Housing as the 4th Pillar

With research showing most people won’t have enough superannuation to enjoy a comfortable retirement and meet aged care costs, is it time we made the family home the fourth pillar of the retirement income system? asks Patricia Pascuzzo.

Research shows that even under a mature superannuation system most people won’t have saved enough to meet their aged-care costs and will have income well below a comfortable income in retirement.  People on average full-time incomes will struggle to have a comfortable retirement unless they make voluntary contributions to superannuation.

Given the increasing cost and rising rate of people going into aged care, we need to make more effective use of all household assets to maintain an adequate living standard. This will also be important for ensuring budget sustainability in the face of an ageing population.

Australian households have more wealth tied up in housing than in any other asset. But there is a growing need to find a way to encourage pensioners to access the equity in their homes to improve their retirement incomes.

However, there are significant obstacles to accessing home equity. The reverse mortgage market fails to support retirement income. Most loans are lump sums not income. As well, the average loan size is small and costly in terms of interest.  Australian retirees own more than $900b in home equity, yet only $3.5b has been accessed through the equity release market

Also, it would be counter-productive to improving adequacy if any funds released in this way were included in the pension means test while housing is exempt.  The value of the home is no different from any other asset, and in principle it should be included in the pension means test. The difficulty is how to access pensioners’ home equity without reducing their cash income, especially as some pensioners own high value homes but are income poor.

An integrated policy response would facilitate the transfer of home equity into superannuation to provide liquidity, asset diversification and retirement income.

Including the family home in the means test would create some problems, including key issues around gender and further putting at a disadvantage  women who have significantly lower superannuation balances than men. These must be considered:

  • Women live longer than men, and so are likely to rely more on housing to help fund aged care. Nearly 70 per cent of 65-year-old women will need to enter permanent age care facilities at some stage. Women are also more likely to receive the family home in divorce settlements, while men tend to have more access to superannuation savings.

  • To effectively tap this home equity, the exemption limit below which home equity would not be subject to the means test would need to be set reasonably high to ensure no pensioner suffers a loss of cash income. There should be enough equity remaining to finance the release of a house’s equity and meet the requirements for accessing residential aged care in the future.

  • A further problem with including the value of home equity in the pension means test is that there are large geographical variations in home values across Australia.

  • A final critical consideration is how much advance notice should be given if it were decided to include the home in the pension means test to enable people to adjust to the new arrangements.

Many other broader ramifications need to be carefully considered in making housing the fourth pillar of the retirement system.  These issues cannot be considered in isolation or on the run. That’s why CSRI champions a holistic perspective to retirement incomes policy.

For Australia to have a sustainable retirement system, policy makers need to look beyond superannuation and consider the interactions with the age pension, age care system, and the key role of housing.

All of these issues will be central considerations at the CSRI Leadership Forum on 12-13 October.

 

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