Last week, Treasurer Scott Morrison warned young Australians not to expect they can rely on the age pension in the future. This was good advice, because the budgetary pressures facing the Commonwealth Government, emphasised again this week in grim forecasts of permanent deficits from Deloitte Access Economics, mean that the sustainability of current policy settings for the age pension is in doubt. Of course, one way the Commonwealth could improve the sustainability of the age pension is by limiting eligibility through including the family home in the means test. This would discourage retirees from tying up so much of their capital in housing, and would encourage them to draw down this capital to support their retirement.

There is partial support for this proposition from the Productivity Commission, which has today released an interesting research paper entitled Housing decisions of older Australians, in which it notes (p. 117):

In principle, including the full value of the principal residence in the Age Pension assets test would improve efficiency and equity.

However…removing the exemption entirely in the immediate future is intractable.

At a minimum, there is a strong case on equity grounds for setting limits on the value of the principal residence that is exempt from the Age Pension means test.

The thresholds beyond which the family home would be included in the means test could be $750,000 for couples and $500,000 for singles, as recommended by the National Commission of Audit, for example.

Also, in the interests of economic efficiency through encouraging labour mobility, the Productivity Commission recommended removing State Government stamp duty on housing transactions. This is another excellent policy recommendation. I hope this latest report from the Commission is widely read by policy advisers and their political masters.