Social Services Minister Scott Morrison’s plan to get people off the pension and living off their own assets has the potential to do the exact opposite as pensioners now caught by the changed rules seek to protect their pension entitlements.
That’s because in his vison for what he says will be “fairer access to a more sustainable pension,” Morrison has constructed a plan which gives clear incentives to avoid the new rules by reducing assets and reinvesting in the family home.
This puts the government’s estimate of a $2.4 billion saving to budget expenditure at risk.
There is another potential consequence: unleashing a wave of older Australians into the upper end of the property market, trading up their house to keep their pension. Let me explain.
At the heart of the new policy is the introduction of an assets test for people on the pension, which looks at “assessable assets” but does not include the family home. So depending on whether the pensioner has or does not have a home, once a certain threshold of “assessable assets” is breached – think stocks, bonds and cash – the pension received is reduced.
That might sound fair enough. But it’s weird rule because it is income, not assets, that is most important across the rest of the tax system.
Morrison’s plan, in contrast, looks not at the income from the assets, but the assets themselves.
It’s doubly weird because it reinforces a potential misallocation of resources into the family home – which is exempt from the assets test yet produces no income – as opposed to income-producing assets which can be used to support pensioners.
In penalising assets, not income, and in reinforcing the status of the family home as a tax effective receptacle of pensioner wealth, this new regulation has the potential to unleash a wave of asset allocation movements as pensioners, now caught by the new asset rules, sell income-producing assets and trade up to new, more expensive, properties.
It’s not as far-fetched as you might think.
Take the example of a home owning couple with $823,000 in “assessable assets”They will lose $14,467 in pension income as a result of having “assesable assets” above 451,500.
That is a lot of income to lose based on an asset base above the new threshold of $371,500 in this case.
At the current top three-month term deposit rate of 3.10% (taken from Mozo.com.au) the $371,500 would generate just $11,516 per annum. So the pensioner has a shortfall of $2,951 over the loss of pension income. Even at the current government deeming rateof 3.25%, the couple is at a loss to where they were before this change.
But that’s not the only change.
Retirees will also have seen a stream of changes to other measures that will impact them. They will be aware that just last year there was a planned changed to indexation which has now been scrapped. They will know that besides the family home the pension system seems to be in a state of flux and may change again.
Economics is all about incentives. The question for pensioners – and importantly their financial advisers – in a low-interest rate environment, where the RBA might cut rates again, is whether people should be restructuring their assets and increasing their “investment” in their exempt family home in order to keep the full pension.
Of course Scott Morrison doesn’t want that, and a large part of the Governments mooted $2.4 billion in savings associated with this measure comes from a reduction in government payments but also in forcing pensioners to live off their assets.
Indeed Morrison says on his website:
It is common for pensioners not to draw down on their assets whilst receiving the pension. Research by the Department of Social Services on asset holdings of pensioners revealed that during an individual’s last five years of receiving the pension, 42.5% increased their asset holdings and 24.7% maintained them at the same level.
Less than a third of pensioners actually saw their assets decrease in their last five years.
That explains why this is an asset test not an income test.
Morrison wants older Australians to use up their assets in retirement.
That’s going to reinforce to retirees, financial planners and their advisers that the best place for family wealth is in the family home. Not in stocks, bonds or cash. Not on income producing assets – because you get penalised for that.
By the department of Social Services own numbers there are 36,528 pensioners impacted just in the $800,000-$900,000 range. That’s a lot of people with an incentive to trade up their homes.
The other side of this coin is that it will free up plenty of property to for purchase for new entrants and first home owners trading up.
But on balance this policy change could end up as one of the biggest policy own-goals of all time.
Looking across the brackets, DSS data suggests there could end up being more than 100,000 Australians entering an already hot property market and all of them doing so to protect their assets, invest in their home and receive a full pension.
Unintended consequences are not uncommon from policy decisions and at the very least this puts the $2.4 billion in savings from this measure at risk.