PensionReforms summary and comments
Australia's Tier 1 "Old Age Pension" is subject to alternative income and asset tests that can reduce the state pension to nothing.  The test that produces the larger reduction applies.  An owner-occupier home has special treatment in that regard with the asset test.

This report focuses on the effect of the income/asset tests on pensioners' decisions whether to trade down the family home after retirement.

The report notes that Australians who are age 65+ move less frequently than younger Australians.  There are several possible reasons for this but economic considerations seem important.

"What evidence we have suggests that owner-occupiers whose household head is 65 and older consume more housing services than they would ideally like.  There are a number of possible reasons for this.  Here, we emphasise the importance of taxation and, especially, age pension provisions in discouraging elders from trading down their large homes.  Trading down an owner-occupied home can precipitate loss of the age pensions under a large number of plausible scenarios.  This has costs not only to the individuals concerned; the housing market as a whole is unnecessarily restricted, and house prices are probably higher than they would otherwise be.  This disincentive to trade down will become more important as opportunities for another lifetime move increase.  Policy reforms aimed at liberating the housing market should be persuasive to policymakers."

What to do about this problem?  One possibility, according to the report, is to "quarantine" the surplus released from trading down the family home so that this doesn't affect the entitlement to the Tier 1 pension.

PensionReforms thinks this is a less than optimal solution.  Apart from anything else, it would encourage the ownership of more expensive homes before retirement in order to capture the advantage conferred after retirement by the suggested "quarantine".  Market distortions are therefore shifted from post to pre-retirement.  More fundamental changes are more likely to free up the post-retirement housing market.

The current combined income/asset tests are very complex.  Most Australians who are making saving and retirement decisions would not understand them.  Indeed, many apparently do not appreciate the link between increasing compulsory Tier 2 assets and reducing Tier 1 pensions. The income/asset tests may be "fair" but that is at the expense of understanding and costly administration.  The "quarantine" proposal would increase that complexity.

Eliminating the income and asset tests would simplify Tier 1 and would also eliminate expensive avoidance techniques that allow those who can afford advice to reduce or even eliminate their impact.

Removing tax preferences for the compulsory Tier 2 would then probably pay for the suggested changes to Tier 1 (and would also simplify Tier 2 as well).  The tax preferences now cost nearly as much as Tier 1 itself.

The report suggests that the income/asset tests lead retirees to "over-consume" housing services.  If the income/asset tests were removed, the post-retirement housing market would be freed up entirely so that retirees would then be free to reduce their consumption of housing services without penalty.  (File size 160 KB)  182