How the family home is wrecking the pension

The Productivity Commission released an excellent report this week on Housing Decisions of Older Australians. It argues that the exemption of the family home from the pension means test creates an incentive for over-investment in housing and is inequitable because it favours home owners over non home owners despite the latter typically needing greater assistance.

The Productivity Commission goes on to conclude that removing the family home exemption from the pensions assets test would be the most efficient and equitable outcome.

If those arguments sound familiar it’s because they echo the conclusions of the CIS flagship research report on this topic, The Age Old Problem of Old Age: Fixing the Pension.

In that report we argued that including the family home in the assets test, boosting the take-up of reverse mortgages through a government backed product, and deeming that income under the pension income test, could save taxpayers $14.5 billion a year and boost incomes for 98% of pensioners by an average of just under $6,000 per annum.

There is, as always, strong opposition to these ideas; National Seniors chief executive Michael O’Neill said “the family home is sacrosanct” and both sides of politics are worried about the emotional response to putting the primary residence ‘on the table’.

However there are two important reasons why these important reforms cannot be ignored.

First, the Productivity Commission found many retirees would be better off in every sense of the word if they moved to smaller, more age-appropriate housing. Retirees want to age in place, in the communities they are familiar with, but age-appropriate housing is often non-existent or too expensive — and 40% of age pension recipients who own their home do not meet even the Association of Superannuation Funds of Australia lower ‘modest’ standard of living in retirement.

The incentives to over-invest in housing typically benefit those who inherit housing wealth, not those who accumulated it. The Productivity Commission notes that, while some of the increase in bequest size may be the unintentional result of overly cautious saving, the total value of bequests in Australia grew from $18 billion to $24 billion between 2003 and 2013.

A properly functioning retirement system enables retirees to use their assets to have a decent standard of living in retirement, with the pension there as a safety net for those who can’t support themselves. Exempting the family home from the pension means test undermines the whole system.

The second big concern is with the cost and fairness of the ($44 billion per year) age pension system itself.

Typically, those on the full rate of the age pension who own their home have more than $400,000 in additional net worth over those who receive a similar pension but don’t own their home. This is a clear equity issue; we should be providing the most assistance to those who need it most.

It is not only unfair to non-homeowners, it is also unfair to taxpayers.

It is particularly galling for young people — who already feel locked out of the housing market because of taxes and government restrictions that boost prices for current homeowners — to be asked to fund welfare for pensioners refusing to touch the $700 billion they have in housing wealth.

Too much of current debate on retirement focuses on redistribution of wealth, particularly superannuation tax concessions for the rich. But the problems with the pension are fundamentally a different issue.

Everyone is perfectly entitled to do whatever they want with their assets, be they superannuation or the family home, right up to the point where they stick their hand into taxpayers’ pockets to pay for those savings choices.

It is little wonder that the budget deficit is currently estimated to be more than $40 billion, with no end to the red ink in sight. How can we begin to close the gap when even those with more than a million dollars of net worth aren’t expected to look after themselves?

Simon Cowan is a Research Fellow at The Centre for Independent Studies