Retiree reverse mortgage scheme needs overhaul not facelift

The federal government is considering renaming its “Pensions Loan Scheme’ (PLS), which was broadened in the May 2021 Budget .

The expanded PLS allows retirees to borrow up to 150% of the aged pension rate against the equity in their home and is open to all retirees over the age of 60, not just those on the pension as the name of the scheme suggests.

Anne Ruston, the Minister for Families and Social Services, says the government wants to give more choice to 3.8 million retirees to tap $500 billion worth of home equity, as recommended by the recent retirement income review:

From The AFR:

“We want to provide a product to improve their retirement outcomes while drawing down on an asset and people remain living in their own home.

“If they want a new car or have a house renovation this will help them do it.

“We’re not going to be pushing it on to people but it’s about making sure people realise it’s available”…

“The name has mistakenly led people to believe that self-funded retirees don’t have access to it, which is not the case.

Anne Ruston is right that the PLS has been underutilised, with only 2,288 participants as at March 2020:

Pension Loans Scheme

The take-up of the PLS has been lacklustre.

That said, it is worth pointing out that Treasury’s 600-page Retirement Income Review explicitly suggested that housing should be included in the assets test to qualify for the aged pension, provided the base pension rate is boosted alongside improvements in access to the PLS:

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…

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).

Including one’s principal place of residence in the assets test for the aged pension is not my preferred reform. Instead I’d like to see the superannuation guarantee (SG) abolished altogether, with the budgetary savings redirected into a universal non means-tested aged pension.

But given such a reform will never take place, since compulsory superannuation is entrenched (and the SG is scheduled to increase), then including one’s principal place of residence in the pension assets test makes sense.

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 2023), 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 expanded PLS, 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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