With home ownership rates falling, especially among younger and poorer cohorts, CoreLogic’s head of Australian research, Eliza Owen, has raised concern that the retirement system is unprepared for a future where a large proportion of Australians rent:
“[If you consider] policies that preserved high values of homes in order to secure Australian wealth, you have to accept that what comes with that is declining homeownership for people in lower-income cohorts,” Ms Owen told Parliament’s inquiry into housing supply and affordability.
“And if that’s the case, how do you ensure their retirement? How do you ensure their long-term financial security? A few people have used the word ‘holistic’ in the course of this inquiry. And I think that also includes things like alternatives to building wealth if you’re going to say to a cohort of people: ‘You’ll never be able to own a home’”…
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“There is long-term a decline in rates of homeownership and the long-term decline in rates of homeownership have been most exacerbated in low-income cohorts, so that would suggest you have widening wealth inequality perpetuated through Australia’s housing system.”
Australia’s current retirement system is based on the presumption that most people will own their homes. But that assumption is running face first into crashing rates of home ownership.
The next charts from the 2016 Census highlight the problem.
The rate of decline in home ownership has been particularly sharp for younger cohorts, who will become Australia’s future retirees:
As expected, the decline in home ownership has been met with an increase in households in rented accommodation, which increased from 27% in 1999 to 31% as at the 2016 Census:
There has also been a collapse in the proportion of households that own their homes outright, from 41% in 1996 to 31% as at the 2016 Census:
Older Australians are also carrying more mortgage debt into retirement (note the particularly sharp increases among the 55-64 and 45-54 age groups):
According to Grattan Institute modelling, the share of over 65s who own their home will fall from 76% today to 57% by 2056, with less than half of low-income retirees owning their homes in future, down from more than 70% today:
Therefore, renting will become widespread among future retirees, placing intense pressure on the retirement system.
In addition to lowering the system-wide cost of housing and boosting public housing via a combination of reforms, the retirement system needs to be transformed to make it more equitable and neutral between owning a home and renting.
In particular, the superannuation system – which unambiguously favours the wealthy (see below chart) – needs to be transformed so that concessions are distributed equitably:
The Aged Pension should also be reformed to provide less taxpayer assistance to wealthy home owners and more assistance to renters, via:
Including one’s principal place of residence in the assets test for the Aged Pension at some point in the future (e.g. 1 July 2022), thus allowing current retirees and prospective retirees adequate time to make arrangements.
Raising the base rate and assets test for the Aged Pension, thereby providing more funding to poorer pensioners genuinely doing it tough.
The Government has already extended the existing state sponsored reverse mortgage scheme, the Pension Loans Scheme, to all people of retirement age. This means that asset (house) rich retirees can continue to receive a regular income stream in exchange for a HELP-style liability that is recoverable from the person’s estate upon death, or upon sale of the person’s home (whichever comes first).
If these reforms are implemented, house-rich pensioners will continue to receive an income stream as they do now under the Aged Pension, but with less drain on the Budget and on younger taxpayers. However, poorer pensioners, most of whom will be renting, will be lifted out of poverty.
A more radical solution is to abandon superannuation altogether and divert the $38 billion in tax concession savings into the Aged Pension system (see Dr Cameron Murray’s blueprint). However, this is clearly a ‘bridge too far’ given the recent rise in the superannuation guarantee, and incremental improvements are the best we can hope for.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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