While all the current attention is on the exemption of the family home from the age pension assets tax, a more important issue for current and future retirees is the harsh treatment of non-homeowners.
Our social security system was designed when house prices were low and rents affordable and over the years scant attention has been paid to the changing situation of non-homeowners. Now with low investment returns and much higher rents, the financial situations of non-homeowners are deteriorating rapidly, forcing many to draw on their capital to live.
Consider the facts. The maximum level of rental assistance for non-homeowners of $120 a fortnight or $3120 a year has not changed for many years despite rising rents. Non-homeowners are subject to the 50 per cent pension income test even on income needed to pay their remaining rent and the assets test only provides an additional $146,500 exemption to non-homeowners.
Even increasing this additional asset test exemption to a more realistic $500,000 would not provide sufficient compensation for rental costs because the separate income test makes no allowance for the rental needs of non-homeowners. As a result, even if pensioners are able to earn the new maximum deeming rate of 3.25 per cent on the proceeds from selling a house, they will lose financially and be forced to draw down their capital.
A simple example highlights the potent effect of current income and asset test arrangements on non-homeowners. Consider a single homeowner on the full age pension owning $202,000 of other assessable assets who sells the home and invests the net proceeds of $500,000 to provide more flexibility with their income.
In this situation, the assets test determines the pension entitlement. The net sale proceeds less the $146,500 non-homeowner exemption is subject to the asset test at a rate of 3.9 per cent.
The end result is an annual reduction in pension entitlement of $13,787. Even after receiving the maximum rental allowance of $3120, the net pension payment falls by $10,667. Investing the sale proceeds of $500,000 at the maximum 3.25 per cent deeming rate would generate an annual income of $16,250. Overall a net amount of $5,583 annually would be available to pay rent.