In the first decade of the 21st century Australians learned to borrow more to buy houses than they did to finance businesses – a strange state of affairs when you consider that the number of people living in each dwelling was virtually static over that period.
Cheap credit helped us bid up the price of houses, while business borrowing lagged for a few years and then positively flat-lined after the global financial crisis, as the chart below shows.
Older Australians live in houses that are now worth an awful lot of money in financial terms, but which perform much the same function they always did – keeping the occupants safe and comfortably housed.
And yet there is another function of housing that has been encouraged and fostered by tax and superannuation law over the same period – houses are the main vehicle through which we leave wealth to our descendants.
There’s nothing new about that, of course, but what is relatively new is the relationship between the value of houses and the pension and superannuation systems.
Looking at the chart above, it’s important to remember that when Paul Keating lost power in 1996, the compulsory superannuation system he set up had only been around for five years.
That meant relatively few retirees had enough in super savings to make them ineligible for a pension or part pension.
Most who did were relying on earlier company or public service pension plans. En masse, old Aussies were on the ‘age pension’.
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So what’s changed? Not as much as should have been the case.
In essence, the average Australian has a thumbnail sketch of their finances that goes something like this:
• I need to own a house so I don’t have to pay rent in old age, and it’s something to hand on to the kids;
• super won’t be enough to live on, I have to contribute to it by law;
• I’m entitled to a pension – after all, I’ve paid taxes all my life.
The problem with this view is that, unconsciously or otherwise, we don’t have a problem pouring a third of each month’s pay packet into our mortgage because we know our kids will get it all back one day, whereas there is a disincentive to pour money into our super (for the fund manager to invest in businesses) because it will only reduce the amount of pension we receive in old age.
Well, now things are getting tricky, with social services minister Scott Morrison announcing on Thursday that around 91,000 retirees on a part pension, will no longer receive it after 2017.
If you’re too rich for the pension, you can borrow money to live on at concessional interest rates. If you’re of modest means you can’t.
Those kicked off the pension list have assets worth more than $823,000 in investments, which the government reckons is enough to live off. The old figure was $1.1 million.
In making that announcement, Morrison promised that the family home will not be part of the assets test for pension eligibility and “never will be under a Coalition government”.
The home as a means of handing money between the generations remains sacrosanct.
Or is it? One of the anomalies of the Australian pension system is that a small number of wealthy Australians – those who fail either the assets or income tests for receiving a part pension, but not both – can still receive the amount of a full pension through a scheme called the ‘Pensions loan scheme’.
The scheme has been around for 20 years, but nobody seems to know why.
It is probably most applicable to old farmers who live on, but no longer work their properties, as it allows the retiree to borrow the full pension from the government each fortnight, at a current interest rate of 5.25 per cent, which is paid back with compounding interest when the property is sold or the retiree dies.
As a recent Australia Institute report puts it: “Put simply, retirees eligible for the full age pension are ineligible for the full PLS – only those ineligible for the age pension are eligible for the full rate PLS.”
Bizarre. If you’re too rich for the pension, you can borrow money to live on at concessional interest rates. If you’re of modest means you can’t.
Now it may be that some of those 91,000 part-pensions who’ll lose money after 2017 may want to look into the pensions loan scheme to remain living in the manner to which they’ve become accustomed.
However the Australia Institute is pushing a more radical agenda. It would like to see the PLS available to all retirees who live in valuable homes but who live on meagre incomes.
That would dramatically alter the relationship between the three cornerstones of Australian wealth management and retirement – home, super and pension.
It might even see a rebalancing of the notion that “the house is for the kids, the super for me”.
That in turn could see less borrowed for houses, more for businesses, and a return to a more balanced distribution of capital across the economy.