04/12/2015 - 12:29

Welfare system distorted, inequitable

04/12/2015 - 12:29

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The inclusion of the family home in means testing for the age pension would be one of a number of ways to pare back a recent expansion of middle and upper class welfare, according to two recent reports.

Welfare system distorted, inequitable
Claisebrook Cove.

The inclusion of the family home in means testing for the age pension would be one of a number of ways to pare back a recent expansion of middle and upper class welfare, according to two recent reports.

The existing system may be encouraging excessive investment in housing equity, and acts as a brake on retirees selling their housing, the Productivity Commission found in its research paper "Housing decisions of older Australians".

That’s because their primary asset’s exemption from means testing gives potential pensioners an incentive to load up more cash into the family home, as opposed to holding stocks or other financial instruments.

The commission’s findings follow a suggestion in the Henry Tax review in 2010 that family homes above a certain threshold value would be included in assets tests, and by the Grattan Institute that there be no exemption for the principal residence.

In the Grattan model, cash-poor and asset-rich pensioners could instead draw down a pension against the value of their home, which would be repaid from their estate.

The Productivity Commission report also said that red tape limited downsizing options for many pensioners, while there was a broad reluctance to tap into home equity to fund retirement.

Institute of Public Affairs senior research fellow Mikayla Novak said there had been a general trend towards higher welfare payments for wealthier Australians in recent decades as means testing rules had become more lax.

Total subsidies to the top 20 per cent of income earners via cash welfare and public service provision, through areas such as healthcare and education, were around $23 billion annually, she said.

“If the government is looking to be serious about addressing the budget problem, it has to ensure, in part, that the welfare system is made more efficient and effective,” she said.

“An important part of that story will be making sure the welfare system is better targeted to those people on low incomes who genuinely need assistance.”

The existing system was problematic in both an equity and economic sense, and there were other reforms that could be made outside of the aged pension, Dr Novak said.

“For example the childcare rebate system should be means tested,” she said.

“I think most people would agree that it’s patently unreasonable and unfair that wealthy families are able to effectively receive 50 per cent rebates off the cost of their childcare just like a mother on lower incomes who’s actually struggling to pay the bills.”

Such a move would save between $250 million and $300 million annually.

Further changes could affect the family tax benefit system, to improve targeting and reduce churn.

Dr Novak found that middle-income households received more in benefits than they paid in income tax, on average.

The gap was more than $100 per week, with tax payments about $348 and benefits of $462.

The savings could enable higher payments for those in the worst financial situations, while still contributing to improving the budget bottom line.

For example, if the entire welfare budget were directed solely at people under the poverty line, each would receive $48,923 per annum.

Overall, tightening means tests would save around $8 billion, Dr Novak said.

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