The family home is protected in public policy settings.The idea that your home does not count when you are assessed for the pension is political fiction. It does count, and so it should. It ought to count for more than it does.
More on that later, but first I need to clear up some confusion. A few readers have queried my Sunday Moneycolumn last week, which stated that your home counts for $200,000 in the new pension assets test, which takes effect on January 1, 2017.
If you are a single homeowner, you can own $250,000 in assessable assets before you start losing the pension. If you are a single non-homeowner the threshold is $450,000.
A couple who owns a home is allowed $375,000 before they start losing the pension, while a couple without a home can have $575,000.
In other words, whether you’re single or part of a couple, home ownership is valued at $200,000 in the new pension assets test.
These amounts were passed by parliament and incorporated into the Social Security Act in mid-2015.
Note this is not a vast change of policy. Under the old assets test, a single homeowner could own $209,000 in assessable assets, while a single non-homeowner had a higher threshold of $360,500. For couples it was $296,500 and $448,000.
So under the old assets test, home ownership was worth $151,500.
The value of home ownership has increased in the new assets test, but the threshold has also increased.
No one will lose the full pension as a result of the changes and about 50,000 extra people will get it. Another 120,000 part-pensioners are likely to see an increase in payments.
So far, so good.
But as most Money readers would know, there are also hundreds of thousands of Australians who will lose their part pension from January 1 because a much steeper taper rate will apply.
Pensioners will lose $3 a fortnight for every $1000 in assets above the full-pension threshold. That’s the same taper rate that applied a decade ago, before the Howard-Costello government changed it to a more-generous $1.50 in the 2006 budget.
That means that single homeowners will lose their pension if they hold $542,500 in assets, while single non-homeowners are permitted $742,500. For couples the cut-off is $816,000 if they own a home and $1.016 million if they don’t.
Again, home ownership is valued at about $200,000. Income limits also apply.
Depending on your perspective it’s either much harsher or much more targeted than the old threshold, which let couples own $1.175 million in addition to the family home and still claim a part pension.
But those thresholds are subject to the regular indexation of the pension, which occurs every March and September. The exact cut-offs will be known later this month when the Department of Social Security announces the new pension figures.
It’s expected that about 91,000 people will lose their part pension, while another 235,000 will have their payments reduced as a result.
It’s an awful lot more than the very small number of wealthy retirees affected by proposed changes to superannuation.
I have sympathy for people who counted on the part pension in their retirement planning and are simply trying to make ends meet.
But the truth is that pension reform should go further, specifically that home ownership should count for far more than $200,000.
A renter would burn through $200,000 in just over seven years at Sydney’s median rent of $530 a week for a house or $525 for an apartment, and that’s under the unlikely scenario of no rent rises during that time.
Melburnians would have closer to 10 years, with a median rent of $400 a week for a house and $380 for units. The prices are from Domain’s Rental Report for the June quarter.
While retirees who own a home may not have much in liquid assets, retirees without a home deserve more help than they get.
It’s also about intergenerational fairness. The property boom since the late 1980s has made a lot of Baby Boomers very rich, even if they don’t feel rich. It’s all relative.
Quarantining the family home from the pension assets test and other tax measures such as capital gains tax discourages people from downsizing to unlock capital.
Yet Baby Boomers are such a big demographic group that whatever they do – buy, sell or hold – can distort the market. If they’re staying in homes that are bigger than their needs because of tax and pension benefits, then that decreases the natural supply in the housing market.
Building new housing stock can only help around the fringes since most of us buy our houses secondhand.
Grattan Institute analysis from 2013 suggested that 80 per cent of mature-age households with $1 million in net assets receive welfare benefits, on average, more than $200 a week.
Grattan is in favour of counting the true value of owner-occupied housing in the age pension assets test. In order to protect asset-rich but income-poor households, people could choose to remain in their home and receive the pension but the government would accumulate a claim against the property.
There is merit to this idea. The purpose of exempting the family home from the pension test is because pensioners need somewhere to live, not to protect one type of asset for the purposes of inheritance.
Those of us in Generation X and Generation Y are happy to be the tax base for the age pension, because supporting our fellow citizens in old age is part of being in a society. But many of us feel rightly aggrieved that we’re supporting property millionaires to get the pension while we can’t afford homes of our own.
I have a huge mortgage instead, which makes me one of the lucky ones.
Caitlin Fitzsimmons is Money editor. You can find her on Facebook or Twitter.This article has been updated with the new indexation figures announced September 14, which provides us with the exact asset test limits effective from January 1.