The government’s proposed change to the age pension assets test may have unintended consequences. The plan to lower the asset threshold for age pension eligibility has the potential to unleash a wave of retirees investing in new homes. And it could lead to a selloff in income producing assets, like stocks, to fund new home investments. In order to explain why, we need to look at the assets test itself.
If you’re like me, you might find the assets test for age pension inherently flawed. That’s because it has its priorities wrong. It assesses pension eligibility based on the total value of assets you own — not how much income you receive from those assets.
Now, it’s important to remember that the family home isn’t included in any asset test. Everything else however is assessable. That includes investment properties, stocks, cash or bonds.
You can see what’s wrong with this straight away. The assets test should be looking at how much income you receive from your assets. If the issue here is how much pensioners need to live off in retirement, why isn’t income the main priority? Doesn’t it make more sense to assess eligibility based on what income you receive, and not the assets themselves? I think it does.
That’s why the proposed change has its priorities mixed. What it may just end up doing is sending retirees rushing back into the property market because the family home is exempt from the assets test.
In other words people are likelier to sell assets like stocks, and reinvest their money into a new home. That would achieve the aim of lowering total assets.
This could result in a glut of pensioners moving up from their existing homes in a bid to keep hold of their pension entitlements. That’s exactly what the property market (read bubble) doesn’t need now — retirees buying up $1 million homes. In fact, the Department of Social Services estimates this could unleash 100,000 new buyers in on the market.
So why does the government want to change the asset test threshold for age pensions? It’s simple really. And it all relates to superannuation.
Why the government wants pensioners with larger super funds to spend their money
If you’re a retiree with any kind of superannuation savings, the government has a word of advice for you. Spend more, and save less. And one other thing: don’t worry about your children’s inheritance — they’ll be fine.
The government is arguing that people with substantial super should be spending more of it. They think far too many retirees are taking out pensions, and leaving their super as an inheritance. The AFR reported that the Treasury had findings showing that most retirees had roughly 50% of their superannuation left over when they died. That’s too much, the government says. In order to save money by cutting down on pensions, they want wealthier Australians to use more of the superannuation.
To give you a quick example of how this might affect you, let’s assume you had assets of at least $750,000. Remember this includes any asset — like stocks — other than your home. Under the new proposal, you would receive $43,467 based on a 3% return on your superannuation. But you would get no pension.
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Yet someone with assets of $325,000 would be eligible for $33,717 in pension entitlements. Their superannuation would draw down $9750 for a total return of $43,467 in income. Altogether they would earn twice the amount of income as the person with assets over $750,000. You on the other hand would need to draw down more money from your super, without receiving a pension.
The government think you should be spending that money, not leaving it to secure your children’s future. That’s why they want to take your pension away. But if they really want pensioners to spend more of their super, they’re going about it the wrong way. All it may result in is a horde of new retirees pushing up property prices even further to protect their age pension.
That wouldn’t be the tonic for cutting expenditure on pension entitlements. And it wouldn’t help Australia’s out of control property market.
Contributor, The Daily Reckoning
PS: Most Aussie retirees rely on their superannuation to live out their dream retirement. But with fees and taxes, many lose out on thousands of dollars to super funds every year.
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