As people most likely know, from 1 January 2017 some 327,000 pensioners have had their pensions adversely affected by changes in the assets test with around 100,000 losing their pensions entirely. Around 50,000 more will have their pensions increased to receive the full pension. The government is doing this to save $2.4 billion over four years, and, they say, to make the pension system more fair and sustainable.
Unfortunately proponents of the changes are framing this as about wealth, whereas it is actually about income. They are also saying that the changes are progressive, whereas the wealthy go completely free and the ones hit are actually hovering close to poverty, when you consider their income.
To refresh, from my June 2015 post Greens sell out on aged pensions, here are the main changes:
- From 2017, the assets test threshold for home-owning couples will be lowered from $1.15 million to $823,000. For single home-owners it will drop from $775,000 to $547,000. In addition, the current taper rate will double from $1.50 to $3.
There are similar drops for non home-owners. This table shows the reductions:
Remember that the assets test includes household contents and personal effects such as furniture, jewellery and heirlooms, plus cars and retirement projects like boats, caravans or collections.
Moreover, pensioners also receive state concessions on rates, utilities and registrations, plus cheap prescriptions at the pharmacy.
A rough calculation indicates that non home-owning couples get around $125 a week extra to pay rent, which is manifestly inadequate in most parts of the country, but that is another story.
Here’s the table showing pension increases:
The income changes are small.
The main issue is about the negative effects of chages to the assets test. At the deeming rate of 3.25%, couples owning their own home, for example, would receive an income from $823,000 of $26,747, provided they didn’t own a car or other non income-earning assets. In June 2015, when the decision was made, the pension for a couple was $33,717. Previously cash assets of $1.15 million would be deemed to earn $37,375.
Formerly there was some incentive to save. Now there is an incentive to liquidate cash. This incentive is now even stronger with the taper rate doubling from $1.50 to $3. This means that for every $1000 of capital you liquidate you get an additional $3 per fortnight in the pension. Per annum you get $78 rather than $39.
That’s equivalent to an interest rate of 7.8%, better by far than you could get elsewhere.
Michael Janda reports the comments of Professor Susan Thorp from the University of Sydney Business School specialises in life cycle finance and individual financial decision-making. She says the pension changes will likely change behaviour in the affected bracket. There will be a temptation to spend the money, or indulge in riskier investments.
Warren McKeown of the University of Melbourne agrees, and says people wanting to maintain their lifestyle could then reverse mortgage their homes, and even get a loan from Centrelink, leaving a debt to their heirs!
Since oldies can’t buy cars or caravans, or indeed give the money away, travel would be one of the favourites. They can also improve their homes.
One factor, already at work, is that oldies are likely to hang onto a larger family home rather than move to a smaller one.
There has been a debate at The Guardian between Ben Eltham and Osman Faruqi on the topic, where I was disappointed to see the issue being framed as about ‘wealth’. The incomes I have been talking about in this post are from around $27,000 to $37,000 for a couple. Average incomes for singles are around $83,000 for men and $70,000 for women. I could not find the median income, the point at which 50% are above and below, but I believe it to be around $55,000. So we are talking about incomes for a couple that are well below the median income for individuals.
We started the year last year with a story One-third of Australian pensioners live in poverty? In September The Conversation ran a fact check on a statement made by Jacqui Lambie to that effect. Their finding was:
Jacqui Lambie was broadly correct to say that one-third of Australian age pensioners are living below the poverty line.
- There is insufficient evidence to suggest the poverty rate for age pensioners will double in the near future. – Rafal Chomik
Ben Phillips in reviewing the finding said that the changes in the assets test could increase the number in poverty by a small number.
The point here is that the whole thing is being worked out in the zone around poverty. To frame it as being about wealth and to label it as progressive, is, I think, a bit obscene. The government is effectively stripping the assets of anyone who gets a dollar of pension.
Roughly 20% of the population are wealthy enough not to receive the pension:
These include the people making the decisions. I believe the average non-home holdings of the top asset-owning quintile is $1.3 million.
The elephant in the room is what happens if you need to buy your way into institutional aged care. Here the family home comes into play. Particularly vulnerable are the non home-owners and the couple where one needs institutional care and one needs to maintain a home. Somehow this never comes up in the context of pensions and retirement incomes.
The CSIRO did a study that found old people tend to live frugally, maintaining their assets and are chided for not running them down.
Treasurer Scott Morrison thinks it is terrible if they leave an inheritance for their kids.
Thing is, you don’t know how long you are going to live, and when you might need a new hip or a new roof. You don’t know whether you will die with your boots on or have a long drawn-out demise under palliative care.
And what, pray, is wrong with helping you kids into the housing market?
Retirement incomes need a comprehensive review, but one that takes realistically into account end of life risks and needs. The current changes are piece-meal and wrong-headed.