Here’s a pension assets test nasty for the May budget

Article published 14 April 2023

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Here’s a May budget assets test nasty for pensioners

Grattan Institute wants all of the family home in pension assets test


FOR almost twenty-five years the federal Government has been running Budget deficits. That means the Government was borrowing to pay for programs it was running, like aged care and the Age Pension.

The Grattan Institute, a thinktank independent from government, has come up with a report, Back in Black?, in which it proposes a long list of measures for the federal Budget to achieve getting back in the black.

The report makes the point that increased Government spending has not been matched by additional revenue raising. When that happens, there are three things governments can do. They can spend less. They can increase taxes. Or they can do both.

Official estimates suggest the long-term annual deficit is about 2 per cent of Gross Domestic Product, or almost $50 billion each year in today’s dollars.

“But”, says the report, “using more realistic estimates of spending – including in defence, health, and support for the vulnerable – suggests a figure of more than $70 billion a year in today’s dollars by the end of the decade.”

Continuing to borrow means we’re asking younger generations to pay for what we consume. And that’s unfair.

While the report says there are “no easy solutions”, it proposes “a menu of ‘least bad’ options to reduce spending and boost revenue without hurting economic growth”.

Family home and assets test

One of those ‘least bad’ options concerns the Age Pension. It’s the old (and failed) idea that home-owning pensioners should use the equity in their home (which means: get a reverse mortgage) to supplement the Age Pension. Under this least bad option, Age Pension payments for homeowners would be reduced and within five to ten years, the Budget would save $4 billion, according to the report.

The report says that 40 per cent of Age Pension payments go to people who have more than $750,000 in assets. It then proposes that everything pensioners have above $750,000 should be assets-tested. This includes the family home. The report acknowledges that the median value of a home in an Australian capital city (where most pensioners live) is $765,000.

In other words, the report says all of the equity in the family home should be assets-tested to reduce the pension payment of 40 per cent of pensioners.

The current lower assets limit of $280,000 (exempt from assets testing) would be raised to $750,000, but the full value of the family home would be included in the asset test.

So, a pensioner with as their only asset a median-priced ($765,000) family home would lose $45 ($3 for every $1,000 over the limit) out of their fortnightly pension payment. It would turn them from a full rate pensioner into a part pensioner.

And look what would happen to this pensioner if they had the audacity to have $65,000 in savings!

They would lose $240 out of their fortnightly pension payment!

This loss of income, the report says, pensioners can cover by drawing down “against the equity in their home, via the [federal Government’s] Home Equity Access Scheme”. This is a reverse mortgage scheme operated by the federal Government.

Why it won’t happen

This is not a realistic proposition. Disregarding the fact that eligibility for a reverse mortgage through the Home Equity Access Scheme is not automatic, and that applicants may fail to qualify, there is an even bigger obstacle.

The forty per cent of pensioners to which the report refers represents roughly 800,000 people. Let’s assume that these people are all partnered and all homeowners. That’s 400,000 homeowning pensioner households.

The number of households currently participating in the Home Equity Access Scheme stands at somewhere between 6,000 and 7,000. If the Home Equity Release Scheme would be called upon by an additional 400,000 households, it would increase the value of the federal Government’s mortgage book by more than $75 billion, with all the unacceptable risks that that would entail.

What this report also ignores is that any reverse mortgage, government-provided or commercial, will only give the borrower access to a maximum 25 per cent of their home equity, or just $191,000 to the owner-occupier of median priced home in a capital city.

Accessing a quarter of home equity in this way means three-quarters of home equity is available for compound interest. If a pensioner starts drawing down on their home equity from pension age, they will never be able to sell up and buy elsewhere. Should they have to go into a nursing home towards the end of their retirement, there will be little or no money to pay for an accommodation bond.

These are all good reasons why no government will ever implement this proposal.

You can sleep easy.


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