Rising tensions plague some retirees

The Australian Business Review

Robert Gottliebsen – Business Columnist

9 February 2021

Many sectors of Australia’s retirees are now enjoying the prosperity that comes from higher sharemarkets and property markets.

But two groups are encountering new levels of tension. The first are those who own a dwelling but have most of their money in the bank. Their wealth is rising but they are becoming income-poor.

The second agitated group are holders of large superannuation balances who are suddenly being declared by young people as “spongers on the system” and “rent-seekers”.

I have encouraging news for both groups.

As people get older they often embrace more conservative investment policies and the bank deposit content of their portfolio rises. In previous years, bank deposits earned reasonable rates of interest, but today there is not much income difference between depositing your money in a bank and putting it under the bed. Banks are merely offering a safe place to store your money.

And so while the wealth of many Australians is rising with the value of their houses, their non-government pension income is falling. Their bank money hits their government pension entitlement and they have less income when their cost of living is rising faster than the CPI, given the high medical content.

There are a number of home loan products on the market, but one that is not often considered is the “Government Pension Loan Scheme”, which dates back to the Keating era but has fallen into disuse. Only about 3000 people took it up last year.

What the government is prepared to do is lend people starting in their 50s — but especially 70-year-olds and above — amounts of money that are not limited by your assets or income. The loans are secured on real estate, usually the family home. They are delivered fortnightly and the amount that is allowed is capped at 1.5 times the aged pension. The percentage of the value of a house that can be borrowed depends on people’s age. It gets very high in the nineties.

The loans are repaid when the family home is sold. While that does lessen later flexibility, many older people who are reluctant to borrow on their house are living in virtual poverty despite their wealth. A clear weakness in the loan scheme is the interest rate has not been adjusted to today’s world and is still 4.5 per cent, but my guess is that before the year is out it will be reduced.

A large number of people have seen a 10-20 per cent rise in the value of their dwelling in recent times. The government scheme supplements income but it does mean that there is less money for children to inherit. But I think it’s reasonable that some of the wealth that is being created in the housing boom is shifted into older people’s living standards.

Big super balances

The second group are in an entirely different situation.

Over a period of years there has been a switch in attitudes to the large amounts of superannuation held by older people. For a long time superannuation rules encouraged people to invest large sums in superannuation. This ALP and Coalition government policy deliberately created some very large superannuation balances, which are very difficult to achieve under today’s rules. The policy of maximising the amount of money people held in superannuation continued right through the Abbott/ Turnbull Coalition years.

Indeed, one of the most successful policies to retain the large superannuation sums was a Coalition government brainchild to freeze many superannuation plans issued prior to 2006-07, and allow the frozen money to be released via retaining large superannuation balances.

The Coalition’s policy was therefore to encourage people to use their personal money and leave large sums in super. That’s not today’s agenda, so one of the controversies in superannuation is how much people should withdraw in their 60s and 70s.

Current Superannuation Minister Jane Hume thinks that not enough money is being withdrawn and people’s living standards are suffering.

While this is might be true, many people are nervous about the amount of money they will need in their 80s given the rising costs of medicine, etc. And of course people in their 80s and 90s are required to take large sums out of superannuation. The level of under-withdrawal of superannuation money by people under 80 depends on what graph you look at. If all superannuation is counted, including zero balances, it is clear that people do withdraw their money. But if you take out the zero balances then there is a conservative rate of withdrawal in the 60s and 70s.

It’s important for the government to honour its election promises and not make major changes in this area — especially given its recent policies to actively incentivise the retention of large sums in superannuation.

But on an overall community basis, people have the fitness to spend money on travelling and other areas in their 60s and 70s, which they might not have in their 80s and beyond.