29 MAY 2016, By Adam Creighton, THE AUSTRALIAN 29 MAY 2016
The answer to Dante Crisante’s question about the pension, posed to Treasurer Joe Hockey on Monday night’s ABC Q&A program, is simple. Trade up to a more expensive home to insulate your assets from the government’s tighter planned assets test — thereby keeping the full pension and eventually passing on your assets unscathed to your children. It’s a no brainer, as they say.
Mr Crisante’s desire to bequest savings to his children might be admirable but it’s far from clear taxpayers, many who won’t inherit much at all, should be subsidising it.
For its first four years until 1912, the value of a retiree’s home sensibly limited access to the age pension, which is now paid to about 80 per cent of retirees (up from a third in 1910) and at about $45 billion is the biggest and fastest growing federal government expense.
Until a government has the courage to include once again this most valuable form of retirement savings in the eligibility test, pension reform will be ineffective, unfair and promote excessive investment in housing.
For all the whining by retirees in the top 20 per cent of the wealth distribution over the government’s plan to cut the threshold of financial assets above which the part-age pension is withdrawn from $1.2 million to about $800,000, it is so easy to avoid.
Mr Crisante needn’t even move; he could renovate or enlarge his home to preserve his savings and keep the pension (and of course, the generous health and travel concessions that go with it).
The reform would broadly reinstate the system that existed before Peter Costello relaxed the taper in 2006, which added many thousands to the pensioner ranks overnight.
The current eligibility test discriminates massively against retirees with relatively less wealth tied up in their home. A couple in a $2.5m home in Sydney’s Mosman with $280,000 in other assets, for instance, receives the full $30,654 a year pension. Yet another in Greenacre in an $800,000 home with $700,000 in superannuation receives about $14,525 a year.
If the Greenacre couple rented, they would receive $20,265 a year, barely an extra $6000 a year.
It is surely absurd given our ageing and growing pool of retirees, poor public finances, high marginal tax rates (for non-retirees), and surging property prices that housing wealth be excused from having to help provide retirement incomes. Retired Australians have built up significant housing wealth, on average far beyond $600,000 or triple the average retiring superannuation balance of men.
The annual value of inherited housing in Australia is projected to double to about $31 billion over 15 years to 2025, according to a recent study.
And this vast increase in wealth hasn’t come courtesy of investment savvy or effort, but rather being of a particular generation and buying a house.
Younger taxpayers are stung twice. As the share of the population in or nearing retirement rises, the attractiveness of housing as a shelter for wealth will also rise, adding to the upward pressure on home values that are occurring owing to lower interest rates.
Including some portion of the principal residence (can we please drop the emotive phrase “family home”) would help reduce some of the pressure on house prices without necessarily affecting the lifestyle of any retiree.
Few arguments are as tendentious as the most common levied against a fairer assets tests — that pensioners will be forced to sell their home, and it would be unfair to those who had the good fortune to buy in suburbs whose dwelling values have skyrocketed. Reverse mortgages mean no one has to move; no lifestyle need change.
It’s no surprise they haven’t taken off. Indeed, out of some 2.4 million-plus pensioners there are barely 45,000 reverse mortgages outstanding, according to recent Centre for Independent Studies research. Why bother if you could lump the cost on to others?
It is ironic that a payment instituted in 1908 to reduce inequality, is now, a century later, used to perpetuate it.
The argument for a more rational eligibility test that treats assets equally is not one for taxing or taking other people’s wealth. No one is arguing against inheritance or the right to leave bequests. But it is an argument against alleviating those who stand to inherit relatively little (which is the bulk of people) from paying tax to ensure others inherit a lot more.
It’s one thing for a country not to have an inheritance tax, it’s surely another to have an inheritance subsidy.
The Henry review suggested a principal residence threshold of $1.2m before the asset test kicked in, the government’s more recent Commission of Audit $750,000. Either proposal would prompt a hysterical response, even though it is better all the value be included. Interestingly, treating all assets equally needn’t affect any pensioners if the government lifted the overall threshold commensurately — although it should then freeze it for something like 25 years.
If Labor actually stood for genuine fairness, it would champion this issue and galvanise a whole generation of irate younger taxpayers who are forking out almost 40 per cent of 50 per cent in the dollar in income tax so their more fortunate work colleagues can inherit more. For a supposed egalitarian country, it’s bizarre.
Original article here