There’s always been something of an irony in the invocation of the phrase “an Englishman’s home is his castle” by those opposed to changing the tax and pension arrangements around the family home.
After all, the main reason the UK government itself owns so many castles is their death taxes chased all the previous owners out of them.
Here in Australia we have seen several proposals in recent weeks that might have fallen foul of the vibe of Darryl Kerrigan’s similarly famous defence that “a man’s home is his castle”. Specifically, proposals to include the family home in the pension assets test.
This week, researchers at ANU have 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 May 2015, my colleague Matt Taylor and I published a report showing that approximately a quarter of age pensioners had a net worth (including home equity) approaching or exceeding $1 million.
Of course, few (if any) politicians have been interested in pursuing these sorts of reforms – and it seems unlikely that the Morrison government’s new retirement incomes review would take such a bold step.
Yet it is also important to understand which problem (or problems) actually needs 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 per cent of federal government expenditure. And at nearly $50 billion a year, Income support for seniors is the largest single government program.
Any savings that can be found in an annual $50 billion spend would be very welcome.
Nor is it clear that the current allocation of the pension is fair to those who don’t own their home. Home owners typically have around nine times the net worth of non-home owners, despite receiving the same level of pension.
Non-home owners can receive additional support – for example, rent assistance – however, non-home owners make up most of those pensioners who are really struggling to make ends meet.
But good luck convincing pensioners (75 per cent of whom own their home) to accept closing these “loopholes”. Including value above a certain threshold, or equity above the suburb median, is doomed to failure. The public clearly does not accept that home-owning pensioners are well off – regardless of house price increases.
Any measure that appears to “punish” retirees for owning a home that has increased in value will be rejected out of hand.
And to be frank, framing this solely as a problem of government benefits going to “rich” pensioners is a fundamentally misdirected approach.
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.
Which means that reducing pensions, or increasing taxes, would add to the difficulties of low income, without assisting retirees to convert illiquid assets into cash.
Currently, pension rules – as well as government taxes such as stamp duty – make it unattractive for retirees to downsize and release equity. Moving is costly. There is also a significant desire among retirees, especially older retirees, to continue to age in place. So pensioners are unlikely to move to more affordable areas.
Yet resolving these issues would actually benefit pensioners in some ways. There is no benefit to anyone in a situation where retirees who don’t own their home struggle, while pensioners with large, valuable homes are also struggling with maintenance expenses.
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 home owner/non-home owner distinction in that means test 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 the 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.
In an ideal world, innovative retirement products would take the place of the existing dependence on the age pension. A hybrid annuity product that provided a monthly payment – drawing down first from superannuation and then from home equity – should be a desirable and relatively risk free way of addressing the asset-rich, cash-poor issue.
A co-investment model, where a portion of home equity would be sold to a financial institution (especially a super fund) in exchange for an income would allow both the retiree and the provider to see upside benefit from home price increases. This model would also mean that retirees would not have to take on the debt of a reverse mortgage.
There is no question this still remains a controversial reform. Too many reform proposals have been focused on closing loopholes, without improving outcomes for retirees.
However, in the longer term, getting the policy settings right will enable innovation in the retirement income space. And this innovation is needed to boost living standards for retirees and reduce cost to taxpayers.
Simon Cowan is research director at the Centre for Independent Studies.
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