Menzies’ home ownership or Keating’s super?
Home ownership or superannuation? For an increasing proportion of Australians, it’s one or the other. That is one of the many unresolved problems (with few suggested solutions) outlined in last week’s comprehensive 648-page Treasury Review of Australia’s Retirement Income. At least it supplied a mountain of facts on which an informed debate can take place, although, as one contributor to the review lamented, this will not prevent ‘a balanced discussion of the retirement income system being bedevilled by narratives that serve vested interest rather than the common good’. Hello Anthony Albanese and the union-backed industry super funds.
It is certainly in the common good for the review to conclude that ‘an increase in the compulsory superannuation rate (SG) comes at the cost of lower wage growth’ and that ‘saving for retirement should not come at an excessive cost to people’s standard of living in working life…. This is particularly relevant when people do not have the option to reduce their compulsory superannuation savings’. That is the context in which home ownership is falling and superannuation is booming. As the nation was investing three trillion dollars in superannuation (most of it compulsorily), the decline in home ownership was led, in a worrying sign for the future, by a 25 per cent slump in the proportion of young Australians (25-34) owning their own homes. The only age group increasing home ownership is the over 65s, many of whom took a lump sum from their super to pay off their mortgage.
There are political implications for the Liberal party in this triumph of Paul Keating’s compulsory superannuation (with its concurrent rise in renters) over Bob Menzies’ ‘little capitalist’ home ownership mantra. As real-estate guru Domain has noted, Liberal seats tend to have higher rates of home ownership, while Labor’s have more renters. So it was political pragmatism as much as ideology that prompted Labor’s demand that the government stick to the legislated Keating objective (and – unnecessary – Coalition election promise) of raising the compulsory superannuation levy from 9.5 to 12 per cent, beginning next July. However, the government will have serious trouble with its backbench if it rejects the firm advice in last week’s Treasury Retirement Incomes Review, that raising the levy would not be in the best interests either of superannuees (lower income groups would be seriously disadvantaged) or the economy. Instead, there is now a political as well a retirement-incomes imperative for the government to look to measures to encourage home ownership by occupiers, rather than landlords.
The Treasury Review demonstrates the significant standard of living benefit of owning your own home on retirement, describing it as ‘an important factor influencing whether retirees achieve an adequate retirement income’ and that this represents a beneficially ‘inequitable’ outcome as against those paying rent in retirement. ‘Compared to a home owner with identical total wealth, a renter receives about $4,000 less in age pension per year’. While acknowledging that to achieve home ownership, the cost of paying it off does reduce other spending during a working life, the offset is in lower retired housing costs. These fall from about a quarter of household disposable income to only 5 per cent in retirement, while similar housing costs for working renters can even rise above 25 per cent once retired. With their principal residence being the most significant asset for more than 80 per cent of retirees, most have a modest asset level allowing access to nearly all the benefits available to renters.
The inequity is due to the long-standing exemption of the principal place of residence from the pension assets test. But the evident decline in home ownership in younger age groups will presumably mean that eventually the proportion of owners entering retirement will fall. With future retirees having been contributing to their superannuation funds for longer than those currently, future renters are expected to enter retirement with more assets – which will be subject to the assets test. So the remaining owners will have an even greater inequitable share of government support, with the result that there could be in the future a more significant incentive to invest in housing at retirement (which currently sees many retirees taking a lump sum to buy or pay off a house) as higher balances at retirement provide the means to do so.
In what is effectively a recommendation, the Review notes: ‘Those renting or with mortgage debt at retirement could be incentivised to convert their superannuation funds into housing to maximise their age pension’. But while the Review repeatedly notes the benefits of home ownership in retirement and stresses the need for more equitable outcomes, it does not even mention any prospect of achieving greater outcomes for more retirees (particularly lower income households that are significantly disadvantaged by compulsory superannuation) by allowing their superannuation levy to be diverted during the accumulation years towards a deposit on a home. There is growing academic recognition that the best way to stop the decline in home ownership among younger people is to allow them to access their compulsory super balances for this purpose. One recent academic study indicates that ‘Allowing lower income households access to their SGL assets to acquire owner‐occupied property is in the interests of both the households and government’ while conceding that extending this to typical Australian households carries the small risk that the government’s net retirement costs might increase.
One issue the government must tackle, no matter how reluctantly, is the unsustainably mounting cost (let alone the inequity) of superannuation tax concessions that, the Review says, outweigh the savings from the resultant reductions in age pension costs and are forecast ultimately to exceed the total cost of pensions. Apart from being concentrated among higher income earners, these tax concessions bring ‘almost no net increase in saving’ as they largely displace other forms of saving. So stand by for more governmental fiddling with super – but hopefully for the better.
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