AGED PENSION: “an economically costly inheritance preservation scheme”: a harsh generalisation!

Andrew Fisher and Alfred Deakin, the prime ministers who oversaw one of the world’s first age pension schemes, would be horrified to see what it has become: an economically costly inheritance preservation scheme. Picture: iStock

Photo: The Australian: Paying very wealthy pensioners is hardly prudent: CAAN: A harsh generalisation!

ABOUT this article from Macro Business on Adam Creighton’s ‘Paying very wealthy Pensioners is hardly Prudent’ ….

THERE are two groups of ‘Baby Boomers’ … the wealth Boomers and Boomers … who may only own the ‘family home’ ….

ALERT! If this were to come in it will erode what is left for Gens X Y and Z! Having lost out to:

-1.6 Million Visa Workers in Australia

-lowest wages growth for 60 years

When you read this sort of stuff it brings to mind the following …

blaming people and punishing them because the place where they live happens to increase in value

ignores the fact a vast majority of the people attacked in the article worked hard, paid their (full) taxes, bought and paid off a mortgage in a location they liked (30 years +), and could afford a house that suited them

does not mention they often paid a lot more interest on their mortgage for many years than current owners (17.5%); were on very modest wages and put up with a lower standard of living for a lot of those years

.the official Reserve Bank cash rate peaked at a punishing 17.5 per cent in January 1990

reverse mortgages, they are not popular for good reasons, yet another way for others to make money whilst reducing home ownership and provide opportunities for investors

Further cutting the AGED PENSION based on an assets test including the family home will:

encourage more creative accounting

-encourage more schemes that will seek to avoid the impact of yet another tax, where it has been done elsewhere houses are left unfinished and/or maintained to deliberately suppress their value

WHAT happens when the asset value declines for whatever reason?

What about this article ignoring the fact that a home is shelter, a place to live, not primarily a financial instrument

What about doing something about the housing market, like addressing the inflation of house prices including doing more than tokenism in response to foreign buyers taking a share of our domestic housing stock

addressing the demand foreign buyers have (driving demand and prices) beyond a series of levies and taxes; that evidence has failed to indicate they have influence on foreigners decision to buy as they continue to do so because they want to buy in Australia and are prepared to pay

AS for years ahead the article does not dive deep into the reality of retirement created by compulsory superannuation introduced over 30 years ago

The fact is less and less retirees will qualify for the full aged pension let alone a part pension

However another issue mentioned in passing may indicate the author is aware we could be facing an even more concerning crisis:

-for more than 7 years the vast majority of Australian workers have had little or no increases in their wages beyond the cost of living, many not even keeping up with inflation

-this has had an effect on their Super, it too has failed to grow so their retirement savings are more likely to be inadequate

-those low paid workers retiring on very modest super and don’t happen to own a home are in the future far more likely to fall below the poverty line and into homelessness; those at the biggest risk being single elderly women …. but hey who cares about them? It seems nobody …

THESE ISSUES could have more serious consequences for the Budget bottom line, and subsequent social and political ramifications than not giving the top end of town and the top tax bracket a break

INSTEAD what about addressing some real issues like:

-New Zealand … why should foreigners own our domestic housing?

-deciding owning a lot of homes is not such good thing, how many is enough, that is why should the Budget subsidise ‘an investors 3rd or 4th property?

-the Second Tranche of the AML legislation, now that would have a positive influence on the Budget bottom line and not be such an attack on those getting old

-doing something about exploitative pay day lenders, like the AML matter the reports are done, the recommendations are there, but nothing is happening … what could it be that is stopping them?


Aged Pension: “an economically costly inheritance preservation scheme”

By Unconventional Economist in Australian budget

November 12, 2019 |  comments

The Australian’s Adam Creighton has continued his war against the Aged Pension’s largesse towards wealthy retirees, labelling it “an economically costly inheritance preservation scheme”:

Last week figures emerged showing about 255,000 pensioners lived in homes worth more than $1m, costing taxpayers an estimated $6.3bn a year — enough to reduce the top marginal tax rate dramatically, for instance. The Australian National University report found almost 30,000 pensioners were in homes worth more than $2m. The biggest asset most people own is excluded from the eligibility test for the Age Pension.

No one begrudges success but the government needs to prioritise who receives scarce tax dollars. The 707 pensioners in Perth’s Dalkeith (median dwelling value $1.5m) or 429 in Sydney’s Vaucluse (median $2.7m) should be lower down the list than families struggling to buy a home facing marginal tax rates of 39c in the dollar.

These well-off people have about triple the wealth of the median household. Pensioners are allowed to have financial assets up to $864,000 before they lose the part-pension, and the array of medical and transport discounts that goes with it.

The biggest red herring is that people would have to move out of their homes if their net wealth were counted in the eligibility test for the Age Pension. That is nonsense, however rhetorically convenient. Financial products called reverse mortgages exist that allow retirees with significant equity in their homes to remain there in comfort without drawing on taxpayers…

The Henry tax review sensibly recommended starting to withdraw Age Pension payments once recipients’ principal residence exceeded $1.2m in value. The Commission of Audit suggested $750,000. Every dispassionate analysis comes to the same conclusion. It’s hard not to.

Perhaps the silliest argument against including the principal residence is that retirees can’t help it if the values rose. Oh, what a burden…

We’ve ended up with a system that taxes labour income at high rates while asset speculation is taxed lightly or not at all.

Adam Creighton is right of course. It’s ridiculous that younger Australians facing the prospect of never owning a home (or being enslaved in mortgage debt) are being called upon to pay ever-rising taxes to subsidise retirees that are far better-off financially than they will ever be.

The policy solution that MB advocates is to:

  1. Including one’s principal place of residence in the assets test for the Aged Pension at some point in the future (e.g. 1 July 2022), thus allowing current retirees and prospective retirees adequate time to make arrangements; and
  2. Significantly raising the overall pension asset test threshold as well as the base rate.

Under this solution, house-rich pensioners choosing to remain in place could continue to receive an income stream as they do now under the Aged Pension via the Pension Loans Scheme (the federal government’s official reverse mortgage scheme), but with less drain on the Budget and on younger taxpayers. But they would similarly be incentivised to move as the family home would no longer be a tax free shelter.

Poorer retirees that do not own a dwelling would also be made better-off via the increase in the overall assets test (thus allowing greater financial assets to be held without cutting-off access to the pension), as well as the increase in the base rate.

It’s a solution that would greatly improve equity and ensure that Australia’s welfare system is better targeted towards those in genuine need.

It would also ensure that the pension system evolves alongside the structural reduction in home ownership rates, by making the system more neutral towards property ownership and financial assets.

Younger people should be particularly anxious to end this inheritance protection racket, especially those who won’t inherit much at all. Picture: iStock

Photo: The Australian