Why your home WILL be part of the new retirement income conversation

The Morrison Government would never include the family home in the Age Pension assets test, Jane Hume, the assistant minister for superannuation, has guaranteed, ahead of the long-awaited release of the Treasury’s Retirement Income Review.

But that doesn’t mean that older Australians wouldn’t be encouraged to start looking at their property and other “voluntary savings” as potential sources of retirement income, Hume told Household Capital’s recent Third Pillar Forum.

The online forum gathered experts from the superannuation, property and financial sectors, as well as economists, policymakers, consumer representatives, academics and unionists, to discuss how Australians’ retirement outcomes could be improved, at a time when the super system hadn’t matured sufficiently to provide all Australians with what is deemed a ‘comfortable’ retirement, yet increasing longevity meant people were already spending many more years than previous generations actually in retirement.

(You can watch videos about retirement income and other issues from the wide range of speakers here.)

And there was plenty to discuss in the vacuum created by the delay in releasing the Retirement Income Review, which the Treasury commissioned in September 2019 and was delivered to Treasurer Josh Frydenberg in June. The review sought to look at the sustainability of the nation’s retirement funding system, particularly as the population ages, including the incentives for Australians to self-fund their retirement.

Senator Hume told the Household Capital forum that the 650-page report was “sitting on the Treasurer’s desk right now” and was “next on his to-do list”, with its release “imminent”.

The property-income connection

The government has long referred to private savings – including the family home – as the third pillar that, alongside super and the Age Pension, makes up Australia’s retirement funding system.

But while Senator Hume offered no hints on the detail of the government’s response to the Retirement Income Review, she did make clear the family home would be even more key to the retirement income conversation going forward.

“The importance of that third pillar in providing retirement as been really overlooked, I think, in the policy conversation about retirement so far,” she said. “For many, as we know, the family home is possibly the most significant form of voluntary savings that retirees have historically had, because [Australian] retirees have historically had a very high level of home ownership compared to other countries.

“However, the family home is not  actually considered a part of a person’s retirement income, which is clear when you look at the underused Pension Loans Scheme that’s run by the Australian Government.”

Senator Hume reiterated promises by the Morrison Government that the Age Pension’s asset testing treatment of the family home wouldn’t be subject to change as part of the Retirement Income Review.

“I think the government has made it pretty clear that we will always maintain the exemption of the family home in the [Age Pension] assets test,” she said. “But that said, what we want to see is a retirement income system with that cohesion between the three pillars.”

The senator added that “greater cohesion” between private savings, super and the pension could be achieved by changes to the way the Age Pension was tapered based on personal wealth, changes that encouraged retirees to spend rather than save their super or the development of new or better financial products to ensure retirees could more easily use their voluntary savings, including their home, to increase their retirement income.

She emphasised the importance of ensuring there was a “glide path” into retirement, meaning that the income transition between working lifestyle and retirement lifestyle was smooth.

“We don’t want a system whereby your retired life is 10 times better than your working life in terms of your income and we certainly don’t want a system where your income in your working life is much, much better than your retired life,” she added. “So it’s not just a part of the accumulation process, that should be part of the decumulation process as well and that’s what the Retirement Income Review is addressing.”

Household Capital is one of the new companies in the ‘decumulation’ sector. It specialises in helping older Australians access equity in their family home to cover short- or long-term shortfalls in their retirement income, through what was known as a reverse mortgage or Household Loan.

Reverse mortgages – also known as equity release products – gained a poor public reputation in the 1980s and 1990s for complexity and weak regulation that saw some retirees lose their homes, but Australian legislation is now the strictest in the world on governing how these products are sold. And with an estimated $900 billion in untapped equity held in Australian retirees’ properties, the family home could be a rich source of income.

However, many Australians remain reluctant to use that wealth, Household Capital founder and CEO Josh Funder told the forum.

“There’s nothing stopping Australians at the moment from responsibly accessing their home equity as the third pillar of their own retirement funding plan,” he explained. “But we’re dealing with a much bigger issue here … Australian retirees are worried. They’ve never lived as long where they’re seen as a burden and they’re uncertain about the complexity that faces them … they don’t spend, they don’t have as good a lifestyles as they could and the whole economy and the community suffers.”

Research fuels calls for asset testing

Over recent years, numerous pieces of research have pointed to the good economic sense of encouraging – or forcing – older Australians to draw on their home equity for retirement funding.

Research by the Australian National University released in November 2019 excited plenty of public debate and media commentary when it showed that almost 30,000 Age Pensioners lived in homes worth more than $2 million yet received pensions at a cost of $680 million a year. A further 226,000 lived in homes valued between $1 million-$2 million and 667,000 in homes valued $500,000-$1 million.

That research was read by many to indicate that older Australians could easily afford to access the equity accrued in their property, rather than drawing on the public purse to fund their retirement. It wasn’t a view older Australians necessarily agreed with, though. A survey by National Seniors at the time found that just under 50 per cent of respondents said the family home should not be included in the pension assets test.

The ANU research wasn’t the first to draw conclusions that many pensioners could afford to use their property wealth as a source of retirement income.

The Grattan Institute released a report in November 2018 with modelling showing that while Australia’s retirement funding system was failing people who spent their working lives on low incomes and in rental housing, for many, it was already more than sufficient – to the point that many retirees were “net savers”, in that they often left an inheritance almost as large as the savings pool they had on the day they retired.

“Most retirees today feel more comfortable financially than younger Australians who are still working,” the Money in retirement: More than enough report said.

“Retirees today are less likely than working-age Australians to suffer financial stress such as being unable to pay a bill on time. Across the income distribution, people typically have enough money to sustain the same, or a higher, living standard in retirement as when working. Most own their own homes. And most retirees are more likely to be able to afford optional extras such as annual holidays. Australians tend to spend less after they retire, and even less into old age. While their medical costs increase, these are largely borne by the taxpayer.”

That meant the value of the family home should be included in the pension assets test, potentially above a threshold such as $500,000, the institute concluded.

And in September, former prime minister Paul Keating suggested to the Royal Commission into Aged Care Quality and Safety that Australians be advanced a loan by the government to pay for their aged care, with that loan to be repaid from their estate on their death.

Former treasurer Peter Costello, in a separate commission hearing, suggested similar, but through expanding the Pension Loans Scheme that allows pensioners to borrow against their family home. A PLS-style loan would help pay for a borrower’s aged care and be repaid when they died and the family home was sold, Costello proposed.

National Seniors CEO John McCallum told the commission that such proposals would be a “hard sell”, however, because “most view their home as a place to live, not an asset … something they want to pass on to their children”.

Barriers to spending are real

The Household Capital forum heard that, as Professor McCallum alluded, older Australians had many reasons for not wishing to spend all of their retirement savings or access the equity in their home to fund their retirement or their aged care.

Senator Hume acknowledged that, for one, Australians weren’t well aware that the government subsidised the majority of an individual’s aged care costs.

“We find that a lot of people hang on to their super, they end up dying with a large portion of their superannuation intact because they’re nervous about what might happen to them with regard to health and aged care,” she said. “Perhaps the onus is on the government to explain that to them … so much of that [health care and aged care] is well-subsidised by the government.”

Former Productivity Commission chairman Peter Harris agreed that while subsidised, the aged care funding system was also so incredibly complex that a lack of understanding, as well as a fear of encumbering themselves or their families with some type of future debt, prompted Australians to preserve their home as insurance against the risk of aged care costs.

He told the Household Capital forum that those concerns were intertwined with Australians’ beliefs about inheritance, as 2015 research by the Productivity Commission illuminated.

“As people get even older, they predetermine for themselves that their real intent in retirement is to pass on an asset,” he said, referring to 2015 research by the Productivity Commission. “So they compound this question of risk  aversion and complexity by convincing themselves that their job is to pass on an asset to the next generation.”

Peter Harris pointed out that this focus on inheritance also caused wider economic issues, because increasing longevity meant that by the time Australians tended to receive an inheritance, they were in their 60s – and so spending less than they would have in earlier life. Instead, benefactors again held on to their inherited asset or cash, he said, by putting it in the bank, contributing it to super or investing it.

“We’re locking up an asset for the long haul that isn’t subsequently transformed into an asset that generates traditional economic activity through consumption and, therefore, employment,” Harris said.

Australian entertainer Jean Kittson, who recently published a book, We need to talk about Mum and Dad, about supporting her 90-something parents through later life health care and aged care, spoke to the forum about how deeply the family home was entrenched in the psyche of hard-working Aussies – and how important it was to them that it was passed on.

“My parents worked, well, two lifetimes’ worth of work and they’ve been very frugal,” Kittson said. “They’ve never had a holiday to Paris or anything like that, not even Walla Walla, if I remember, but they’ve always saved for the family home.

“They wouldn’t even consider the idea of spending money from the family home on their own care, they would consider that was squandering the lifetime of saving … The family home is their largest financial achievement and what they want to do is pass that onto the children.

“For many of my parents’ friends, owning their own home is [also] an insurance for their own children and their grandchildren who are increasingly finding it difficult to find work, to buy their own homes.”

Besides, Kittson added, the concept of having sufficient income for a ‘retirement lifestyle’ was a recent one – and not something her elderly, pensioner parents identified with. That added an additional blocker to the consideration of the family home in the retirement funding discussion.

“They have lives, not lifestyles,” she noted. “They have good lives with their families, very modest lives but they manage quite well like that.”

It was a take on the situation that resonated with Household Capital CEO Josh Funder, who pointed out that the retirement funding issues in Australia – super inadequacy and the increasing taxpayer burden posed by the Age Pension, among others – were advancing more quickly than was the discussion with older Australians about the role the family home could play in alleviating some of those issues.

“Nobody in history has ever lived as long as Baby Boomers and we don’t know where that goes,” he told the forum. “When the pension was first introduced, the pension age of 65 was the life expectancy of people. And we’ve walked that forward to where the pension is a huge part of the three pillars.

“If you think about our superannuation system, which leads the world, but when it was introduced only 30 or so years ago, people were expected to be covered [by retirement income from it] until they were 85 and now they’ve got to plan to live to 95!

“And likewise for housing. Housing isn’t just a source of funding, it’s not just a house – it’s your identity, it’s your family, it’s your community, it’s housing and it’s a source of funding, but it’s not ready yet to be a cohesive part of the three pillars.  And we’ve got to work with Baby Boomers [on that issue] but we’ve got to get moving because it’s getting too late.”