Are Age Pensioners getting their fair share? The owner-renter divide

The announcement of another review into Australia’s retirement income system gives the community a chance to reflect and debate what we mean by an adequate retirement income.

The highly subjective nature of this question is reflected in the significant disparities we get in the answers, even from the experts. For example, the Grattan Institute’s (GI) minor stoush with ASFA last year that was caused partly by GI’s recommendation that all references to ASFA’s retirement income adequacy advice be removed from ASIC’s Moneysmart website – presumably because they thought it was misleading.

It’s pretty obvious when you think about it that an adequate retirement income for one person (or couple) is going to be inadequate for another. In some ways, it’s a foolish question for policy makers to ask themselves.

In any case, retirement income is only one component of an adequate quality of life in retirement. As a minimum, I want to see retired Australians living in dignity which means their basic needs must be met. If the individual doesn’t have the financial capacity to meet those needs, then the state must step in.

Deciding on a retirees’ basic needs is easier to do objectively than deciding on a universally adequate retirement income in isolation, and there has been much research done over the years in many jurisdictions looking to define these basic needs.

There is almost universal agreement that they include:

• food
• water
• sanitation
• adequate accommodation (housing)
• health care
• aged care (support for individuals who lose the ability to care for themselves in their own homes).

I would add a little extra for some discretionary spending on yourself or others that individuals in our wealthy society have a fair reason to expect. Subjective, I know! If these are the criteria for an adequate and dignified retirement, how does Australia measure up?

Given that this article is ostensibly about retirement incomes, I’d like to assume for the sake of the argument that our health care and aged care systems tick the ‘retire in dignity’ box.

That leaves us with a requirement for dignified housing (water, shelter and sanitation) and a level of income that enables the retiree to eat, pay the running costs of their accommodation and have a bit left over for discretionary spending. This analysis then lands us with two categories of people.

Home owners

For those who already own their own home, their retirement income needs to cover the costs of running the property, meet their food needs plus a little extra for discretionary spending. It seems likely that the current Age Pension is just about adequate for this purpose.

In fact, the Age Pension is currently set at a level only slightly below the amount that ASFA currently defines as being required to fund a modest lifestyle in retirement. The fact that around one third of Age Pension recipients save in retirement lends support to this view.

I expect the majority of those who save whilst living off the Age Pension own their own home. Whilst some of the wealth locked up in the home may get consumed funding aged care, the tax-free status of the home and its generous treatment in the pensions means test seem a more than fair quid pro quo for providing your own accommodation in retirement.

In fact, given that homes are now significantly more valuable than they used to be (as a proportion of average annual earnings) there is a strong argument for being less generous in their treatment.

Renters

The situation is much more difficult for retirees who don’t own their own home and need to rent. Accommodation is a significant cost and, whilst it does vary a lot around the country, rents in state capitals are high by world standards.

Given there is no differentiator in the income means test between renters and owners and the maximum amount of rental assistance is around $3,500 for a single person and $3,300 per person for a couple, the Age Pension is unlikely to fund an adequate and dignified retirement for those who don’t own their own home.

This is a problem and one of the highest-value targets for reform in our quest to provide adequate retirement incomes for our retired citizens.

The conclusions of this brief analysis can be broken down into the following suggestions:

• It is possible to objectively assess retirement income adequacy in terms of basic human needs
• If the retiree cannot meet those needs, the state has a moral obligation to do so
• Assuming our health care and aged care systems are adequate, the current Age Pension provides an adequate retirement income if you own your own home
• For those who don’t own a home and must rent, the Age Pension is likely to be inadequate.

It is likely that the latest review will highlight all this which in very general terms means that:

• Those retirees who own their own homes are unlikely to see any increase in government assistance and may see it drop. For example, through eventually seeing some of their home’s value included the Age Pension asset test
• Those retirees who don’t own their own home (who in my view are in quite urgent need of more help, particularly divorced women) will see an increase in government support that may need to be paid for via a reduction in government support for retired homeowners.