Retirement changes focus on the wrong assets, won’t boost incomes

The fundamental paradox of retirement is that retiree living standards depend on stable and secure incomes, but most retirees typically end up asset rich and cash poor. Solving that problem is key to meeting the challenges of the ageing population.

However, this budget doesn’t even contemplate that challenge. Consequently pension expenditure continues to climb towards $50 billion a year and beyond.

In an environment where interest rates are at historically low levels and retirees are searching for extra yield to boost incomes, tightening the pension assets test to discourage pensioners from holding liquid assets is a bad idea.

The broad-based indexation changes from the last budget — which the Intergenerational Report claimed were crucial to future pension sustainability — have been jettisoned in favour of a short term fix.

Instead, the government’s pension changes close small loopholes and tinker at the edges of pension affordability while potentially adding to the enormous sink of unused capital in the family home. The rate at which the part pension cuts out has been doubled from $1.50 to $3 for every $1,000 dollars of assets above the threshold. The threshold has also been increased.

These changes will move some 91,000 pensioners off the pension, and reduce payments to 236,000 more, while around 170,000 part rate pensioners would see a boost in their payments with some moving back onto the full rate of the pension.

Given a $44 billion  (and rising) annual pension bill, estimated savings of less than $2.5 billion across the next four years barely scratch the surface. These savings also rely on strong asset price growth from a vibrant economy, which is hardly a certainty.

The government’s changes also further increase the incentives for pensioners to move superannuation assets — which boost incomes and heavily impact pension eligibility — into housing assets that do neither.

Why wouldn’t a retiree facing record low interest rates invest a bit extra in their home to get onto the pension? The government is making that option even more attractive. Expect pensioners to respond and the supposed $2.5 billion in savings to disappear.

There are other reasons this is a bad policy.

First the big allure, and part of the big cost, of the part pension for wealthy retirees is not a small increase in income each fortnight, it’s the healthcare benefits card — potentially worth thousands of dollars each year. The government has guaranteed that even those losing their pension won’t lose access to the benefits card.

Second, for a government concerned about sustainability of pension payments in the long term, moving people back onto the full rate of the pension is a clear step backwards.

There is no evidence to suggest pension payments are inadequate; the full rate of the pension is equal to, or higher than most, measures of adequacy such as the ACOSS 50% relative poverty test or the Henderson poverty line. Nor are the current asset test thresholds too low; if anything they are too high, as evidenced by the high number of retirees on the pension.

Australians are often told we have not saved enough for our old age. That’s nonsense. The real problem is that one of our biggest savings options — the family home — isn’t being used properly to fund retirement.

In defending his policy announcement, Morrison claimed it was unfair to include the family home in the pension assets test. This is wrong. What is unfair is someone living in a million dollar home getting the same pension as someone with nothing to their name.

Homeowners on a full pension have nine times the wealth on average of non-homeowners, yet they get the same pension payment. This change does nothing to fix that inequity.

Instead the government’s policy targets only pensioners with significant assets in addition to the family home: $550,000 for singles and $820,000 for couples. Pensioners with those asset levels have homes worth $700,000 on average, suggesting these pensioners have significant wealth to support themselves.

But so too does someone with a $1 million house and $250,000 in assets — and they are going back onto a full pension.

While retirees can at least breathe a sigh of relief that the punitive tax increases Labor proposed have been rejected, the government has done nothing to fix the problems with super that leave 70%-80% of retirees on the pension.

The pension was designed to provide support for people who can’t support themselves, not as a reward for paying tax and home ownership. It’s time the government focused on ways to boost retirement income without dipping into taxpayers’ pockets.