If renting is to become more prevalent in Australia, as a new report on housing affordability suggests, renters will have to demand big changes to the retirement system.
The Committee for the Economic Development of Australia (CEDA), which released its Housing Australia 2017 report on Tuesday, has a long history of sober policy analysis and this report is no exception.
It deals with a number of the key issues tackled by The New Daily in the past three years, such as:
- The distorting effects of negative gearing and the capital gains tax discount;
- property-based inequality between and within the generations;
- the issue of ‘empty nesters’ unable to downsize to more appropriate homes;
- and Australia’s cumbersome planning system that makes the ‘retro-fitting’ of cities too slow.
They are important debates, but it also identifies the really big fork in the road for ‘Generation Rent’ – the growing wealth divide between those paying off their own homes, and those who rent.
It notes: “Investment in housing by owner-occupiers is very sensible given the lenient treatment such investment receives in the Australian taxation system by its exclusion from capital gains taxation and from pension asset tests. Nevertheless, access to housing is an essential part of retirement planning and it is not clear that the various elements interact well.”
Not clear? The way the ‘various elements’ interact is a disaster for renters.
Consider two hypothetical neighbours: John, who went to the ‘bank of Mum and Dad’ for a deposit for a mortgage, and his neighbour Alice, whose parents can’t spare that kind of money.
If Alice wanted to arrive at retirement with similar wealth to John, she could look at a breakdown of his mortgage payments – he pays a lot to ‘rent’ his home loan from the bank, and ‘saves’ a smaller amount by paying down the principal.
Depending on interest rates, that ‘principal’ accounts for a large part of the difference between John’s mortgage repayment and Alice’s rent.
Theoretically, therefore, Alice could save and invest that amount elsewhere each month.
The obvious choice would be to put more into her superannuation where it would be best protected from tax. However, on current settings there is no sign that Generation Rent will do this.
Lower-income groups who rent tend to spend more of their pay packets just surviving – what economists call having a ‘greater propensity to consume’.
So Alice is more likely to spend those potential investment dollars on food, healthcare and so on. That will eventually create a huge problem at retirement.
At 67, if John is still living next door to Alice, it probably won’t be for long – she’ll be looking for a cheaper place.
In the absence of a day job, Alice will find the pension, plus her lifetime super savings don’t go far in covering her rent. And rent assistance doesn’t even come close to making up that gap.
Even if Alice had increased her superannuation contributions over the years to match John’s ‘savings’, the result would still be inequitable.
The value of John’s home is not included in the pension asset test, though Alice’s now higher superannuation balance is.
So John might get the full pension and pay no rent, while Alice pays rent on a part-pension.
And the two of them will leave very different inheritances to their heirs.
Make it fair
If we’re planning to become a nation with a larger proportion of renters – like many other nations – big changes to the retirement system must be made.
The obvious change is to consider John’s ‘savings’ in his home to be equal to Alice’s savings in her super account – that is, bring the family home into the pension asset test.
The other change would be to raise rent assistance from its current, hopelessly inadequate level.
What we cannot do is set one group of householders on a path to prosperity, and another on a path to poverty in retirement.
CEDA’s report contains an excellent list of measures to start addressing affordability.
But to the extent that governments fail to accept its advice, they must start planning now to mitigate the harm Australia’s distorted housing market will do to retirees in the years ahead.