Jenny is in her early 60’s and partially retired from a career as a nurse. She’s managed to hang on to acreage in regional NSW despite long periods at home with four kids. As she approaches retirement, she wonders how she can keep the property. Her meagre super balance along with the pension will not be enough. For starters, the old farm house is falling down around her. Not to mention the sheds. She needs to liquidate some of the equity in the property without selling up entirely.

Enter the federal Pension Loans Scheme – the government’s reverse mortgage scheme for pensioners.

The scheme allows pensioners to unlock the equity in their homes via a pension loan at 5.25% p.a (compounding interest), about 1% less than the existing commercial reverse mortgage interest rates.

Previously, the scheme was only available to part-pensioners to boost their income to the value of the full pension,

Under changes announced in this year’s budget, the Pension Loan Scheme can be accessed by anyone past retirement age (65+) up to 150% of the pension.

This means retirees can claim up to a maximum of $35,396 for a single person and $26,680 each for a couple, with the difference from their pension being borrowed against their home.

Incentives to go & the means to stay

The changes are somewhat at odds with measures in last year’s budget, demonstrating the political line the government is attempting to walk. On one hand, housing supply issues; on the other hand, retiree aspirations to ‘age in place’.

Last year’s policy allows people aged 65 and over to make a tax free contribution into their
superannuation of up to $300,000 ($600,000 per couple) from the proceeds of selling their home. These concessions aim to coax empty nesters out of large homes in established neighbourhoods, reducing structural imbalances in the property market.

In reality, these incentives only benefit wealthy “self-funded” retirees who don’t rely on the pension. Pensioners are unlikely to move the equity from their family home into their superannuation; superannuation is subject to the pension asset test whereas the family home is not.

By expanding the Pension Loan Scheme, the government is enabling retirees to draw out the equity in their homes rather than downsizing.

Perhaps, policymakers have realised that even if pensions were unaffected, using the tax and transfer system to induce downsizing is unlikely to be effective.

Retirees occupying big, empty homes are not especially motivated by money, as the Grattan Institute pointed out in their recent Housing Affordability paper:

For two-thirds of older Australians, the desire to ‘age in place’ is the most important reason for not selling the family home…

Often they stay put because they can’t find suitable housing in the same local area…

In established suburbs where many seniors live, there are few smaller dwellings because planning laws restrict subdivision. And even if the new house is next door, there’s an emotional cost to leaving a long-standing home, and to packing and moving. Therefore when people are considering downsizing, financial incentives are rarely the big things on their minds.

Undercutting the banks & a nudge in the right direction

At the very least, the government has undercut the retiree reverse-mortgage market. The Pension Loan Scheme offers fairer interest rates and guards against predatory lending by banks (listen to Denise Brailey on Renegades for the full monty on private sector asset stripping ).

An expanded Pension Loans Scheme opens the door to a fairer treatment of housing wealth in the pension assets test.

Currently the pension assets test assesses the family home in a regressive and unusual manner. The first $203k of the family home is subject to the assets test, but the remainder is excluded. That means one-bedroom unit worth $250k is considered in the same way as a $1.2m dollar unit. They both affect the pension up to the $203k threshold.

A more progressive policy would do the reverse – exempt an amount up to a threshold, then subject the remainder to the assets test.

The Pension Loan Scheme acclimatises owner-occupiers to the option of drawing a pension out of their home equity. This makes it more politically feasible to include that equity in the assets test.

It’s preferable to confiscate some home equity from the Asset Rich Income Poor (ARIPs) who rely on a pension, than it is to remove the pension (an existing source of income) from the asset rich.

This policy shift reflects Richard Thaler’s nudge theory, whereby subtle shifts in policy help people to make good decisions in their own interest.

Opening the door to a fairer treatment of housing wealth

The problem with our current tax and transfer system is it discriminates heavily against renters and in favour of owner-occupiers, including pensioners.

Currently owner-occupiers can shelter an unlimited amount of wealth from welfare exclusions and tax so long as they hide it in their home (or the land underneath it). This form of wealth preservation is simply not available to renters, however, they are able to hold about $200k more in other asset classes.

Wealth is an individual’s net worth (assets minus liabilities e.g. debts) , and this includes the equity in their home.

Income is the amount of money a person receives in a given period that is available for use on consumption.

Means is the ability one has to support themselves, which includes both a person’s assets and their income.

An individual can have a high income and few assets (e.g. a young doctor), or a low income and many assets such as savings in the bank (e.g. a retiree). It cannot be denied that pensioners who have more assets (including their home equity) are wealthier than pensioners who have fewer assets, even if they have a lower income.

Who does current policy really benefit?

The original policy rationale for favouring owner-occupiers was the assumption everyone could become a homeowner and thus benefit from the policy.

Ironically, the favourable treatment of owner-occupier housing has contributed to land price inflation. This has made the privilege of home ownership increasingly unattainable for young people as well as some retirees. Home ownership can no longer be considered a broad criteria for targeting welfare policy, if it were ever reasonable to begin with.

If we really care about helping retirees of little means, why have we created a system that privileges retirees on the basis of owning property (of residence) rather than on their actual means?

A fairer system would see the discrimination of property removed from retirement policy, especially given “saving” in owner-occupier land values is zero sum non-investment.

Including the family home in the assets test could go some way towards rebalancing investment away from owner-occupied land and housing.

Improvements in affordability wouldn’t be significant in the medium term, but it would reduce snowballing inter-generational inequality driven by land inheritance .

Retirees currently shield their accumulated land value nest eggs, relying on the aged pension to meet their basic needs.

Instead of transmitting land rents as bequests, those land rents could be used to provide much needed facilities and care for our elderly citizens. When you’re about to fall off the demographic cliff, signposting is everything.

Once home equity no longer becomes a sacred cow immune from government means testing, why keep it immune from taxation?

By providing universal reverse mortgages, expanding land tax using deferrals (as in the Pension Loans Scheme) becomes more feasible and acceptable.