The super guarantee is a super distraction

For example, there seems no more agreement than before about the impact of, say, increasing the super guarantee on wages. Indeed, just three days after the release of the report, Paul Keating was on 7:30 arguing that the increase will come from “the profit share of companies”.

Many others, particularly in the industry funds sector, will similarly refuse to accept super comes from worker’s wages, not least because it is too ideologically uncomfortable for them to accept the increase they want will harm the workers whose interests they supposedly represent.

Nevertheless, the small band of dedicated patriots seeking to hold back the ever-expanding super behemoth must perpetually challenge these vested interests; much like Roman senator of antiquity Cato the Elder, who continually ended even unrelated speeches with the warning “Carthage must be destroyed”.

Challenging the case for increasing the super guarantee is important because of the trade-off between different forms of savings: particularly, in this context, between superannuation and buying home.

Home-ownership rates have been falling among younger generations for some time, and increasing saving through super will exacerbate the challenges of saving for a deposit or paying off a mortgage.

This creates difficulties not just during people’s working lives but also during retirement because, as the retirement income review makes clear, the family home is central to the adequacy of living standards in retirement.

The review relevantly notes there is a marked difference in terms of the living standards of retirees who own their home compared to those that don’t.

This is not limited to the issue of housing costs, which are typically far higher for pensioners who don’t own their own home, notwithstanding the additional support provided by taxpayers through rent assistance.

In part, this inequality is supposed to be offset by allowing non-home owners to hold more assets before they begin to lose pension eligibility. However, two problems emerge.

First, the asset test is only set just over $200,000 higher than for home owners, and the overwhelming majority of home owners (around 95 per cent) have higher levels of home equity than this difference.

Indeed, the report notes the median value of an age pensioner’s home is approximately 2.5 times this amount. Moreover, around 15 per cent of pensioners have more than $1 million in home equity. This is one of the reasons around 20 per cent of pension expenditure goes to those in the top two wealth quintiles.

This group has many multiples of the net worth of those in the bottom quintile. Yet, as many in the top two quintiles receive full age pensions, their incomes are often the same.

Further, as 2015 CIS research found, despite the difference in asset-test thresholds, home owner pensioners on average actually had significantly more non-home wealth than non-home owners.

This is why most pensioners who are doing it tough are found among those who are renting and solely dependent on the pension.

In fact, in many respects, the surprising thing is that the gap between living standards for home owners and non-home owners is not far wider.

Indeed, were it not for the underutilisation of housing equity by retirees, the inequity created by the treatment of the family home would be abundantly clear.

As the review also notes, though it may seem contradictory to the first point to some extent, most retirees do little to access the value stored in their home to boost their retirement income.

Despite attempts by government to facilitate some equity drawdown through the pension loan scheme and the option to deposit some of the proceeds of downsizing into super, just a handful of retirees take up these options.

The report notes that less than 10,000 people accessed the downsizing scheme during the 18 months to the start of 2020. The DSS annual report states that just under $42 million in total is outstanding under the pension loan scheme.

There are 2.55 million people on the age pension, 75 per cent of whom are home owners; this represents just over $20 per pensioner on average, or just 0.004 per cent of median pensioner home equity.

The private market is little better, with the reverse mortgage market worth just $2.5 billion at the end of 2017, and fewer than 10 per cent of outstanding loans either progressive drawdown or income stream products that could supplement living standards.

Some prefer to release equity by selling their home, but a number of disincentives are reducing the use of this channel of equity release as well.

First, restrictive planning practices often limit the supply of age-appropriate housing in areas where pensionsers with substantial home equity reside. The desire to age in place is not limited to a particular home, but often extends to wanting to stay in a familiar community, close to current healthcare providers and friends and family.

Second, the physical and financial challenges associated with selling a home, buying a new home and then moving the accoutrements assembled over decades of life should not be underestimated. Often once potential downsizers realise how little they may gain from selling, they are discouraged.

This is to say nothing of the disincentives stemming from potential loss of age pension entitlements, fears of future health costs, or the emotional desire to bequeath the family home to the kids.

The importance of improving the efficient use of assets in retirement, both superannuation and housing, is perhaps the most important, if not most prominent, takeaway from the retirement income review.

It’s an aspect that has received far too little focus for far too long.

Instead, for years, the focus in the retirement income debate has been on ways to fine-tune the superannuation system to achieve desired outcomes. This has involved extensive navel-gazing over the appropriateness and targeting of tax concessions, accompanied by a near-religious faith in the need to increase contributions.

But in many respects, the retirement income review reveals these are actually red herrings.

Resolution of the housing puzzle is far more important to maintaining future retiree living standards, as well as facilitating genuine self-funded retirement, than increasing the superannuation guarantee.