Spiralling mortgage debt among retirees could slash retirement incomes by almost 12 per cent, industry experts have warned.
Figures reported this week by The New Daily showed the proportion of home owners aged 55 to 64 years owing money on mortgages has tripled from 14 per cent to 47 per cent, while the ratio of debt to income doubled to 152 per cent over 25 years.
The revelations come at a time when Australians are already working longer to cover late-life mortgages.
Phil Gallagher, retirement policy specialist with Industry Super Australia, said growth in retiree debt was “a very serious issue that has the ability to undermine the effect of the superannuation guarantee”.
“I gave evidence to a parliamentary committee a few years ago that showed the average mortgage debt at retirement was now $100,000, far more than at the end of the 1980s,” Mr Gallagher said.
That would effectively shrink a retirement super balance of $300,000 back to $200,000 for a person retiring at 67 and living until 92 – translating to a cut of $4500 in annual retirement income comprised of super payments and the age pension.
“A cut of that size would mean you would lose all flexibility in retirement because you would need to spend all the income you could generate. There would be nothing left over for house repairs, a new car or caravan,” Mr Gallagher said.
Reducing income levels to $36,400 would push the retiree in question to well below the comfortable retirement standard calculated by the Association of Superannuation Funds of Australia (ASFA), which demands net income of $43,300 a year.
Alternatively, a retiree with a net $200,000 in superannuation who chose to live on the ASFA comfortable standard would be forced to live on the age pension after age 78, according to the Mercer retirement income simulator.
Mercer senior partner David Knox told The New Daily that people retiring with mortgage debt and superannuation often benefit by paying off the debt.
“Paying off mortgage debt when you retire is often sensible because of the age pension means test,” Mr Knox said.
This is because owner-occupied housing is not included in the means test. Paying down a mortgage with super means a higher age pension may be claimed to replace some of the lost super income.
“[However] most retirees like to have a fund for a ‘rainy day’, and paying off debt with super means people don’t have a buffer,” Mr Knox said.
A practical result of higher levels of debt running into retirement means “people may need to work for a bit longer”, Mr Knox said.
This phenomenon is already working its way through the system.
The latest figures from the Australian Bureau of Statistics lend weight to the view, showing 20 per cent of people intended to work to 70 or older while another 50 per cent expected to retire between 65 and 69 years – cumulatively 70 per cent of Australians are expecting to work beyond 64.
A further 23 per cent intended to retire between 60 and 64 years.
ASFA research chief Ross Clare conferred, saying “there also has been a trend to a greater proportion of those aged 65-plus staying in the paid labour force, which assists in paying off mortgage debt”.
“The trend in mortgage debt reinforces the need for the Superannuation Guarantee to get to 12 per cent as soon as possible, so that Australians can achieve dignity and comfort in retirement,” Mr Clare said.
The New Daily is owned by Industry Super Holdings