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.
More 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.
- 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.
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.
- 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.