Adding the family home to the means test for the age pension was one of the recommendations that we knew was coming in the report of the National Commission of Audit, released today.
Many believe that the home should be beyond the reach of government, something that your working life is dedicated to securing and then enjoying – or leveraging – in retirement.
For this reason the recommendation that a family home should be included in the means test has drawn much criticism. Today we got a simple explanation from Tony Shepherd’s commission on why the current setup is unfair, as they see it. Put simply, wealthy people can have huge amounts of assets tied up in their homes, and still claim the pension.
From the report:
[U]nder current rules a single person who owns a $400,000 house and has $750,000 in shares ($1.15 million in total assets) would not be eligible for the pension, while a similar person with a principal residence worth $2 million and $100,000 in shares ($2.1 million in total assets) would be able to claim a pension at the full rate.
Cynics might say this is a suggestion from a business-friendly audit panel that releases capital from the housing market and into other parts of the economy, like stocks. But really the part to focus on in the sentence above is the bit in bold at the end. You can be incredibly asset-rich and still claim the pension.
But this doesn’t really address the cultural opposition to means-testing of a home. The family home is not only the most valuable asset most people ever have – it’s what they work towards their entire lives. People take huge risks in climbing the property ladder, backing one suburb over another to get a better return, renovating to try and turn a profit before finally being able to have a place they call their own in retirement.
This is a high cultural hurdle for this proposal to clear. And the political challenge is tied up in the demographic devilry that helped necessitate this audit in the first place: the population is getting older. So retirement arrangements are politically front-of-mind for voters in ever increasing proportions of the population.
There’s a more extended excerpt from the report below. It recommends a $750,000 threshold for couples, and $500,000 for singles. Which raises a separate question: what happens when one half of a couple dies, and the threshold falls for the means test, cutting off the pension payments? It’s an irksome aspect of an already unpopular plan.
Anyway, here it is:
The principal residence is currently exempt under the means test. This is inequitable as it allows for high levels of wealth to be sheltered from means testing. Under current arrangements someone can transfer their savings in superannuation or other sources to upgrade their home or pay off the mortgage and simultaneously increase their pension entitlement.
For example, under current rules a single person who owns a $400,000 house and has $750,000 in shares ($1.15 million in total assets) would not be eligible for the pension, while a similar person with a principal residence worth $2 million and $100,000 in shares ($2.1 million in total assets) would be able to claim a pension at the full rate.
The Productivity Commission has noted that many older households have saved through building equity in their own home (Productivity Commission, 2013). They found over 80 per cent of older households own their own home but retirees typically do not use this equity. Chart 9.1.9 shows that older households have the highest levels of equity in their homes but the lowest disposable incomes for all age groups. In other words, retirees tend to be income poor but asset rich.
The value of the principal residence should be included in the comprehensive means test above a certain threshold. This threshold should be $750,000 for couples noting that this could be expected to affect around 10 per cent of coupled Age Pensioners based on 2011-12 data. Using a two-thirds relativity, the threshold for single pensioners could be set at $500,000 which is estimated to affect around 25 per cent of single Age Pensioners based on 2011-12 data (ABS, 2012). The threshold in 2027-28 would be equivalent to the indexed value of a residence valued today at $750,000 for coupled pensioners and the indexed value of a residence valued today at $500,000 for a single pensioner.
Including the principal residence in the means test will not force pensioners to move out of their homes. Financial products – such as reverse mortgages or home reversion products – exist which allow homeowners to draw down on the value of their home over a period of time. Importantly, these products have legal protections ensuring that no-one can be forced from their homes, even in the event that all equity has been exhausted.
More details on the commission’s report here.
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