Productivity Commission’s brave call on the family home is right

It’s been clear for some time that the exemption of the family home from the pension assets test is hurting everyone. Taxpayers pay $44 billion a year in pensions, non-homeowner pensioners face significant housing stress, and 40% of homeowners on the pension don’t even meet a modest standard of living in retirement.

Pensioners with hundreds of thousands — even millions — of dollars in assets are struggling to get by on a part pension, while those with mere hundreds of dollars in assets look enviously at the wealth and security of owning a home.

Now the Productivity Commission report, Housing Decisions of Older Australians, has laid bare the flaws in the system creating this bottleneck. The key findings echo those in our research report The Age Old Problem of Old Age: Fixing the Pension. Exempting the family home is unfair and creates incentives to over-invest in housing. At the same time, blockages in the system — including stamp duty and planning restrictions, as well as problems with reverse mortgages — limit the ability of retirees to access their wealth.

The advantages of home ownership are built into many government policies, from exemptions on capital gains tax to the exclusion of the home from the means test from the pension. The Productivity Commission rightfully notes that this creates an incentive for retirees to over-invest in housing.

They found that retirees have a total of more than $900 billion in home equity. Our research suggests that the total home equity of pensioners alone accounts for $700 billion of this. Essentially, the home represents the primary source of savings for the bulk of the population.

We found that homeowners on the full pension had nine times the net worth of non-homeowners receiving the same pension. These groups have substantially different capacity to support themselves. It is unfair that they receive the same level of taxpayer support.

Around 60% of retirees across their lifecycle do not sell their home. While retirees can use their home as security for moving into aged care facilities, this still represents only a small fraction of those in retirement. Not only that but the share of older people in residential age care has actually fallen and, the Productivity Commission also notes, these facilities are increasingly used for end of life care.

Key to this reluctance are three things. Stamp duty is a tax on housing mobility, effectively cutting the value of family home particularly for those pensioners with larger, more expensive homes. Planning restrictions also reduce the supply of age appropriate housing within existing communities. The third motivating factor is the emotional and financial attachment to the home.

This aversion to selling the home is, if anything, outweighed by an antipathy to accessing the equity in their home. Less than 1% of retirees currently draw down on their home equity.

Worse still, the Productivity Commission found that between 40% and 50% of those 70 years and over would not access their home equity under any circumstances. The Productivity Commission found the primary motivating factors were debt aversion and a strong attachment to the home, as well as unsuitability of available products.

Another driving factor can be discerned in nearly half of all retirees saying that keeping hold of the family home to pass onto their kids is ‘a key objective’. Which highlights that the primary beneficiaries of the family home exemption from the pension are actually those who inherit housing wealth — either because retirees have gone without to pass on their home to their kids, or because retirees could not or would not use the value of the home to support themselves in retirement.

The Productivity Commission concludes that including the full value of the family home in the assets test for the age pension would improve efficiency and equity, though they believe the opposition to such a move would be intractable in the immediate future.

However, there are substantial benefits in including the home in the income and assets tests, while encouraging and supporting pensioners to access the equity in their home. Our modelling found that nearly 98% of pensioners would receive an income boost on average of almost $6,000 a year.

The current exemption of the home from the means test creates an incentive to over-invest in the home, to the detriment of everyone — including retirees. While the family home has a complex, emotional role in our lives, it can and should also have a positive role in boosting living standards in retirement.

Simon Cowan is a Research Fellow at the Centre for Independent Studies, and co-author of The Age-Old Problem of Old Age: Fixing the Pension