When there’s a change of prime minister, projects that had been placed on the back burner suddenly heat up again.
And so it was this week, when crossbencher senators saw a chance to liberate billions of dollars of equity locked away in retirees’ homes.
Jacqui Lambie, Glenn Lazarus, Ricky Muir and Nick Xenophon this week released costings for a plan that fell flat with the Abbott government, but which they hope will find favour with Prime Minister Malcolm Turnbull.
Australia’s tax, pension and superannuation systems have led to a situation in which many older Australians are sitting on large amount of capital in the form of the family home.
It is exempt from the assets test for the pension, so a retiree is encouraged to sit tight on that fortune until they die – in some cases living a ‘cash-poor, asset-rich’ existence that will eventually provide a giant windfall to their heirs.
The net result is a vast pool of lazy capital. It can’t be spent now, even though Australia badly needs increased private demand to fuel the economy.
And when it is finally transferred to those bewildered heirs, baby boomers’ kids will be receiving the biggest intergenerational transfer of wealth in Australian history.
Many won’t know what to do with it, and it will be too late for many of them to use that money to start businesses, employ fellow Australians and drive prosperity.
In economic terms, then, it will be a shock.
The cross-benchers think they have a way to reduce that shock, by extending the already existing Pension Loans Scheme.
How does the scheme work?
This wonky, upside-down scheme allows retirees who are not eligible for the pension to borrow money from the government at very low interest rates to turn some of their huge asset into an income stream.
The reason that’s upside-down is that people on a full-pension are excluded even though many would love extra money to spend on things such as presents for the grandkids, extra visits to the cafe or RSL, lawnmowing, cleaning, and so on.
So the cross-benchers want to do one of two things – with both plans guaranteeing not to kick retirees out of their homes, no matter how long they live.
Firstly, they would increase the amount full pensioners and part-pensioners can borrow.
At present, someone on a full pension can’t borrow a cent, and somebody on a 50 per cent part-pension can borrow 50 per cent of another full pension amount. Somebody on zero pension can borrow up to 100 per cent of a full pension.
Confused? You should be. The less you need the money, the more you can borrow!
Under the proposed scheme, the maximum amount any full pensioner or part-pensioner could borrow is the amount that would bring their income up to three times the pension – subject to them having enough equity in their home to pay it back when they are deceased.
The second proposal would allow superannuants who receive no pension to borrow up to three times the full pension as well.
In either scenario, the government would be using its borrowing power in the bond market to deliver the cash to retirees at rates well below anything commercial ‘reverse mortgage’ providers could match.
The costing also assumes that most people would not borrow the full amount, simply because the “borrowing limit is set for each participant based on their age and equity at the establishment of the loan”.
Whose money are you spending?
If you’re 90, living in a $2 million home you can borrow a lot, but if you’re 67 and living in a $1 million home you’ll be allowed to borrow a much smaller amount.
Effectively, the retiree is spending part of their heirs’ inheritance. While that might upset a few spoilt Sackville-Baggins types, it would effectively bring forward private spending in the economy.
The money locked up in mum and dad’s house would be spent over many years, by them, rather than in an orgy of consumption by their children. (Damn. There goes my Ferrari.)
Parliamentary Budget Office costings requested by Senator Lambie show that after only three years, interest on the loans would make the impact of the scheme positive in fiscal terms – it wouldn’t cost taxpayers a cent.
The PBO report states: “These loans are treated as investments by the government, and transactions relating to investments do not have the same impact on the fiscal and underlying cash balances in the same financial year.”
The only major risk to taxpayers would be a major property price crash, which would wipe out the equity being offered in return for the loan. To mitigate that risk, the PBO allowed for the administrative costs of re-assessing the values of homes each year, and adjusting the amount that could be lent against them.
The PBO reckons the scheme could liberate $2.8 billion a year, which would have a stimulatory effect by boosting private demand now rather than in 10 or 20 years.
And the scheme could actually grow much bigger. The PBO reckons the first version described above would create 40,000 new loans, and the second version would add another 1000 loans, but it notes that those forecasts have a “very low reliability” because there’s a risk of the scheme being wildly popular, or not popular at all.
“Due to the very low take-up of the current PLS, there is insufficient administrative data to reliably inform behavioural assumptions,” it says.
Well yes, but some things we do know.
We know that with four cross-benchers already on side, it would likely have an easy passage through parliament for the proposed start date of 1 July 2016.
We also know that many pensioners rattling around in million-dollar homes don’t know about the existing scheme.
If told about it, and allowed to join the scheme with larger loan sizes, they’d be highly likely to want to spend a bit of their own money before they die.