Flat White

Using your equity in retirement

7 August 2021

12:24 PM

7 August 2021

12:24 PM

Australia has had a national age pension since 1909. Introduced by the government of prime minister Andrew Fisher, it mostly replaced the private charity of benevolent societies. Not a lot of people qualified for it — you had to be 65 years old when people typically didn’t live much past retirement age, and there was a means test.  

It was also seen as charity by another means, continuing the expectation that people would save for their retirement and only receive the pension if they were unfortunate or indolent. Being a pension recipient was nothing to be proud of.  

During the twentieth century a lot of countries introduced contributory age pension schemes in which taxpayers contribute money in addition to their taxes. With these, everyone receives a pension once they reach retirement age, irrespective of need, with the amount dependent on how much they have contributed.  

Australia did not do that. Age pensions are still only paid to those who satisfy the means test and nobody directly contributes, or has ever contributed in the past, to their age pension. Our only obligatory retirement saving is via compulsory superannuation.  

But if eligibility for the age pension has not changed, attitudes most certainly have. A great many Australians now believe they have an absolute right to a pension upon reaching pension age. Moreover, while they understand there is a means test, they will go to enormous lengths to ensure they pass it.  

Perhaps this is a result of so many migrants arriving from countries in which contributory pension schemes operate. Maybe it is because so many other government handouts have created a sense of entitlement. Whatever the cause, that view is now deeply entrenched.   

The result is a very expensive problem. More than a third of the government’s entire budget is committed to welfare and social security. Of this, $54 billion goes to pay for age pensions. That’s $10 billion more than the entire defence budget, including army, navy and air force. And with retirees increasing as a proportion of the population, it can only increase.  

An obvious solution is to modify the means test to include total wealth, including the family home, so that retirees use more of their own resources before claiming other people’s money. As it stands, people with very substantial homes can receive a pension at least partially funded by taxpayers who will never be able to afford to buy a home themselves.  

This is politically risky. When I first wrote that the family home should be included in the pension means test, thousands wrote to disagree, many not politely. The government hears the same voices. There is even an industry super advertisement in which a couple declares they would hate to have to sell their home to fund their retirement.  

For a lot of retirees, replacing the family home with something less expensive and lower maintenance would actually make a world of sense. Many could live far more comfortably and have money left over to enjoy life, perhaps not even needing the pension.  

For those reluctant to sell, borrowing against the home is also an option. A reverse mortgage, for example, is a loan that is only repaid when the home is sold. Similarly, the Pension Loan Scheme enables retirees to borrow from the government using their home as security. Both provide additional income and can reduce reliance on the pension, yet neither has proved popular.  

A recent incentive is to allow anyone over 60 who downsizes their home to contribute $300,000 to their super fund. This creates a clear link between home equity and retirement, addressing the fear of many retirees that they lack sufficient super to live without a pension.  

There’s a good chance nothing much will come of that either. The British government is similarly dealing with reluctance by the elderly to sell their houses to fund aged care because they believe it should be provided at no cost even to people who own expensive houses.  

Some of those opposed to either selling or leveraging the family home are family members who hope to inherit it. The challenge for the government is to convince them that their inheritance should not be underwritten by handouts funded by other people.  

In fact, convincing Australians that they are not entitled to a pension unless they are relatively poor is probably not achievable. In that case, the solution may be to follow other countries and convert the aged pension into a contributory system.  If nothing else, when people then claim they have a right to a pension because they paid for it, it will eventually be true.  

David Leyonhjelm is a former senator for the Liberal Democrats  

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