Scott Morrison's budget solution rests with revised pension home loan scheme

There's a little-known government reverse mortgage scheme, the pension loan scheme (PLS), which will necessarily become part of Minister for Social Services Scott Morrison's solution to the pension assets test conundrum.

Most people may not be aware that the scheme exists and although the PLS is listed on the Centrelink website, it does not appear prominently. 

My barber told me about it. 

The issue has arisen given the proposal that family homes should be included in the assets test, raised last year in the Abbott government’s National Commission of Audit and a hot topic last week. 

Morrison suggested he would be addressing the rules that deter the elderly from selling the family home and then downsizing to a smaller, cheaper properties, while allowing pensioners to retain some cash without reducing their entitlements.

However the government scheme is currently only available to better-off retirees exchanging equity in their homes for a loan that is repaid from the proceeds when the home is eventually sold, the interest on the loan being capitalised.

The Centrelink and Department of Veterans' Affairs scheme is restricted to those on a part age pension, who own their own home or investment property.

The loan has to be taken as an income stream and is limited to that which, when added to the part-pension, takes them to the maximum pension.

The interest rate is 5.25% and fixed, which is much lower than the variable interest rates charged by reverse mortgage providers in the wider marketplace.

But oddly retirees who are poor enough to be on the full age pension and who own their own homes are currently unable to boost their income through the government scheme.

Self-funded retirees who own property can access the scheme if they are ineligible for the age pension under either the income test or the assets test, but if they are ineligible for the age pension under both tests, they cannot access the scheme.

The Australia Institute says the scheme is available to retirees who need it the least and says the scheme should be made available to everyone of pension age.

"This may seem consistent with the broad goals of means testing," the institute suggested in the 2014 report, Boosting retirement incomes the easy way - Extending the Pension Loan Scheme to all retirees.

"Those with both high income and high value assessable assets cannot use the PLS.

"But it also has consequences that seem perverse. A retiree with income just under the threshold and very high value assets can use the PLS, as can a retiree with very high income but assessable assets just under the threshold.

"But a single retiree with just over $202,000 in assessable assets and just over $160 private income a fortnight cannot access the scheme, as their pension is reduced under both tests."  

On the Australia Institute's numbers complied by researchers, Richard Denniss and Tom Swann, the scheme could be expanded without significant cost to the budget. 

"A simple modification to the PLS that would, in making it fairer, significantly help to boost the retirement incomes of a large number of current retirees," the report said. 

The Australian government will spend around $36 billion in 2014-15 on tax concessions for superannuation, the stated purpose of which is to increase retirement incomes.

The PLS has been in place in some form since at least 1986, and the interest rate has since been adjusted.

The researchers noted it was unlikely that governments and policymakers would have let a costly but regressively targeted loans scheme remain in place without it attracting attention – especially given current concern about budget deficits.

They then noted that the PLS is not mentioned in the 2012-13 Department of Human Services Annual Report and the Australian Instutute could not find mentions in previous annual reports.

Nonetheless, it is likely the scheme is run at a low cost to the government and could be expanded on a cost-neutral basis, it is suggested.

Indeed, given current concerns about the budget deficit now and down the track, the Abbott Hockey government could readily reform the scheme so that it actually generates revenue.