Housing and Retirement Income: An Integrated View

By Patricia Pascuzzo[iogh

The recent proposal and ensuing debate about allowing young people to access their superannuation to buy their first homes has again highlighted  many of the shortcomings about policy discussions in Australia today.

Once again, the various parties took up their positions for and against the proposal. While debate is undoubtedly welcome, sometimes there can be limited consideration of the wider policy considerations, the interaction between housing and super or the long-term impact on the retirement income system.

Its not as if the super-for-housing proposal was without merit. Home ownership is a fundamental determinant of living standards in retirement and declining homeownership is a matter of significant policy concern.

Allowing super to be withdrawn for home deposits also might improve young people’s engagement with super, while encouraging better planning for retirement and helping to keep super funds competitive.

But the proposal suffered from one major flaw:  It was the wrong solution for the problem at hand, namely housing affordability.  Moreover, in the absence of other measures, it had the potential to exacerbate the problem of housing affordability.

Of course, the problem is not new. Curtin University associate professor Rachel Ong told a CSRI forum a year ago that there had been a discernible decline in home ownership rates, particularly among younger people, since at least the mid-80s.

What is new is the political impetus to address the problem, with pressure now on the government from such senior figures as financial system inquiry head, David Murray,  to address affordability by reexamining tax breaks for property investors.

It seems clear that such measures, along with restricting self-managed super funds from leveraging into property (another of Murray’s inquiry recommendations), would be more effective in addressing housing affordability at its source.

Aside from withdrawing unnecessary stimulus to demand, also available is a suite of possible measures, such as land release and town planning provisions, to address supply constraints. Many of these are in the hands of the State and territory governments.

A number of other policy measures could be actively considered as part of an integrated retirement incomes policy agenda that would also indirectly improve the environment for first home buyers.

These include reconsidering the extent of the tax-preferred status of the home and/or including housing in the age pension means test, so long as the exemption limit is set sufficiently high to ensure no pensioner suffers a loss of cash income.   The latter measure could be designed to ensure that there is enough equity remaining to finance the release of a house’s equity and meet the requirements for accessing residential aged care in the future.

The challenge is to enable pensioners to access their home equity without reducing their cash income, especially for those who are asset rich and 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 home in the means test however could further disadvantage women, who tend to have significantly lower super balances than men and who live longer. This increases their reliance on housing to fund their aged care. (Nearly 70% 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.

A more minimalist approach with similar outcomes would be to facilitate retirees downsizing, and liberating their homes for younger buyers, by quarantining the proceeds of downsizing from the means test.

The attached CSRI position papers discuss these issues within the context of an integrated retirement incomes policy program.

It’s time for a measured, mature debate.

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