Fairness and the family home

The exemption of the family home from the pension means test is one of the most emotionally charged elements of Australia’s retirement system. The mere suggestion that the value of homes be included in pension eligibility tests draws the ire of many.

Yet, reluctance to touch home equity is harming taxpayers, pensioners who do not own their home, and ultimately home-owning pensioners themselves.

Three in four pensioners own their own home, and almost all of them are free of a mortgage. For most pensioners, this represents the vast majority of their net worth. Indeed the combined value of pensioner home equity exceeds $700 billion, far outstripping any other form of savings.

Yet just 1% of retirees use these savings to boost their living standards through a reverse mortgage. Nor do many seek to downsize. In fact most pensioners hold onto their home equity until they go into age care, or until they pass those assets on to their children.

Instead they rely on taxpayer support — through the age pension — for the majority of their income.

Around a quarter of all pensioners have a net worth of $1 million or more and 5% of pensioners are in the top wealth bracket. Pensioners with no other income, and less than $10,000 in assets, are sharing payments with those worth millions.

Yet many of those pensioners with million dollar homes are still struggling to make ends meet. They can’t afford to maintain their homes and lifestyles while pensioners a couple of suburbs away struggle with rental payments and daily living expenses.

The protected position of the family home, combined with a strong sense of the importance of home ownership, has led retirees to massively overinvest in housing assets, to the detriment of their standard of living.

It is wrong to expect that taxpayers, particularly those who are locked out of the housing market, will hand over more and more money to subsidise living standards (and bequests) for retirees. Projections that the cost of future pensions may exceed workers’ contributions to their own retirement, together with a rapidly ageing population, reflects the sobering reality that the age pension is unsustainable.

Three interlocking reforms will resolve this problem.

First, the family home should be included in the pension assets test. The pension asset test needs to properly reflect how pensioners hold their savings, and the simple fact is that pensioners with substantial home equity can and should support themselves.

The second step is to assist in unlocking that home equity by creating a government-backed reverse mortgage scheme. With a government guarantee, banks and superannuation funds could offer low rate, low fee, reverse mortgages that provide a regular income stream just like the age pension.

The last reform, which dovetails with the two previous reforms, is to deem reverse mortgage income in the pension income test. This will encourage pensioners to take out reverse mortgages that will boost income, and allow pensions to automatically adjust if reverse mortgage income falls.

These reforms not only  save taxpayers almost $15 billion every year, but mean 98% of pensioners would see a boost in their income of nearly $6,000 on average — a significant rise for those wholly reliant on the pension. These reforms could also fund a substantial boost in the pension for the poorest pensioners, as well as lifting rent assistance for non-homeowners.

There are political, cultural and social issues to overcome when talking about an emotive topic like the family home. However, refusing to even consider pension reform is entrenching unfairness, increasing government spending and lowering pensioner living standards. Unlocking home equity is the big-bang reform this government needs.

Simon Cowan is Research Manager at The Centre for Independent Studies and the author of several reports on the retirement system including The Myths of the Generational Bargain and The Age Old Problem of Old Age: Fixing the Pension.