Fix the flawed pension system - The Centre for Independent Studies
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Fix the flawed pension system

ANU last week estimated that more than $6 billion a year is paid out to pensioners in homes worth a million dollars or more. This follows work from the Actuaries Institute suggesting some or all of the value of the home should be included in the pension assets test.

These are not new findings. The Henry Tax Review and the Grattan Institute have previously made similar recommendations.

In 2015, Matt Taylor and I published  The Age Old Problem of Old Age: Fixing the Pension,  showing that approximately a quarter of age pensioners had a net worth (including home equity) approaching or exceeding $1 million.

It is important to understand what problem (or problems) actually need solving; because a proper understanding of the issues will suggest that some reform may actually be beneficial to retirees.

The most obvious problem is the cost of the pension. Social Security payments are by far the largest item in the federal budget, representing nearly 36% of federal government expenditure. And at nearly $50 billion a year, Income Support for Seniors is the largest single government program.

Nor is it clear that the current allocation of the pension is fair to those who don’t own their home. Homeowners typically have around 9 times the net worth of non-homeowners, despite receiving the same level of pension.

Non-homeowners can receive additional support — for example rent assistance — however, non-homeowners make up most of those pensioners who are really struggling to make ends meet.

The issue that needs to be resolved is that retirees have most of their savings locked up in illiquid assets (especially houses), and tend to have low incomes. This has become even more acute a problem in an environment where interest rates — and consequently returns on safe assets — are at record lows.

This is why our 2015 research recommended three interlocking reforms be undertaken.

First, we recommended the family home should be included in the pension assets means test and the homeowner/non-homeowner distinction in that means test should be abolished.

Second, the government should support pensioners’ accessing reverse mortgage products by legislating for a default reverse mortgage product. This product, provided by banks and superannuation funds but guaranteed or insured by government, would provide a regular annuity payment at a low interest rate up to a set equity limit.

It would also ensure pensioners would never be forced to sell their home.

Third, the government should deem income from the default reverse mortgage for the purposes of the pension income test in the same way income from financial assets are treated. This would remove the distorting treatment of housing assets, provide a safeguard for pensioners and ensure the focus of the pension remained on raising living standards.

These reforms would not only deliver $14.5 billion a year in pension savings but also deliver $14 billion a year in additional income for pensioners.

There is no question this still remains a controversial reform.

However, in the longer term, getting the policy settings right will boost living standards for retirees and reduce cost to taxpayers.

This is an edited extract from an opinion piece published in the Canberra Times as It’s time to storm the gates on age pension reform