Unlocking home equity solution to ageing population

Unlocking home equity for seniors may not be the sexiest proposal around but it is one of the smartest and will help save the Budget from a full-scale blow out, according to new research released by the Property Council of Australia.

A new report by Grant Thornton shows that the 184,000 older Australians currently living in retirement villages save the federal budget $2.16 billion through delayed entry to aged care and reduced public health care expenditure.

The report shows that with the increase in the seniors population and a higher percentage of seniors forecast to move into retirement living, there will be a doubling in the number of residents wanting to live in a retirement village by 2025, up to 382,000.

Removing the disincentive for pensioners to downsize from their existing homes through tightly targeted aged pension reforms, would, on indicative estimates calculated by PwC, save the government $86 million per annum where those people choose to move to a retirement community.

This simple change would increase savings to the Budget significantly as the population ages said Chief Executive Ken Morrison.

“The release of the Intergenerational Report today showing that in just four decades time we will have more than 7 million Australians aged over 70, placing extraordinary pressure on the federal health and aged care budgets,” Mr Morrison said.

“Retirement communities already save the government $2.16 billion per annum. Extending this option further to the 75.1% of pensioners who own their home, but limiting it to the 1.11 million pensioners over 75, will extend these savings even further.

“Without policy changes now, governments will not be able to afford to meet the demand for services.

“A long-term view is needed – the substantial savings to be achieved in the health and aged care budgets by ending the penalty on full-rate over 75 pensioners wanting to sell their family home far outweigh the policy’s very small cost to the aged pension budget.”

Executive Director – Retirement, Mary Wood said: “This is a very simple, easily implementable policy solution to one of the biggest problems facing government.

“It affords older Australians a real choice about where they want to live during their retirement and allows them to be far more self-sufficient.

“The Property Council’s policy proposal is tightly targeted and has high-level costings to ensure the benefits are accessed by those in need and not so-called “millionaire retirees”.

“The benefits of this policy will also be felt in Australia’s property market – particularly in hot spots such as Sydney – where more large, family homes will become available for families and first home buyers as older Australians take up the opportunity to downsize.”

Media contact: Fiona Benson – 0407 294 620

Note: The Property Council’s Unlocking home equity for seniors policy proposal and key findings from Grant Thornton’s National overview of the retirement village sector report are below. A copy of the report is attached.

KEY FINDINGS FROM THE NATIONAL OVERVIEW OF THE RETIREMENT VILLAGE SECTOR

· Currently about 184,000 Australians live in retirement villages, or 5.7 per cent of the over 65 population. This rate is projected to increase to 7.5 per cent in 2025.

· Combined with the increase in the seniors’ population, means that there will be approximately 382,000 people wanting to live in a retirement village by 2025. This is more than double the 184,000 residents currently calling a retirement village home.

· Retirement villages offer a range of services and supports to their residents. As these services and supports are self-funded, there is an additional benefit of not only improving residents’ lifestyles, but generating savings to governments.

· The analysis has shown that this generates $2.16 billion in savings to the health care system. $1.98 billion of these savings are achieved by retirement villages delaying residents’ entry into government funded aged care facilities.

· In addition to the $1.98 billion saved through delayed entry to aged care, there is a potential $177 million saved through residents requiring fewer hospital and GP visits, earlier discharge from hospital, and better mental health.

PROPERTY COUNCIL OF AUSTRALIA’S UNLOCKING HOME EQUITY FOR SENIORS PROPOSAL

Background

Since 2013 the Property Council has been actively promoting aged pension reform that allows full-rate age pensioners to downsize without being penalised. This briefing note explains the rationale, the policy proposal, modelling, indicative costs and offsetting savings from allowing certain pensioners to exempt a small cash surplus from the age pension means test.

The Age pension asset test and how it stops people from downsizing

The problem

· Australians over 65 who satisfy either the income or assets test for the age pension are eligible to receive it. The full rate of pension is payable under the asset test for homeowners who have total assets (excluding principal place of residence) of less than $202 000 ($286,0 for a couple combined).

· For single pensioners who have more than $202 000 of assets, their pension is reduced by $1. per fortnight for every $1000 of assets over the threshold. E.g., if a pensioner with assets close to the threshold downsizes, and makes a cash surplus of $1 000 from selling her family home and buying a smaller place, her pension would be cut by $58 pa. This acts as a penalty, and means that most pensioners who wish to downsize choose not to.

· A survey of more than 2000 Australians over by National Seniors in 2014 showed that 30% of pensioners who are considering downsizing see the pension means test as a significant barrier.

· 1.39 million or 59% of all pensioners receive the full pension (basic rate is $776.70 per fortnight for a single person), with this number expected to increase over time.

· 75.1% of pensioners own their home, and 1.11 million pensioners are over 75 (a combination of full and part rate pensions).

The Solution

1. Make a highly targeted adjustment to the age pension means test, exempting a certain amount of home sale proceeds accruing to age pensioners who:

• are homeowners;
• aged 75 or over;
• receive the full age pension; and
• Purchase a cheaper home within 12 months (this aligns with the time Centrelink currently allows for sale proceeds from a family home not to be assessed). NB: a lower price is the best proxy for downsizing.

 

2. The amount of money exempted from the means test under our proposal should be set at somewhere between $100 000 and $200 000 in total, to avoid inequity (e.g. age pensioners who make hundreds of thousands of dollars out of a home sale should not retain the full pension) and achieve the public policy objectives below.

Unlocking home equity: maximizing the private and public benefits of downsizing

The policy criteria outlined above:

· Protect against exploitation (or ‘welfare creep’) by Australians who might qualify for a part pension (‘millionaire retirees’), but for whom the age pension asset test is not a real barrier to downsizing.

· Reduces government distortion of personal preferences, and enables older people on very low incomes to downsize if they wish to, and to live in smaller homes that are more manageable to clean and maintain, with lower rates and utility bills.

· Extends the independence of older frail people, and significantly delays entry into residential aged care, by freeing them to move into smaller homes and apartments that are designed for older people (no stairs, grab rails in bathrooms, close to public transport etc).

· Allows older people to enjoy a higher quality of life by accessing services they currently struggle to pay or can’t afford, e.g. private health care, home care services, meals-on-wheels, taxis.

· Enables pensioners to support themselves better, and reduces reliance on certain taxpayer subsidies for health and aged care (e.g. home care packages, PBS payments, residential aged care).

· Is a boost to the housing market – thousands of large family homes could be sold, and private money (age pensioner’s home equity plus capital investment by housing developers) is leveraged into greater housing supply.

· Does not rely on value or valuation of principal place of residence.

Savings from unlocking home equity

One of the most significant and direct cost savings is in reduced residential aged care expenditure by the Australian Government.

In 2014 consultants (Grant Thornton) were commissioned by the Property Council to quantify the savings to the health and aged care portfolios of people over 65 choosing to downsize to a retirement village, which evidence shows keep people healthier, happier and living independently for longer.

The savings represented by the current number of over 65s who live in retirement villages include $1.98 billion p.a. in federal aged care savings (Grant Thornton).

This is because people who live in retirement villages, who end up moving to residential aged care, enter on average 5 years later than the general population (Australian Institute of Health and Welfare).

As the annual cost to the federal government of an aged care bed is $51 078 (Productivity Commission – Report on Government Services, Jan 2015), a 5 year delay saves the government around $260 000 per person p.a.