Falling home ownership: the elephant in the superannuation retirement room

by Harry Chemay | Sep 4, 2023 | Finance & Tax, Latest Posts

Paul Keating envisaged a superannuation system which funded the aged in retirement. It has turned into a giant tax shelter where wealth is captured and passed on to descendants, and where falling home ownership was not factored in. Harry Chemay reports.

The Intergenerational Report (IGR) paints a worrying picture for the more than 4.5 million Australians soon to retire who depend on the pension, and increasingly on their home, to enjoy their twilight years. 

In making his case for a universal superannuation system in 1991, Paul Keating noted (to a lecture theatre of uni students) that “when my generation begins to retire after the year 2010, you will be the taxpayers who will have to provide for us.”

Keating further noted that,

We have lived well. And there are also a lot of us. We will want to retire in a style to which we have become accustomed. If you have to carry us, you will know it.

At the time of those statements, there were just over 2 million Australians of Age Pension age, with 5 people of working age (15 – 64) for every Australian aged 65 and above.

Spin forward to Treasury’s latest Intergenerational Report (IGR), and there are now some 4.5 million individuals of Age Pension age, a number that is expected to double by 2062-63. And currently around 3.8 people of working age to every person aged 65 or over, a ratio that is forecast to fall to 2.6 over the next 40 years.

I’ve been a part, and seen firsthand the growth, of Australia’s superannuation system for some 26 of the 31 years since the introduction of compulsory superannuation in 1992. In that time the system has grown from less than $150 billion to be the world’s fourth largest pool of retirement assets, a leviathan of some $3.5 trillion at present.

I’ve also been a keen follower of all six of the Intergenerational Reports produced since 2002, specifically as it relates to retirement incomes policy. This most recent IGR is the first to hint at a growing retirement issue that has been apparent to me for quite some years now, but has never been openly discussed. I believe it’s time it should.

The Age Pension isn’t under pressure

Keating’s contemporaries are well into their seventies, with the youngest of the Baby Boomers now approaching retirement age. Yet, the latest Intergenerational Report suggests no medium-term budgetary pressure on, or to the continuance of, the Age Pension.

Instead, the total projected annual cost of Australia’s retirement income system is expected to remain relatively steady over the next 40 years, at around 4 to 4.5 percent of GDP.

Further, spending on the combined Age and Service Pensions is actually forecast to fall over the next 40 years, from 2.3 percent to 2.0 percent of GDP.

In short, despite Keating’s warnings, or perhaps because of his creation of universal superannuation, the Age Pension is not under any foreseeable budgetary pressure.

Far from it, as 31 years on from his implementation of a universal superannuation scheme, it is the Age Pension that still does the heaviest lifting in Australia’s retirement income system.

Around 64 percent of Australians of qualifying age will receive some Age Pension during this financial year. When Disability Support Pension, Carers Payment and the Service Pension are included, pension and related income support payments are made to around 70 percent of qualifying age Australians at present, as the below chart from the 2023 IGR illustrates.

IGR Chart 1 - Age Pension Rates Over Time

Chart 1: Persons of Age Pension age or over, by pension category.

Thus, while universal compulsory superannuation has been a feature of the Australian economy for over three decades now, some two in every three retirees of pension age still rely on the Age Pension as a key source of their retirement income.

In addition, more recipients receive the full rate of Age Pension than a part pension, although this is forecast to invert as the superannuation system matures and more Australians retire with super balances capable of creating a viable retirement income stream.

Falling home ownership – elephant in the retirement room

So the Age Pension is under no great pressure, and its primacy for the average retiree remains without peer.

What is a concern, however, has been the fall in home ownership over time, as two-plus decades of strongly rising property prices relative to real income growth has impacted the ability of average Australians to acquire a main residence and, increasingly, to have it paid off before retirement.

At the heart of Australia’s retirement income system (albeit more whispered in policy circles than shouted) is the presumption of home ownership, unencumbered by debt. The rate of the Age Pension reflects this assumption. As do many of the ‘retirement budgets’ that purport to inform retirees of retirement income adequacy. As does the main retirement income projection tool currently provided by ASIC on its Moneysmart website.

Yet, home ownership can no longer be taken as a fait accompli, as younger (and lower income) Australians struggle to break into the property market at the same rate as previous generations.

The latest IGR is the first to make explicit the homeownership-retirement connection, showing clearly that those in the key first-home buying years have been most impacted.

Ownership rate amongst 30 – 34-year-olds has fallen from 68 percent in 1981 to under 50 percent at the last Census. For 35 – 39-year-olds, the fall has been from 74 percent to under 60 percent.

In fact, right across the working age spectrum, from 25 to 64, rates of property ownership have declined over the past four decades.

The only groups making headway into property ownership are those 65 and over, with the 65 – 69 cohort steady at 81 percent ownership, while the 70 – 74 cohort actually improved from 79 percent ownership in 1981 to 82 percent, as this IGR chart below reveals.

IGR Chart 2 - Home Ownership Rates

Chart 2: Home ownership rate over past 40 years by age.

This speaks to the growing unease that the social contract underpinning intergenerational equity appears to be fraying in today’s Australia.

Because as Treasury’s own Retirement Income Review of 2020 correctly noted,

outright home ownership supports retirement income by reducing ongoing expenses and acts as a store of wealth that can be accessed at retirement.

The retirement maths for renters and the heavily indebted

If you can’t break into homeownership at a reasonable age (giving yourself a fighting chance of being mortgage-free before retirement), it creates pressure at the other end of the journey in achieving both housing security and a dignified standard of living in retirement.

And if you’re one of the 30 percent of households who rent, and continue to face the private rental market into retirement, that’s a challenge on a different scale altogether.

A simple example illustrates the point.

At present, the full Age Pension for a single person is approximately $27,600 per year. For a couple, the equivalent amount is approximately $42,000. To which the soon-to-be-increased Commonwealth Rent Assistance (CRA) may add a further circa $4,500 per year at best.

According to CoreLogic data, the current median rent for all dwellings across the country is $577 per week, and $603 in capital cities.

Taking the nation-wide average, that’s approximately $30,000 in annual rent, which would obviously consume more than an entire single full Age Pension, and be met (just) only with the help of the additional Commonwealth Rent Assistance benefit.

In the case of a retired couple, the current median private rent would consume some 65 percent of their combined full Age Pension and CRA.

Those who have managed to break into homeownership aren’t exactly out of the woods either, with research done in 2019 showing that the proportion of homeowners aged 55 – 64 with outstanding mortgages had increased from 14 percent in 1990 to around 50 percent by 2015.

And of the main uses of super lump sums during 2016-17, mortgage and other debt retirement accounted for over 40 percent of such withdrawals.

Little wonder then the latest IGR makes the point that,

these trends present a fiscal risk to Age Pension spending in the future and may impact patterns of how superannuation is drawn down.

Housing security is retirement security

Deciphering this Treasury-speak, it basically means: hitting retirement either as a renter or as a heavily indebted mortgagor is going to impact the retirement security of very many Australians, possibly putting pressure on both the Age Pension and superannuation system.

Not quite the outcome Paul Keating had in mind, but here we now are.

Whichever way governments of either persuasion slice or dice it, housing security and retirement security are two sides of the same coin.

The latest Intergenerational Report makes it abundantly clear, much to our collective dismay, that we have now entered an era where decades of neglect of the former will haunt the latter; absent meaningful, sustained and impactful policy action.

Forget the cash-splash for the poor, Josh’s Budget giveaway is super for the rich

Harry Chemay has more than two decades of experience across both wealth management and institutional asset consulting. An active participant within the wealth and superannuation space, Harry is a regular contributor to investment websites in Australia and overseas, writing on investing and financial planning.

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