New Pension Law
Under the new pension assets test incorporated into the Social Security Act, which takes effect on 1 January 2017, your home counts for $200,000.
For example, a single homeowner can own $250,000 in assessable assets before they begin losing the pension. For a single non-homeowner, the cap is $450,000. The threshold for a couple who own a home is $375,000, while a couple with no home is allowed $575,000.
This means that whether you are single or part of a couple, the value of homeownership is $200,000 under the new pension assets test.
The change is not much, as under the old law, the cap for a single homeowner was $209,000, $360,500 for a single non-homeowner, and $296,000 and $448,000 for couples.
So, homeownership was valued at $151,500 under the old assets test.
Under the new assets test, both the value of homeownership and threshold has increased.
The changes will not result in people losing their full pension. In fact, 50,000 more individuals will get it. An extra 120,000 part-pensioners could see a rise in payments.
However, hundreds of thousands of Australians will also say goodbye to the part pension starting 1 January 2017, as much higher taper rate will take effect.
Pensioners stand to loose $3 every fortnight per $1000 in assets over the pension cap. That taper rate is similar to the one in effect 10 years ago before it was amended to a more-generous $1.50 in the 2006 budget.
So a single homeowner will say goodbye to their pension if they have $542,500 in assets, while singles with no homes are allowed $742,500. The threshold for couples is $816,000 if they are a homeowner and $1.106 million if they’re not.
Again, the value of homeownership is roughly $200,000.
The new rules are much stricter or much more targeted compared to the past threshold, depending on your outlook. The old limit allowed couples to have $1.175 million on top of the family home and still collect a part pension.
But regular indexation of the pension, which happens every March and September, applies to these thresholds. The exact limits will be known in late October 2017, when the new pension rates are announced by the Department of Social Security.
About 90,000 individuals are likely to loose their part pension, while an additional 235,000 will see their payments cut.
Home ownership should count more
The new rules would affect some people, but the fact is pension reform should be further expanded, home ownership, in particular, should count for far more than $200,000.
Nothing would be left of the $200,000 in eight and a half years for a renter in Newcastle, where the median rate is $470 per week for a house, or $420 for an apartment. And this is taking into account the unlikely scenario that rent would not increase in that time period.
Renters in Melbourne would have closer to a decade, with a $400 a week median rent for a house and $390 for apartments. But renters in Sydney would have nothing left in just seven years.
Retirees with homes may not own much liquid assets, but retirees with no home should have a right to more assistance than they are currently getting.
Intergenerational fairness is also at play here. A lot of Baby Boomers have become very rich, thanks to the property boom in the late 1980s. They may not feel rich, but it’s all relative.
People are discouraged from downsizing to release their capital due to quarantining the family home from the pension assets test and other tax schemes such as capital gains tax.
However, Baby Boomers comprised a good portion of the population that whether they buy, sell or hold, the market can get distorted. If they are living in properties that are larger than what they need to not lose their tax and pension benefits, this cuts off the natural supply in the housing market.
Building new houses can only help minimally as majority of the people purchase second-hand homes and there is very little land available in Newcastle without going to the outer suburbs.
There is merit to the idea of exempting the family residence from the pension test. This is because pensioners have to live somewhere, rather than safeguard one form of assets for inheritance purposes.
The Gen X and Gen Y are satisfied with being the tax base for the age pension, as assisting our fellow citizens in retirement age is part of being in a society. But many of us are feels wronged, and rightly so, for helping rich property owners get pension while we don’t have enough to pay for a home of our own.