The great Aussie dream of home ownership has long also been seen one of the best ways of accumulating personal wealth. It used to be that as long as you had a solid job, and worked and saved hard, home ownership was largely achievable for anyone who pursued it.
One of the reasons property ownership has been so popular in Australia has been the tax and welfare incentives available to those who invest in a family home. In 2013, for example, tax and welfare concessions of $36 billion a year were available for owned homes but not for other investments, according to a new report from the Grattan Institute.
And there’s been an added advantage to owning your own home when you get older. “Government subsidies for aged care are less affected if a person owns a home rather than other assets,” the institute pointed out.
But while older Baby Boomers who were able to use the rocketing value of their properties to help pay down or pay off their mortgages before they entered retirement have largely benefitted from Australia’s surging property prices, younger Baby Boomers don’t look set to reap the same advantages when it comes to owning a home in one’s later years.
If current trends continue, a greater proportion of people reaching retirement age will be renting, with more of them depending on the private rental market rather than social and public housing, the Grattan Institute forecast in its new report. And those that do own their own home will be still paying off their mortgage in retirement. (The proportion of 55-64 year olds who own their houses outright fell from 72 per cent in 1995-96 to 42 per cent in 2015-16, the institute found.)
Some of these retiring mortgagees will, quite rationally, use some or all of their superannuation savings to pay off their mortgage debt – despite the main objective of the superannuation system being to fund retirement. But for those left with mortgage or rental payments in retirement, a lean lifestyle is likely in store, because the Aussie superannuation and Age Pension systems assume retirees own their homes outright.
“Retirees who have paid off the mortgage are insulated from rising housing costs, a substantial safety net if they exhaust their retirement savings,” the Grattan Report said. “Home ownership is particularly attractive for retirees because in effect, only the first $203,000 of the value of the home is included in the Age Pension assets test.”
The report notes that the tax-free benefit, where the value of the family home is largely excluded from the Age Pension assets test, is worth at least $7 billion a year to home-owning pensioners.
But the institute points out that the current system encourages an unfair scenario in which “many households with significant housing wealth receive a full-rate Age Pension, while many pensioners who do not own their homes get much less pension despite having less assets overall”.
To even out the gap – so, in effect, the benefit of the housing boom isn’t held in the hands of an older demographic, while even younger Baby Boomers continue to struggle to pay rent or mortgages on their retirement income – the Grattan Institute has suggested that pensioners with particularly valuable homes have their main residence included in the Age Pension asset test. Exempting only the first $500,000 from the asset test, and thus slashing the amount of pension many homeowners are entitled to, would help distribute more welfare back to lower-income earners.
That would have the effect of reducing the gap between the lucky, older housing boom winners and those that have been priced out of the market or are struggling to pay off a huge mortgage necessitated by the rise in property prices.
The institute conceded that changes to the Age Pension are inherently unfair, because current retirees have already planned and organised their retirement finances.
“But this is less of a concern with a reform that primarily affects inheritances rather than retirement incomes,” it said. “This reform reduces the unfairness of the current system that treats homes and other assets very differently. And it seems unfair that the current system pays welfare to retirees who own homes that many in a younger generation will never be able to buy.”
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