Why retirees aren't spending their savings - The Centre for Independent Studies
Donate today!
Your support will help build a better future.
Your Donation at WorkDonate Now

Why retirees aren’t spending their savings

retirees sunset pensionA number of recent reports, including one this week from CSIRO, show that retiree households are not drawing down their wealth to support themselves in retirement.

In June 2015 an ARC Centre of Excellence in Population Ageing Research paper found that, while households draw down their resources early in retirement, older retiree households maintain or increase their wealth.

This finding was echoed by Productivity Commission research on Superannuation Policy for Post-Retirement which found that while super balances were run down between the ages of 55 and 70, net worth declined only slowly over retirement. The PC showed that 75–79 year olds had a higher net worth on average than people 50–54.

While some have lamented that retirees are being overly cautious, this reluctance to use savings is actually symptomatic of two deeper flaws in the retirement system.

First, the age pension means test rewards those who convert assessable, income-producing assets (for example shares) to non-assessable, wealth accumulating assets (like the primary residence). This has led to clear over-investment by retirees in illiquid and untapped housing assets, such that around 70% of retirees have 75% or more of their wealth locked up in their home.

Second, as noted in the 2009 Harmer Pension Review Report, is a strong but erroneous belief in those who have ‘worked hard and paid taxes all their lives’ having the ‘right’ to a state funded pension. Those of this view argue that because they have saved they deserve support, and shouldn’t have to use those savings to support themselves.

But the pension is no more a reward for a lifetime of service as a taxpayer than it should be a vehicle enabling wealth accumulation.

This supposedly moral case for welfare is just a recipe for churn, higher taxes and ultimately big government. If payments are made to everyone who can’t afford to live without them and everyone who thinks they deserve them, who will be left to pay for all this largesse?

Around 7 in 10 retirees already receive an age pension, and for most the pension constitutes the bulk of their income. Life on the pension is not typically glamorous, but for those who own their own home and have some superannuation income, it is certainly better than those dependant on Newstart — and probably many on the minimum wage too.

And therein lies the core of the behavioural dilemma over retirees’ savings. The primary reason retirees don’t draw down their home equity, or take more than the minimum from superannuation, is that the state-funded pension means they don’t have to.

It may be perfectly reasonable for pensioners to self-insure for longevity risk, to be overly cautious and to want to bequeath something to their kids, but this behaviour is possible only because taxpayers are covering the day to day expenses.

Without access to the pension, retirees would have to draw down their savings to support themselves.

The perverse incentives created by the existence of the pension compound the perverse incentives within the pension means test towards asset accumulation: it is hardly surprising that retirees are asset rich and cash poor, the system rewards them for being so.

The challenge for policy makers is how to limit these perverse incentives without unduly impacting the 20% of pensioners who have no assets and no income other than the pension. For those pensioners, particularly those who rent in capital cities, the pension is barely adequate.

There are two places to start. First, the exemption of the family home from the pension means test is the primary reason why net worth may increase over retirement. A government-backed scheme for reverse mortgages combined with including the family home in the pension assets and income tests could save taxpayers $14.5 billion a year and boost incomes for 98% of pensioners by an average of $6,000 a year.

This scheme would not adversely impact the poorest of pensioners, as overwhelmingly they don’t own their own homes.

Second, the government needs to look at superannuation not as a source of additional tax revenue but as a source of expenditure savings. Boosting superannuation balances, combined with other reforms to better align superannuation with the purpose of enabling more self-funded retirement, should produce offsetting pension savings.

This would also better align the pension with the purpose of supporting only those who cannot support themselves.

It is important to keep in mind that the issue is not people dying with ‘unused’ assets, or even retirees accumulating additional savings across retirement. The problem is taxpayers being asked to pay welfare to people who can support themselves.

As long as retirees are not taking some of the $44 billion a year currently being paid out in pension payments, it is no business of the government what they do with their savings.

Simon Cowan is a Research Fellow at the Centre for Independent Studies and co-author of the report The Age Old Problem of Old Age: Fixing the Pension.