The government should include the full value of family homes in the age pension assets test.
The age pension provides income support, and access to a range of concessions, to older Australians. Unlike social security in the United States, the Australian age pension is not an entitlement, but a means of support for those who are unable to provide for their own retirement. Because of this, it is only available to Australian residents aged 65 and over, who pass an income and assets test.
However, the current assets test largely excludes family homes. This has a distortionary effect on the Australian housing market, but more importantly, it is simply unsustainable. The age pension is already Australia’s largest welfare payment, totaling an estimated $44 billion in 2015-16, and this is expected to increase as the population ages. In order to preserve Australia’s generous welfare system for future generations, we must have means tests which accurately target support to those who need it most. For the age pension, this means including the family home.
The current system is unsustainable
The age pension’s income test considers the income an applicant earns from any assets they own, as well as any income earned from a job, and the income of their partner, if applicable. The assets test assesses the collective value of any assets an applicant owns, above a prescribed ‘assets test free area’. The assets test free area ranges from $250,000 to $575,000, depending on marital status and homeownership. After the applicable limit is exceeded, applicants’ pensions are reduced by $1.50 per fortnight for every additional $1,000 worth of assets.
Home ownership is taken into account, to a limited degree, in the assessing the appropriate rate the assets test should start to apply (the assets test free area). For example, the assets test free area is $450,000 for a single non-homeowner, but only $250,000 for a single homeowner. Therefore, a single homeowner has an assets test free area that is $200,000 lower than a single non-homeowner. But this is well below the market prices for real estate in most major Australian cities. Family homes are therefore largely except from the age pension assets test.
This is possibly because of the strong emotional attachment Australians have to home ownership. It may also be because family homes are often mortgaged – making them a financial liability and not, in fact, an asset — but this can easily be taken into account. And in many cases, pensioners own their homes outright.
Excluding the family home from the age pension assets test has a significant impact on the federal budget, and the housing market.
The housing market is effected because Australian taxpayers are effectively subsidizing pensioners to remain in family homes that often exceed their needs. This increases real estate prices and pushes young families into small apartments, or away from urban centers.
Australian pensioners should be free to remain in their family home. But this decision should not come at the cost of the Australian taxpayer.
The age pension is already Australia’s largest welfare payment, totaling an estimated $44 billion in 2015-16. By 2018-19, this will be $50 billion, or about 10 percent of the total federal budget. If Australia wants to maintain a generous welfare system, then we must target support to those who need it most. Pensioners who live in multi-million dollar family homes are far more able to cover the cost of their own retirement than those without such a large asset. Including the family home in the assets test will enable the government to better identity those in need, and target support accordingly
What including the family home would mean for pensioners
Retirees with a family home that does not lead them to exceed the assets test for the aged pension will see no change.
Retirees who exceed the assets test and are disqualified from receiving the age pension because they own a family home of substantial value will be faced with a choice.
If they are able to support their own retirement while continuing to live in their family home, then they will simply miss out on the age pension. If they rely on the age pension to support their retirement, then they can sell their family home and move to more modest accommodations. Or alternatively, they can access the equity in their home by taking out a reverse-mortgage, which can be designed as an income stream similar to a pension.
This will lead to fall in the price of larger family homes, as the supply on the market increases. These newly affordable homes will be available to young people who may otherwise be unable or unwilling to start families of their own — thereby improving Australia birth rate over the long term.
Including the family home in the age pension assets test will free up larger homes for young families, reduce the financial strain on the taxpayer, and make the age pension more sustainable so that those who are truly struggling can continue receive the help they need. The age pension is too important a safety net to be allowed to fall into extinction due to unsustainable policies made to cater to unrealistic expectations.