Retirement Income

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GUEST OBSERVATION
Here’s the boldest idea the government’s inquiry into retirement incomes should consider but might not: no longer exempting all of the value of each retiree’s home from the pension assets test.
The test would merely exempt part of the value of retirees’ homes. The change would free-up funds to support other retirees who are struggling because they have to pay rent.
It’s an idea with an impressive lineage.
The <a href="http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm" target="_blank">Henry Tax Review</a> suggested exempting only the first A$1.2 million. The bit above $1.2 million would be regarded as an asset and subject to the test.
<a href="https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a>
<a href="http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm" target="_blank">Henry Tax Review</a>
The review said it would hit only 10,000 retirees. The $1.2 million figure was in 2009 dollars, meaning that if the change came in today the review would want it to cut in at a higher dollar figure.
The <a href="https://grattan.edu.au/news/theres-no-silver-bullet-when-it-comes-to-housing-affordability/" target="_blank">Grattan Institute</a> suggests a lower cut in: $500,000. The first $500,000 of each mortgaged home would remain exempt from the pension assets test, the part above $500,000 would be regarded as an asset. Grattan says it would save the budget $1 to $2 billion a year.
The <a href="https://www.propertyobserver.com.au/https://www.abc.net.au/news/2017-02-03/family-home-should-be-included-in-pension-asset-test-acci-says/8237206" target="_blank">Australian Chamber of Commerce and Industry</a> agrees, as does the <a href="https://actuaries.asn.au/Library/Miscellaneous/2019/RetirementIncomesGreenPaperFinal.pdf" target="_blank">Actuaries Institute</a>.
The idea scares homeowners
Who could object?
The Combined Pensioners and Superannuants Association says asset testing the family home would be “<a href="https://www.propertyobserver.com.au/https://www.abc.net.au/news/2017-02-03/no-homes-in-assets-test-say-pensioners/8238828" target="_blank">massively unfair</a>”, targeting the vulnerable.
But people with high-value mortgage-free homes aren’t normally thought of as vulnerable.
Labor’s treasury spokesman Jim Chalmers says it would push more retirees “<a href="https://www.aph.gov.au/Parliamentary_Business/Hansard/Hansard_Display?bid=chamber/hansardr/e79ccb2b-a20c-483b-95e8-ca89001fbbd2/&amp;sid=0011" target="_blank">off the pension, out of their homes, or both</a>”.
He is right about the former, but wrong to think the retirees who suffered a cut in their pension or lost their pension would be badly off.
The worst off retirees, as recognised by a <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Economic_security_for_women_in_retirement/Report" target="_blank">Senate Committee</a>, are those without homes making do with grossly inadequate rental assistance.
Right now it is possible for a single person owning a $1.3 million mortgage-free home and $260,000 of other assets to get the full age pension.
Assuming that person draws down on those other assets at the rate of 5% per year, he or she can spend $37,000 per year and pay no rent.
Yet homeowners do well
A non home owner with $785,000, or half the assets, would be denied the pension.
Like the much-richer homeowner, that person would be able to draw an income of about $37,000 per year, but half it will have to go on rent.
It’s hardly fair.
It encourages retirees with homes to stash more and more of their assets into them in order to get the pension (and pass something valuable on to their children). Retirees with lesser assets miss out and have to rent.
But fairness is in the eye of the beholder.
The problem is that a ceiling on exemption from the assets test that seems fair in one part of Australia might not seem fair in another where home prices and perhaps the cost of living is higher.
Our suggestion could be sold as fair
In order to make more equal treatment seem fair to all retirees with homes I and fellow actuary Colin Grenfell have <a href="https://actuaries.asn.au/Library/Miscellaneous/2019/RetirementIncomesGreenPaperFinal.pdf" target="_blank">worked up an option</a> that would use the median (typical) price for each postcode as the cut off point for exemption from the assets test.
It would happen postcode by postcode, updated every year using Council valuations and as the median prices changed.
Only the owners of homes who values were atypical for the area would be affected, and only that part of the value of their home that was atypical would be included in the assets test.
Its key selling point is that it wouldn’t threaten homeowners with values at and below the average for their area.
The funds freed could increase the overall pension, but would probably be better applied to lifting rent assistance.
It’s important to treat retirees in the same financial circumstances the same, regardless of whether they own a mortgage-free home, and <a href="https://theconversation.com/fall-in-ageing-australians-home-ownership-rates-looms-as-seismic-shock-for-housing-policy-120651" target="_blank">fewer and fewer</a> retirees are owning mortgage-free homes.
It would have the added benefit of reducing the pressure on our parents and grandparents to own houses with bedrooms on the first floor that are never opened, not until they die and their houses are sold.
<img src="https://counter.theconversation.com/content/125500/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">Anthony Asher, Associate Professor, UNSW.
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/postcode-by-postcode-a-clever-way-to-include-homes-in-the-age-pension-assets-test-125500" target="_blank">original article</a>.
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j.ballantyne1990-6AQqhLzZaK

Postcode by postcode: a clever way to include homes in the age pension assets test

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The 2015 budget confirms pre-budget announcements that the government is committed to reducing the cost of the age pension, but will now do so more fairly than it had intended in last year’s budget.
<h2>Indexation plans dumped</h2>
The government had previously wanted to link the annual increase of the age pension to CPI instead of wages. Since prices grow more slowly than wages, this would have affected negatively anyone expecting to receive the pension in future.
Crucially, that policy would have lowered the safety net for those with the lowest incomes, halving its value relative to wages in the next forty years. Of the different options to reduce pension costs, this was the <a href="https://theconversation.com/the-intergenerational-report-and-reforming-the-age-pension-38056">most inequitable</a>. Thanks to Senate opposition it has now been abandoned. The freeze on eligibility thresholds relating to the pension will also be abandoned.
<h2>Changes to means-testing</h2>
The <a href="https://scottmorrison.dss.gov.au/media-releases/fairer-access-to-a-more-sustainable-pension">new proposal</a>, to start in 2017, is to make the pension more targeted by tightening the asset test, particularly for home-owners.
As with any means-tested benefit, there are <a href="https://theconversation.com/the-intergenerational-report-and-reforming-the-age-pension-38056">three parts</a>: maximum benefit (i.e. the full pension), the amount of assets you can have before the pension is reduced (i.e. the asset “free area”), and the rate at which the pension is reduced as you have more assets (i.e. the taper). Income is tested separately.
The previous policy would have cut the maximum. The new proposal is to extend the free area, but to make the taper on extra assets more aggressive (see illustration) – a measure originally <a href="https://www.acoss.org.au/media/release/drop_unfair_plan_to_lower_pension_indexation_reform_super_and_pension_asset">proposed</a> by the Australian Council of Social Service (ACOSS).
The family home is still not counted as an asset. But as this graphic shows, people who own their own home will be affected differently to those who do not because the free area increases much more for non-home-owners than for home-owners.
 
<a href="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/81342/area14mp/image-20150512-19524-1rgvrrx.png"><img src="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/81342/width668/image-20150512-19524-1rgvrrx.png" alt=""></a>Asset test changes for pensioners <a class="source" href="https://scottmorrison.dss.gov.au/media-releases/fairer-access-to-a-more-sustainable-pension">Data from DSS</a>, Author provided
<div class="enlarge_hint">Click to enlarge</div>
<h2>Who will be affected by the new means test?</h2>
You will be affected if your (non-home) assets are within the green or red asset ranges, which differ depending on relationship status and housing tenure. One consolation: the Treasurer has <a href="https://www.budget.gov.au/2015-16/content/speech/html/speech.htm">promised</a> that “anyone who currently has a Pensioner Concession Card will continue to receive a concession card that provides the same benefits.”
The vast majority of older people will see no change. Those gaining and losing are part-pensioners. The Government <a href="https://www.abc.net.au/am/content/2015/s4231137.htm">estimates</a> that 170,000 with modest savings are expected to gain some age pension and about 330,000 part-pensioners with more assets will lose at least some of their entitlement.
For example, older couples who own their home and have other assets between about A$800,000 and A$1.2 million are expected to lose their part-pension altogether.
Of the $2.4 billion savings to the budget created by these changes, almost the entirety is borne by changes affecting better-off home owners.
So the measure takes a step toward redressing the inequality of excluding the family home from the asset test, where someone who used their savings to buy a house is favoured over someone who uses theirs to pay rent.
The ideal policy would include the family home beyond a certain level and make better use of the <a href="https://www.humanservices.gov.au/customer/services/centrelink/pension-loans-scheme">Pension Loans Scheme</a>, under which pensioners can get the age pension and eventually pay it back from the equity of their home.
While not saving as much as the previous indexation policy, the effect of a tougher asset test will build over time as Australians accumulate more superannuation savings. In future, more Australians will have assets that will reduce their age pension.
Either way, Australia would be expected to continue to spend very little on public pensions <a href="https://www.oecd.org/els/public-pensions/pensionsataglance.htm">compared</a> to most OECD countries.
<h2>Fragility of retirement incomes</h2>
The proposed policy is a fairer alternative to the indexation changes proposed in last year’s budget. That such indexation changes had any currency at all points to the fragility of the retirement income system when policy-makers focus only on sustainability. Issues remain, but at last both sustainability and adequacy are being considered.
<h3 class="fn"><a href="https://theconversation.com/budget-brief-will-i-lose-my-age-pension-41447?utm_medium=email&amp;utm_campaign=Latest+from+The+Conversation+for+12+May+2015+-+2805&amp;utm_content=Latest+from+The+Conversation+for+12+May+2015+-+2805+CID_67c2eed5a2983e7197bcdbadd5314e11&amp;utm_source=campaign_monitor&amp;utm_term=Budget%20brief%20will%20I%20lose%20my%20age%20pension" target="_blank">Rafal Chomik</a> </h3>
<h3 class="fn">Senior Research Fellow, ARC Centre of Excellence in Population Ageing Research, UNSW at UNSW Australia Business School.</h3>
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