Paying very wealthy pensioners is hardly prudent
Vote-seeking governments long ago forgot that we had the genuinely needy in mind.
I don’t know about you but homeowners in Australia’s most expensive suburbs, with a few hundred thousand dollars in financial assets in the kitty, do have resources to obtain a livelihood. 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.
READ MORE: Flaws in home owner-pension argument | Retirees ‘upsize’ the family home to get the Age Pension | The pension should not be protecting mansions
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 past few decades have seen enormous, unexpected, untaxed windfall capital gains in the value of dwellings. Since 1999 the value of household dwellings has surged from $1.4 trillion to $6.3 trillion — enough to pay all federal expenses many times over.
A secular, global decline in interest rates has had much more to do with this than skill or effort. Is it not too much to ask that a small portion of this boon be used to fund retirement incomes, making way for substantial income tax cuts that would supercharge economic growth and efficiency?
Listen to Adam Creighton's podcast on Australia's property obsession
The Age Pension has always been a safety net paid out of general revenue. However much people think they deserve it because they’ve worked hard, it has never been a contributory system along European or US lines. Conservative governments here tried unsuccessfully to introduce such schemes in 1928 and 1938.
British liberal William Beveridge once said the welfare state was common sense. What starts out as common sense can become a fiscal disaster, however. Successive governments, in a bid to buy votes, gradually expanded eligibility for the pension. In 1962, the original 25-year residence requirement was cut to 10 years. In 1973, pensions became payable to people retiring overseas. The Whitlam and Fraser governments relaxed the means tests.
The most egregious subversion occurred long before, though. Between 1908 — when federal old-age pension legislation was introduced — and 1912, the value of the family home limited eligibility. Before 1912, pension payments dissipated entirely once the recipient’s net assets exceeded £310, about $40,000 in today’s dollars — impractical now but a reminder how frugal governments once were.
The Age Pension is by far the biggest government expenditure, costing about $48bn a year and forecast to rise to $54bn in three years. Total assistance to the aged is set to jump from $70bn to $80bn across the same period (double the cost of assistance to families).
Younger people should be particularly anxious to end this inheritance protection racket, especially those who won’t inherit much at all. The number of Australians over 65 is forecast to grow at about three times the rate of the wider population across a decade.
Health and aged-care costs are set to push income taxes ever higher. For all the talk of tax cuts, income tax continues to rise as a share of household disposable income, driving smart workers abroad and fuelling tax avoidance.
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. If anything, this strengthens the argument. Another argument suggests it is all too hard. It shouldn’t be so hard for a good politician to make the case for change. Asking a few hundred thousand heirs to receive slightly smaller inheritances seems a reasonable price to pay for dramatically lower income tax rates for millions of workers, not to mention the attendant economic benefits such changes would bring.
Indeed, the Hawke government did have the courage to tighten up eligibility for the pension in 1985, introducing an asset test. John Howard, not yet opposition leader, wanted to support it, adding in his autobiography: “I thought this was good policy, although politically unpopular.”
There seems little hope the Morrison government will do anything that remotely jeopardises re-election. But that doesn’t mean we should not point out major problems. We’ve ended up with a system that taxes labour income at high rates while asset speculation is taxed lightly or not at all.
When productivity growth was strong, nations could afford damaging tax systems. It no longer is. Government has a responsibility to raise a given sum of money with the least disruption to the economy as possible.
Our home may be our castle but, thanks to financial innovation, it also has become an ATM, whose deposits shouldn’t be ignored when assessing individuals’ rights to social security.
‘Steady as we go’ despite Trump’s 20pc tariff threat
Australia will assume a 10 per cent tariff until it is advised differently by Donald Trump, Trade Minister Don Farrell says, after the US President lifted his baseline duty to 15-20 per cent.
Trump has toxic appeal in Australia, poll reveals
Donald Trump’s popularity in Australia has plunged with 70 per cent of voters expressing negative sentiment towards the US President, who is yet to meet in-person with Anthony Albanese.
When Australia introduced old age pensions 110 years ago it was for the genuinely needy. As one early 20th-century Victorian parliamentarian put it, the pension was “for people who have discharged their obligations as citizens and now find themselves unable to obtain a livelihood”.