Outright ownership of one’s home has long been the de facto fourth pillar of Australia’s retirement income system, allowing the Government to keep the Age Pension at a relatively low fixed rate.
Indeed, when announcing the terms of reference for the first comprehensive review of retirement incomes in 30 years, Treasurer Josh Frydenberg and Assistant Minister for Superannuation Jane Hume explicitly acknowledged the critical role of the family home in providing a good retirement, by including it in the third pillar of the system, voluntary savings.
It’s clear, then, that careful consideration of the future role of the home in providing Australians with a comfortable and dignified retirement is essential.
The assumption underpinning both the setting of the pension and the structure of our superannuation system is that the majority of retired people will have very low housing costs, either because they have paid off mortgage debt during their working lives or, for non-homeowners, because they will be accommodated in low-rent social housing.
Yet over the past three decades, as house and land values in Australia have increased at a rate far outstripping income growth and investment in social housing has declined to record lows, there is growing evidence that this key plank in the foundations of our asset-based retirement income system is crumbling.
Of course, the popular narrative is that older Australians are sitting on piles of property wealth, driving up asset prices through the use of generous tax concessions and locking younger generations out of the housing market. This, some claim, is leading to significant generational inequality.
Challenging this view, however, is recent research that shows that Australia is now divided into asset-based classes of wealth and income, and that “what we’re seeing is not generational inequality, but class inequality across generations“.
Owning a home is the key determining factor of financial security and wellbeing in Australia, but it is a position increasingly out of reach – and not just for young people.
The fact is, the soaring cost of land and housing in Australia over the past three decades has effectively destroyed the asset base on which our retirement income system relies. The proportion of homeowners aged 55 to 64 who still owe money on their mortgage has more than tripled since the design of our compulsory superannuation system – from 14 per cent in 1990 to 47 per cent in 2015. Among those aged 45 to 54, the rate has doubled, as has the ratio of mortgage-debt-to-income (from 82 per cent to 169 per cent), while that same ratio has blown out from 72 per cent to 132 per cent for those in their last decade before retirement age.
This will have a significant impact on retirement incomes, one that will only grow as successive generations find it harder to enter the property market and live with higher levels of housing debt much later in life than experienced by previous generations.
The two obvious implications are that some future retirees will need to spend a significant lump sum of their superannuation savings to pay off outstanding mortgage debt at retirement. More of them will then be reliant on the Age Pension for income. Others will have no hope of ever owning a home and will, therefore, have to meet the rising costs of rent in the private market.
Older Australians have also traditionally relied on the equity in their homes to fund their care in later old age.
Many Australians expect to draw on the equity in the family home to fund entry to residential aged care, and still hold the hope of passing something down to their children.
These expectations are under significant threat from the declining rates of home ownership in Australia.
It is imperative, then, that the retirement income review engages deeply with the economic implications of changes to home ownership among retirees, both for individuals and for the Federal Budget, even in the context of relatively low housing costs. Currently, 2.5 million Australians receive the Age Pension and the Federal Government spends more on payments to older Australians than on any other benefits, with $70.2 billion forecast for the next financial year.
If a majority of age pensioners are not to be living in poverty by the middle of this century, the Government must implement policies to provide secure, affordable housing for the growing number of retirees who will not own their homes.
While the economic imperative is obvious, policies to deal with the changing role of the home in retirement must grapple with more than mathematical equations.
Increased housing costs affect more than just the economic wellbeing of retirees. Housing is a key social determinant of health at any age, and recent research shows that housing insecurity and debt already negatively affect the health of older people.
It is important for policy makers to understand the home as much more than a financial asset. The ‘home’ is not made of bricks and mortar, it is a place that can enshrine memory, a place from which, especially as we age, we can access support networks and family relationships.
Beyond its value as a financial asset, the home has a unique capacity to help us face other vulnerabilities we experience in older age, particularly social isolation and loneliness.
Per Capita’s own research suggests that older people experience home as a social relationship: a place to connect with others, somewhere they can sustain or build meaningful social roles, a community. This finding challenges the assumptions underpinning our policy settings that people will always make economically rational decisions in relation to housing.
So, what policy changes should the retirement income review consider in tackling the challenge of the changing role of the home in retirement?
Some argue that, given the disproportionate increase in the value of housing over recent years, it is past time to include the family home, or a portion of its value over the median, in the Age Pension assets test.
This is politically difficult, to say the least; indeed, Mr Frydenberg has already ruled it out, saying it “will never be part of [government] policy”.
Beyond political concerns, though, including the home in the assets test arguably would result only in more retirees being cut off from pension access, thus reducing their standard of living without meaningfully improving the living standards of non-home owning pensioners.
Far more pressing is the massive increase in the number of older people entering the private rental market in recent years. Renters in the 55–64 age cohort have risen from 14.7 per cent to 21 per cent in the past 20 years alone. Worryingly, this includes former homeowners, forced out by mortgage foreclosure and life events such as family breakdown, ill health and unemployment. The rates of older women experiencing homelessness, with those over 55 now making up the fastest growing cohort of homeless Australians, can no longer be ignored.
Anglicare’s 2019 Rental Affordability Snapshot shows that only 0.8 per cent of rental accommodation is accessible for a single age pensioner. This points to the urgent need for significantly more age-appropriate social housing to be built by state and federal governments.
In the short term, however, the most immediate solution is to increase Commonwealth Rent Assistance (CRA) for those in receipt of social security payments. The rate of CRA has not kept pace with the cost of private rental properties, largely because increases are linked to the Consumer Price Index (CPI), which is lagging far behind the rise in the cost of housing.
With forecasts of a 60 per cent rise in eligibility for CRA by 2031, increasing the rate to align it with housing costs is critical to addressing short-term housing stress for older people, but any increase should come with legislated protections against rental price gouging by landlords.
Finally, the Government must grapple with the reluctance of older Australians to tap into home equity to provide income in retirement. Reverse mortgages, offered by private financial institutions, and the government-backed Pensions Loan Scheme (PLS), which enables homeowners to increase their pension payments by 150 per cent, have low take-up rates. YourLifeChoices’ 2019 Retirement Matters Survey shows that fewer than one in five retirees would consider accessing their home equity to increase their income.
Policy makers can no longer ignore the behavioural factors – the desire to ‘age in place’, the fear of needing assets to draw on during late old age due to infirmity or illness and the hope to leave an inheritance for the next generation – that make people resistant to drawing on their home equity. A different mix of social policies, such as the universal provision of in-home care as a replacement for residential aged care, is needed to resolve this issue.
The retirement income review provides us with an opportunity to think more broadly about what makes it possible for Australians to live a good life in retirement. If that is our collective goal, we must shift how we think of the home, away from its role as merely a financial pillar of retirement income.
Having a place to call home, one that cannot be taken from us, is perhaps the greatest source of security there is. Providing that to all Australians should be the fundamental aim of retirement income policy.
Should the Government be looking long and hard at how housing affects retirement outcomes – from both financial and wellbeing perspectives?
* Emma Dawson is executive director of public policy think tank Per Capita and Myfan Jordan is Per Capita’s director of social innovation. Per Capita is an independent, progressive think tank dedicated to fighting inequality in Australia.
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