A simple change to Australia’s biggest welfare program to end an “extremely preferential” bias in favour of homeowners should be considered to make the nation’s welfare system fairer. And it would remove perverse incentives for older Australians to hoard their wealth in housing, economists say.
The debate around reforming the eligibility rules for the Age Pension has been reignited after the federal budget increased taxes on investors in the name of intergenerational fairness. But analysis shows billions in support payments like the pension flow to older residents with a large amount of wealth.
Under the current system, homeowners are incentivised to upgrade to the most expensive home they can and sit on it until it eventually passes to their children as a tax-free inheritance.
“I think this is going to be one of the biggest political battlegrounds for the next decade,” economist Cameron Murray told Yahoo Finance on Monday.
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Commonwealth payments to seniors – namely the Age Pension and closely related payments – cost the federal budget nearly $70 billion a year. According to the Australian National Audit Office, the Age Pension was the second largest cost for the Australian government accounting for 8.4 per cent of the federal budget, and the biggest component of total social security payments at 42.5 per cent in the 2024/25 year.
That likely won’t be sustainable in the years ahead.
That’s why Melbourne-based think tank, Policy Institute Australia is pushing for a simple change to how means testing works for recipients of the Centrelink payment.
Henry Williams, the think tank’s Director of Policy, said it’s a common myth that the family home isn’t counted in the asset means test for the pension.
“The way that means testing is done with the Age Pension, it has extremely preferential treatment for owner occupied housing,” he said on the Fresh Economic Thinking podcast published this morning.
“Homeowners have different asset test thresholds to non-homeowners. But the difference between these thresholds is about $250,000. And other than that, the home is not counted,” he explained.
“What that means is that someone with a $5 million home is being treated exactly the same as someone with a $500,000 home. And both of them have been treated more preferentially than someone who’s a renter, who doesn’t own at all.”
