Asset test plans will skew retirement savings strategies
The higher assets-test taper rate announced in the budget penalises those saving for their retirement.
Instead of reducing future costs, the budget age pension assets-test proposals to apply from January 1, 2017, could well lead to even higher age pension outlays as retirees adjust their savings strategies.
While even some rational economists welcome the proposed doubling in the assets-test taper rate, reducing pension eligibility by 7.8 percent of assessed assets will encourage the dissipation of capital and over-investment in the family home.
With the cash interest rate at 2 percent and conservative shares including franking credits yielding about 6 percent, a 7.8 percent taper effectively confiscates all the income and part of the investor's capital each year. About $1million of assets is required to generate a married couples' annual indexed age pension entitlement of $33,717. Yet the new rules deprive a couple with this level of assets of any pension income.
Future retirees will soon realise the new married couple homeowners' asset-test-free area of $375,000 will, along with the full age pension, generate a higher income stream than $1 million of assets.
The minister commented that current pensioners who lose out under the changes will be able to maintain their income by using up to 1.8 percent of their capital annually to live. But many existing pensioners may discover that reducing their capital by much larger amounts will help them retain their pension entitlements. Spending up on holidays, cars and consumer durables, improving the family home or providing gifts to family members five years or more prior to retirement are all ways to increase age pension entitlements
The changes will also deter retirees from selling their home or downsizing because of the much harsher assets-test treatment of any surplus cash received. This is despite the proposed increase in the additional assets-test exemption for non-homeowners from $147,000 to $200,000.
While a positive step, this higher allowance is still well below the value of even an average home. It certainly is not sufficient to allow non-homeowners to generate the additional income needed to pay their rent.
The 7.8 percent assets-test taper will effectively also mean that unlike at present there will be little if any income available from the sale proceeds above $200,000 to help meet rental costs. There is no escaping the basic fact that with a generous indexed age pension available to all eligible residents of Australia for 10 years or more, there also needs to be tangible financial rewards for retirees funding their retirement.