The Australian Government’s Pension Loans Scheme (PLS) is a reverse mortgage scheme that allows people of pension age to access an income stream by borrowing against their housing equity. Currently it is only available people of pension age (or their partners) who are unable to receive a full pension because of the income or assets test. Amidst recent debates over the cost of aged care and the treatment of the family home in the pension assets test, two think tanks, the Australia Institute and Per Capita, have suggested expanding the scheme.
How it works
The PLS allows people to top up a part pension to the full rate or, for those not eligible for any pension, receive fortnightly payments equivalent to the full rate. It is open to people of pension age (or their partners) who have equity in Australian real estate that they can use as security for the loan. To be eligible the person or their partner must receive no pension or a reduced rate of pension due to the income or assets test (but not both). It is not available to those receiving the full rate of pension. Compound interest is charged on the loan and it is normally repaid if the home is sold or from the person’s estate after their death.
History of the scheme
The PLS was created in 1985 when the Hawke Government reintroduced an assets test for pensions. The scheme was first proposed by the Panel of Review of Proposed Income and Assets Test headed by Professor Fred Gruen.
The panel recommended an assets test that included the pensioner’s home. In doing so it recognised that an assets test could disadvantage people with assets that were difficult to sell, either because there were few buyers or for ’social or psychological reasons’.
To deal with this problem the panel proposed setting up a scheme that would allow people to receive a 'pension-sized' amount as a loan that could be recovered from their estate.
Despite the panel’s recommendation, the Government decided not to include the pensioner’s home in the assets test but took up the proposal for a loans scheme. The Opposition opposed the reintroduction of an assets test and was critical of the PLS. Senator Messner, the Coalition spokesperson for social security, referred to it as the ‘pay as you die’ scheme.
Poor take-up was a problem with the PLS from the beginning with only 13 applications for loans in its first two months.
The Keating Government responded to poor take-up by broadening the scheme from 1996. One of the major changes was to extend eligibility to people whose pension rate was affected by the income test. Take up continued to be low. According to the Productivity Commission, there were only 710 loans outstanding in 2010.
In a 2013 research paper on population ageing, the Productivity Commission looked at some of the reasons for low take-up. These included the scheme’s exclusion of people already receiving the full pension rate and the fact that it was restricted to an income stream equal to the full pension rather than allowing access to larger lump sums. However, the report concluded that ‘the scheme demonstrates it is practical to develop models in which governments provide loans secured against housing equity for social welfare purposes’ (p. 220).
Recent proposals for expanding the scheme
Recently there have been proposals for expanding the PLS to cover aged care costs or allow the family home to be included in the pension means test.
In January this year Emily Millane of Per Capita argued that asset-rich Australians should be obliged to use equity in their homes ‘to fund a portion of their aged care in the home. They would do so by means of a loan, or a line of credit, secured against the family home and payable once the home is sold’ (p. 20). Millane proposed modifying the PLS to support this.
In February this year The Australia Institute’s Richard Denniss has argued that the scheme would allow the government to extend the assets test to pensioners’ homes without depriving them of an income stream. In 2014 Richard Denniss and Tom Swann released a report arguing:
If family homes above a value threshold were included in the assets means test, affected retirees could still stay in their homes by drawing from their own equity, rather than the government budget, through the PLS. The expanded PLS would extend this option to all retirees (p. 10).
The report also argued access to the PLS should be expanded to all retirees, including those already receiving the full rate of the pension.
Adam Creighton recently argued in The Australian that the family home should be included in the pension assets test and that this would not force retirees to move because the PLS would allow them to access an income stream.
As debate over tighter targeting of income support unfolds, interest in the Pension Loans Scheme is likely to continue.