Should the family home be included in pension asset test?

Ross Greenwood speaks to Rice Warner’s executive director Michael Rice  who says the family home should be included in the means test to make the age pension system fairer.

Ross Greenwood: Welcome back to Money News. Right around the country now, you get a sense, or at least I do, that in the future, there is going to be more changes to our superannuation system. Now I know you’ll all groan about this because it just seems bonkers that the rules keep on changing, but I’ll tell you, with the aging of our community, with the fact that interest rates are so low and that puts pressure on the returns, the money is not going to last as long as many people anticipated.

Sure, a lot of people have actually been– Well, I suppose, in some ways, insulated from the real worries about those low interest rates by virtue of the fact that the returns from superannuation funds for the past 10 years since the global financial crisis have been on average well above the inflation rate, well above. In many cases, the average would be almost three times the inflation rate.

There is a fundamental problem here. That is there are issues in regarding to how much money do you need in that retirement. The fact is that there could be technically real declines in the aged pensions going forward. Also, remember that there is the pressure with the aging population going through that does not have enough superannuation. They’ll run out, and so more people are going to end up on the aged pension being paid for by younger taxpayers. They ultimately would have to pay more net tax.

What are some of the solutions? Well, the Actuaries Institute has just put out a green paper on retirement reform, which looks at issues of growing life expectancy, changing patterns of work, and home ownership. It talks about, a cross in between the generations. Three of Australia’s best known actuaries, David Knox, Michael Rice and Anthony Asher have written this green paper. Michael Rice, a good friend to this program, is online right now. Michael, many thanks for your time.

Interview with: Michael Rice, Executive Director, Rice Warner

Michael Rice: Thanks, Ross.

Ross Greenwood: Just explain one thing. The great fear that I have going forward is that government is effectively going to say, after all these years of saying, “Look, it’s your super, you look after it. We don’t want to have anything to do with it because we don’t want the risk of paying you pensions. We want you to have more super.” My great fear is that they’re going to say, “In the future, you can never touch that super except to take an income from it. By the way, when you die, we want to have no super left so nothing goes to the next generations.” Do you believe we’re getting closer to the day when governments might say something like that?

Michael Rice: As the pot of money gets bigger, people are going to want to get a share of it, as you know. I think one of the problems we have is we don’t really have an objective for super, we don’t have an objective to the aged pension, we don’t have integration with social security and, say, aged care, and we’ve got a lot of anomalies in the system. Wealthy people get the aged pension, some people who rent don’t get enough, the aged pension isn’t enough for them to live on. While you could say we’ve got a structural system that’s okay, the parameters underlying it, they need a lot of tweaking.

Ross Greenwood: Tell me who is most disadvantaged by our current retirement income system?

Michael Rice: The people who are worst off are people who rent in private housing in retirement. People often say that the biggest group in poverty are single renters on the aged pension. They’ve got no super, they rely on the pension. Because housing is expensive, whether you own it or rent it, they really don’t have enough to live on.

Ross Greenwood: One of the most controversial aspects of this green paper you put out there is to try and include the family home which is currently exempted from the incomes or assets test, to include that into the mix when it comes to determining how much a person will get paid as a pension. You would recognize politically that might be difficult for any government to achieve.

Michael Rice: It is. Remember, these are options for reform, we’re not recommending one over any other. Although, as you know, personally, I think the house should be included in the aged pension means test. The way to do it is firstly to do it over a period of time so it doesn’t come in straight away and to people already on the pension. Secondly, if you included the family home, let’s say the average house price in Australia was, pick a figure, $800,000, you could add that to the thresholds.

At the moment, if a married couple has less than, say, $380,000, they would get a full pension. You can increase that threshold to $1.1, $1.2 million. In fact, Middle Australia would still be in the same position, but the person sitting with $5 million in a house, which of course as you know, one day they’re going to leave it without capital gains tax, without death duties to their children who might then be retired themselves. There’s no tax on that. Should they get a pension, which for a married couple, age 67 is probably worst, present value is probably $800,000, should the tax pay give that to people who are really quite wealthy?

Ross Greenwood: The other thing you is that the age pension should be simplified by integrating it with super and aged care. It can be much more simplified than what it is today. The real problem with superannuation, the aged pension and retirement living is the systems are so complicated. You need a PhD basically to try and work your way through this.

Michael Rice: You do. You think about it, the means test is based on assets and income, so they take the worst position for you in either of those. It’s reviewed quarterly, we’ve got the concept of deeming, so we use a figure that may not be what you actually earn but what someone says that you theoretically could earn.

Ross Greenwood: There’s a bit of a fight over that at the moment, do you know?

Michael Rice: There is. Someone said to me the other day, there can be hundreds or thousands of small adjustments, $2, $3 a quarter. How do you live when you don’t even know what you’re going to get?

Ross Greenwood: That’s very true.

Michael Rice: While the differences might be trivial, why do we have such a complex system? How do you work it out?

Ross Greenwood: Tell you what, we’ll come back to you and talk another day. I know. It is so difficult. That is a problem for so many people these days, and why it needs to be simplified. Micheal Rice, one of Australia’s leading actuaries, one of the co-authors of this green paper. Of course, with Rice, one of the actuaries, the other part of this that is also controversial, consideration should be given to some form of universal death duty so that it goes down. We’ll talk to Micheal Rice another day about that. Many thanks for tonight, Michael.

Michael Rice: Okay. Take care, Ross.

Image source: 2GB

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