberal shyte.
    The Family home transcends a fking asset class.
    Pensioners who spent half their lives paying of a family home, shoveling out 30 years of interest payments to our rapacious banks, should be the last to have their assets clawed back.
    Those “over taxed young people” aren’t being fked by pensioners. It’s the fking corporate sector, esp the big players who are doing that and paying next to no tax with their offshore tax havens and complex legal structures.
    We should be going after those cnts long before encouraging a war on old Pensioners by the Young.
    Young people who themselves will be to old to work some day also.

    • Ermo I do not disagree that pensioners worked hard. But their houses earned them far more than their labour ’cause they voted for governments that pumped the price of their house. Now the young un’s have to work even harder paying taxes for all those pensions and will never have a chance to buy an adequate home to bring up a family or have a decent pension themselves. The Ponzi must be dismantled and everyone needs to take a hit to reset the system. G

      • ErmingtonPlumbingMEMBER

        We will just be shooting young working class Australians in the foot (in the long run) with these reverse mortgages as well.
        Half here calling for this kind of grubby proposal do so based on their resentment of too higher house prices.
        Don’t blame bloody Working class pensioners for that!
        Hear is a story about what is really to blame for ridiculously over priced houses.
        https://www.domain.com.au/news/teenage-school-student-sells-12-million-springfields-estate-in-warrawee-1013971/

        • Jumping jack flash

          Agree!

          If house prices are “too high” then make the necessary adjustments to allow those who want to buy a house access to the correct amounts of debt that are required to do it. Simple!

          If pensioners without debt are expected to take on debt to fund their retirement then why not ask the banks to do their civic duty and cough up?

        • Good on you Ermo, well said.
          Have you considered a tilt at parliament?
          We need a lot more representatives who think like you.

        • @ErmingtonPlumbing and @Gold are both right. I think the idea of reverse mortgages is a bad idea, having thought through it and turning down an opportunity to join a fintech in that space. However the consequences of the Ponzi scheme cannot only be felt by the younger generations. There is much reform in tax policy that needs to be done.

    • Even StevenMEMBER

      Homes = money. Others want it. Others don’t have it. It represents wealth and accumulated savings. Reverse mortgages address the disruption and emotional attachment argument.

      Taxation needs to reflect wealth. Welfare needs to reflect wealth. Unless you are suggesting a different basis for a fair and equitable society. If so, I’m all ears.

    • Assume as a pensioner you have a $1m property asset bought 30 years ago for $200k. You just paid it off and paid a blended interest rate of 5%. Assume they repaid $200k principle and 5% x 100k x 30 years = 200 + 150k = 350k. Essentially they have accrued $650k of asset value in 30 years due to the effect of time, inflation, population and govt incentives.

      Turn to today, the asset is worth 1m, the loan pension scheme charges 4.5% on balances. Assume you withdraw $20k a year for 20 years. The average balance would be $400k of withdrawn funds. $400k of drawings and 4.5% x 200 x 20 = $180k. Our total comes to $540k paid on the reverse mortgage thus on today’s money the asset is now worth $460K.

      Here is the thing though, that property in 20 years from now will be closer to $4m in value if it doubles each 10 years. $540k, let’s call it a $1m to avoid arguments from $4m is still $3m. The kids inheritance will be fine and makes that original $350k spent on principal and interest seem like a bloody good investment.

  9. Jevons ghostMEMBER

    So just who is it then who is buying those thousands upon thousands of 300 SqM battleship grey MacMansions plonked cheek by jowl on 450 SqM allotments out there in the sticks. Once upon a time 120 SqM homes were the norm, sited on 700-1000 SqM (40 Perch – 1/4 acre – allotments common in Queensland and maybe also in NSW back in the day). So why not now.

  10. working class hamMEMBER

    Maybe, rather than forcing actual pensioners into reverse mortgages, they should tighten super and tax regulations to stop people abusing the system.
    New land tax rules, will already stop “anyone on a pension living in a cottage on the beach, that bought 30 years ago” from ever happening again. Now the aim is to force anyone that got missed by land tax, to cough up or move?
    The only people that will be affected by this are pensioners who truly have no other assets/options. The gamers of the system will simply redirect their game into another loophole.
    Rules like these are just another sleight of hand, furthering the cause of the truly wealthy, misdirecting blame of the decades long asset price pump to a marginal group of fortunate oldies.

    • ErmingtonPlumbingMEMBER

      Yep. It’s another disgraceful neoliberal attack on working and middle class people.

  11. I’m relatively young I think than many on this forum and even I think this policy isn’t great. Not because I don’t agree that retirees due to inflation have more wealth than the young; more because we are trading existing houses for even more debt under this scheme and really not getting much as a country in return. In the long run the young I think are actually worse off is this occurs.

    In the end we are just increasing our level of household debt (again) doing this to save the government actually spending. Tbh its a classic Liberal policy move – increase debt/mortgages of households to reduce government expenditure so they can claim better “economic management”. If a retiree could slowly sell bits of their home maybe that would make more sense – but equity ISN’T cash unlike some Australian’s believe. Eventually trading equity for debt means more interest and someone having to pay that off (usually the young buying the house at an artifically higher price done by the Government to support that new debt level).

    Encouraging more debt just encourages the Government to keep house prices higher since now it means they don’t need to fund retirements, and because the debt risk to the whole economy has increased by retirees doing this they will be even more scared to let any correction go.

    • Jumping jack flash

      “In the end we are just increasing our level of household debt (again) doing this to save the government actually spending.”

      Bingo. Up until COVID the people owned 4 times as much debt as the government. And that’s just mortgage debt.

      But if you think household debt is high now, you aint seen nothing!

      Bankers made this mess so they should fix it. Tax the bankers to pay the pensions!

  12. Poochie the Rockin DogMEMBER

    Must feel bad tho every week to lose a little bit of the house. People don’t like losing things specially something as emotional as housing. It’s true the wealth is unearned but I think death taxes is a better way to reduce unfairness. The rich aren’t on the pension anyway. This will only hurt the lower middle class as their kids won’t get an inheritance

    • Even StevenMEMBER

      The “rich” are those that have total assets (including house) that exceed a certain threshold. So I beg to differ.

  13. If I needed to reverse mortgage the family home to fund my retirement, and so pass on a debt to my kids to feed myself, I’d rather starve or simply walk off into the sunset.

    At the age of 65 or 70 it ISN’T a personal asset if you’ve got your head and morals right.. it’s a family asset, essential for your kids to be able to go on and have their own children in circumstances better than penury and slavery.

    People that support these kind of moves have no idea how they are playing into a system where there is nothing but work and taxes, while the whole lot ends up in the hands of the super-rich or the state.

  14. Ailart SuaMEMBER

    There’s only one solution to this childish ‘generational warfare’ and the destructive donor induced Ponzi’s. A citizen revolt that demands the complete banning of any form of political donation. There, you have the cause and the solution in one hit. Houses can become homes again and governments with their donor pals will have to engage their lazy brains into becoming innovative, respectable members of the community. And all it would take is a citizen petition with several million Australian signatures.