Australia’s ageing population threatens society with unsustainable debt | John Edwards

pension

As our ageing population threatens Australian society with unsustainable debt, it is time to ask the question:

How can we help people live independently in retirement so they are less reliant on the government pension?

It is clear that we need to come up with a solution to this looming problem.

Unless we find ways for retirees to live independently, there is a real risk that the standard of living for the aged, and for all of us in general, will reduce.

The government simply can’t keep spending more than it receives forever, that is – unless we want to see ourselves in a situation like Greece.

It’s all about your home

This article explores superannuation guidelines (with reference to the family home) that could incentivise greater independence from government support among retirees.

In most cases, the family home is the largest valued asset held by many retired people.

moneyMore often than not, it will not be fully utilised and in reality, most retired people do not need the space it provides.

If you can afford to live without any financial help, then by all means continue to live in and enjoy your family home where you have spent most of your life.

However, if you struggle to afford to stay in your home, and need government assistance in order to remain living there, then rational economics suggest it may be time to sell and move into a home that is more in accordance with your financial position.

You may find my statement harsh, but it is the reality and what we would all have to do if the government wasn’t there to support us in our old age.

Notwithstanding the economic rationalism, it is very difficult to make a social and political change and remove something that has been in place for many years.

For decades, people have planned for retirement based on the assumption that they would never have to sell their home.

They paid taxes, and accepted those taxes on the basis that the government would support them in old age and never have regard for the value of the family home.

Yet the reality is that we can’t continue this way.

We have to find a solution – something that will help retirees be independent of government support and still enjoy a comfortable lifestyle in retirement.

So, for what it is worth, here is my proposal on what I believe Government should do:

  • Include the value of the family home in the means test when identifying the right to any pension or part thereof. The value of the family home included should be an amount that exceeds say $400,000.a-retirement1
  • Allow any person to contribute up to $2 million into their super fund where such funds are generated from the sale of the family home and the person is over the age of 60 years.
  • The ability to contribute to the super fund should be a one-off entitlement and have no tests other than those in the above point. It should be allowed, even where the person is receiving a pension from their super fund.

Currently, there is a significant amount of discussion around the right of people to contribute more than is realistically needed into their super simply for estate planning purposes.

That discussion is soundly based given the large cost this potentially has on tax revenue when the government is struggling to reduce debt and balance the budget.

In reality, even if we retire at 60 years of age, most of us don’t need to support ourselves for more than about another 30 years.

So how much do we really need in our super fund?

If we assume an inflation rate of about 2%, and we are happy that we can comfortably live on $70,000 per year after tax, then we would need to have a fund of approximately $2.06 million today.

This assumes our fund has a growth rate equal to the inflation rate only.

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Clearly, our fund should be able to do better than this.

On the above basis, it appears reasonable that the government should place a limit on the size of the tax-free status in a super fund to something in the order of $2.5 million.

Given all of the above, it seems to me that a reasonable and acceptable solution is to encourage retirees to downsize their home and at the same time alter the super fund rules so funds have a limit of $2.5 million.

People downsizing should also be allowed to make a contribution of up to $2 million into their fund.

The result would be a win/win situation for everyone.

The benefits for those who downsize include:

  • They will still be able to live in a home that they own.bigger houses
  • They will no longer have a tax liability on earnings being generated off the sale proceeds of the family home.
  • They will not have to enter into s reverse mortgage, which have a high interest cost and have the potential to reduce the value of their asset by an unknown amount when it is sold.
  • Their prior, non-income earning home will start to produce income, tax-free, and enhance their lifestyle.

The benefit to the government is the cost of the super fund arrangements, and the amount spent on pensions, will be reduced.

Those who contribute funds to their super as a consequence of the sale of the family home will, in all probability, require much lower levels of support.

Perhaps as an additional benefit, state governments across the nation might consider removing conveyancing duty where a person over the age of 60 sells their family home and buys a lower cost property, then contributes any surplus funds into their super.

Maybe all of this is wishful thinking, but I really hope for the future of our aging population, and for generations to come, that the government takes my suggestions on board and actions start to be put in place to help retirees live independently.



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John Edwards

About

John is Consulting Analyst for Onthehouse, Australia’s most comprehensive real estate portal, and Founder of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and the general public. Visit www.OnTheHouse.com.au/


'Australia’s ageing population threatens society with unsustainable debt | John Edwards' have 8 comments

  1. March 19, 2015 @ 6:02 pm gilstamp

    Surely, as this generation becomes more self-sufficient in retirement due to their lifetimes of superannuation accumulation, and especially if a limit is placed on large superannuation contributions as has been stated, the situation should resolve itself without any punitive measures being placed on retirees.

    Reply

    • March 19, 2015 @ 8:07 pm Michael Yardney

      Unfortunately most Baby Boomers do not have enough Super to retire on comfortably as this blog shows http://propertyupdate.com.au/the-superannuation-dilemma-for-baby-boomers/

      Reply

      • March 20, 2015 @ 2:20 pm Peter

        Michael – I think they are some very sound points! I have two widowed nan’s both on full pensions – yet one lives in a house worth 1.5 million and the other a 2 bedroom unit worth $500k. I can’t understand anyone who can rationalise this on any basis.

        The only issue is that cashed up retirees downsizing will drive up the prices of homes in the same price range as FHB. Again it seems all arguments and policy debates lead to supply!

        Reply

        • March 20, 2015 @ 3:10 pm Michael Yardney

          Peter
          Supply of suitable land is definitely one of the issues

          Reply

  2. March 20, 2015 @ 2:47 pm Justin

    This will create an opportunity for suitable properties to be built that either allow seniors to continue living with families, smaller, easier to maintain homes for seniors or ‘retirement/aged’ facilities that better meet the needs of people as they move out of their homes and into care.

    Reply

    • March 20, 2015 @ 3:10 pm Michael Yardney

      You’re right Justin
      We’re not building the right sort of properties

      Reply

  3. March 20, 2015 @ 11:45 pm Kathy

    I think the bigger problem will be when retiring baby boomers try to sell their assets to downsize and convert their assets to cash, and find that there’s a glut of properties, shares and businesses flooding the market at the same time as more and more boomers retire. This has already started to trickle through as the first of the baby boomers (born 1946) started to retire from about 2011 (aged 65).

    This will become more pronounced in years to come and those boomers relying on the sale of their businesses as their superannuation will find stiff competition from other retirees selling similar businesses to a smaller pool of new business owners.

    It will be the same thing for those wanting to cash out of their properties and shares.

    Here in Brisbane we can already see this, for example in the prestigious suburbs of Hamilton and Ascot where there are million dollar mansions on large blocks which can’t be developed due to heritage restrictions. The children don’t want the house because of the enormous cost of upkeep and can’t really sell it for it’s true worth because not too many people can afford this type of house, which will ultimately drive down the prices of real estate as well as shares and businesses.

    It’s just demographics at work, just look at what’s happened to Japan for the last 20 plus years and their stagnating asset prices. Australia won’t be affected as badly as Japan due to immigration, but the new immigrants coming into Australia are looking for different types of housing (and businesses and shares) and are happy to have multiple generations living on the same property.

    Ultimately this is probably where Australia is heading too, with larger blocks holding several properties including granny flats for older parents or buying two or more houses next to each other to be close to aging relatives or more resort like aged care facilities like Seasons.

    Reply

    • March 21, 2015 @ 7:34 am Michael Yardney

      Kathy
      You’re right the future holds some “interesting” challenges for us.
      It also holds some great opportunities.
      let’s prepare for the former as we take advantage of the latter

      Reply


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