Business Spectator’s Rob Burgess has written another interesting article today calling for the Government to back the reverse mortgage market so that asset (house) rich, cash poor retirees can extract equity from their homes to use in their retirement:
To understand, in tangible terms, what needs ‘fixing’, let’s assume a couple, Mr and Mrs Smith, in their mid 70s with a superannuation fund worth $500,000 and a house within 15km of a capital city CBD.
Once upon a time their ‘cheap’ house was on the periphery of the city, but it’s now worth $1,000,000 because it is seen as ‘inner city’ in comparison to newer suburbs further out.
The Smiths draw an income from their super fund, topped up by the pension, but struggle to make ends meet…
But then one day, the Smiths see an ad for a ‘debt free’ equity release product in which the bank will buy a stake in their home (at a large discount, in the way bonds are bought at a discounted rates to reflect the ‘interest’ they will pay over time) and decide to ‘sell’ half their house.
Based on normal actuarial principles, a $500,000 stake might be worth, say $350,000 to a bank that has to hold the asset to maturity – and manage risk, particularly ‘longevity risk’.
So the Smiths now have: $500,000 in super, $500,000 in equity in their own home, and $350,000 to consume themselves, to use for the benefit of their children/grandchildren or invest elsewhere.
The beauty of such a scheme is that it allows the Smiths to stay in their own home until death/old age catch up with them. Same neighbourhood. Same friends. And a better standard of living – expensive renovations such as a stair-lift or walk-in bath are now affordable, and Mr Smith will never cut the lawn himself ever again…
If you read Rob Burgess’ article for yourself, you will see that he does also identify some of the inherent flaws in Australia’s superannuation system, namely: that super concessions are “massively regressive and work against both the principle of a ‘progressive tax scale’” – in reference to the 15% flat tax applied on superannuation contributions, which provide bigger tax concessions the further one moves up the income scale.
That said, I do not believe that Burgess’ proposed government backing of the reverse mortgage market is a sound solution.
First, it would mean even more government support for the housing market. Instead of letting retirees downsize to homes that better suit their needs (freeing-up stock for younger, growing families), they would be encouraged to stay put, helping to keep home prices inflated and resulting in less efficient usage than is currently the case.
Second, it would worsen inter-generational equity, unless the funds received from the reverse mortgage are counted in the financial assets test for the aged pension. For example, if a pensioner couple receiving $1,133 per fortnight from the Government reverse mortgaged half of their $1 million home for $350,000, would they still be entitled to the full pension under Burgess’ plan? If yes, then it would worsen outcomes for younger Australians, who would still be called upon to subsidise oldies that are well placed to look after themselves. If not, then Burgess’ plan might have some merit.
Finally, the plan seems overly complicated. The main issues working to make Australia’s retirement system both inequitable and unsustainable are: 1) the 15% flat tax, which provides the lion’s share of concessions to those who need them least (i.e. upper income earners); and 2) exempting one’s principal place of residence from the assets test for the pension (resulting in wealthy retirees receiving benefits at the expense of the young).
Surely, a better way of addressing these distortions is to: 1) make concessions on salary sacrificing into super 15% for everyone; and 2) means testing all of one’s assets (including the family home) when working out who receives the pension?
As argued last time, the fundamental issues around superannuation concessions and means testing of the aged pension need to be addressed before considering government involvement in the reverse mortgage market.
