Pensioners are prudent by relying on taxpayers

Australia is currently having an overdue debate on retirement income policy. However, as the government and opposition both rule out certain options for political reasons, we risk the retirement system overburdening taxpayers and failing older Australians.

The key problem is that the weight of Australia’s ‘three-pillar’ retirement system—based on the age pension, compulsory super and private savings—is distributed unevenly.

A Productivity Commission report this week again confirmed that two-thirds or more of retirees will remain on the pension in 2055 despite six decades of compulsory superannuation.

While the Productivity Commission may not have found this was due to pensioners spending their super in one hit on holidays and new cars, superannuation does allow more than half of retirees to leave the workforce before pension age, most of them retiring voluntarily.

Indeed, these failings explain why Treasury estimates in 2009 found the maturation of the super system will reduce pension expenditure by just 7%.

With government budgets already under pressure, the population ageing and the ratio of taxpayers to retirees shrinking, affording this system will become an escalating problem. It is clear retirees cannot rely on the taxpayer to continue increasing pensions forever.

But there is good news on pension affordability for a government bold enough to take on tough choices: 75% of pensioners have the bulk of their savings outside the superannuation system and are not using them to boost their retirement income.

Australia’s pensioners can use the $625 billion they have in home equity to significantly increase their living standards as well as reduce government pension expenditure.

A three pronged approach is necessary.

First, the government should include the family home in the pension assets test. This will reduce the incentive of pensioners to overinvest in housing and underinvest in income producing assets. It will also reduce the unfairness in the pension means test where non-homeowners, who have fewer assets and less capacity to look after themselves, receive the same pension as those with $800,000 homes.

Second, the government should introduce a government backed reverse mortgage product. Currently, despite the fact that 80% of retirees own their own home, and most have low private incomes, only 1% of them use their home equity to support themselves in retirement through a reverse mortgage.

This government backed reverse mortgage would have low fees, low interest rates and be structured to provide a steady income stream to supplement superannuation and reduce dependence on the pension.

Finally, to incentivise retirees to take out these reverse mortgages the income from them would be deemed to be included in the pension income means test. This would also ensure that pensioners who had a lower income stream from their home would automatically get a higher pension.

The combination of these policies would boost the income of more than 2.37 million pensioners by nearly $6,000 per year. It would also reduce government pension expenditure by $14.5 billion a year, with the benefits growing over time as superannuation matures.

Australians are often told they haven’t saved enough for their retirement, but that is not true. We just need to focus superannuation on reducing pension expenditure and to unlock the potential gains in living standards from the family home.