Asset Rich, but Income Poor: Australian Housing Wealth and Retirement in International Context

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1 Asset Rich, but Income Poor: Australian Housing Wealth and Retirement in International Context Bruce Bradbury Social Policy Research Centre University of New South Wales Sydney, Australia Presentation at the 16 th Colloquium of Superannuation Researchers, 4 July 2008, UNSW Based on research funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA). All views expressed in this document are those of the author alone and do not necessarily represent the views of FaHCSIA or the Australian government. Outline Australian retirement support Australian home ownership wealth since the early 1990s v Are the elderly running down their housing assets? (No) v Are there cohort differences? (Maybe) International comparisons using the Luxembourg Wealth Study v Is the lifecycle pattern of housing wealth different in Australia? (Yes) Implications Australian retirement system Around 70% of people over retirement age receive at least some Age or Veteran s pension. v Flat rate, pay-as-you-go funded from general revenue v Income and asset tested v Relatively low payment compared to social insurance State-mandated private saving (superannuation) growing in importance, but yet to reach maturity Private savings, particularly owner-occupied housing, historically important Owner-occupied home exempt from the pension asset test (though non-owners have a higher threshold for other assets) v Provides incentives for people to keep wealth in their own home Distribution of non-housing wealth: Home-owners over age pension age, Singles Source: Survey of Income and Housing Costs Notes: Asset test withdrawal range: Singles: $150 - $300,000 Couples:$210 - $470,000 Couples

2 Mean household wealth holdings by age: Australia Average value of own-home wealth by age, to ($ ) Average own-home wealth by cohort ($ ) Average value of own-home wealth by cohort ($ , deflated by mean house values)

3 Luxembourg Wealth Study ( (ABS HES for Australia) Average household disposable of age group, relative to overall average / household ('000 USD 2002) House price to rent ratio relative to long-term average LWS code Country Year GDP/capita ('000 USD 2002) Australia Australia CA99 Canada UK USA (PSID) USS01 USA (SCF) Germany Italy FI98 Finland NO02 Norway SE02 Sweden Home-ownership rates Mean own-home wealth relative to GDP/capita (5% of adjusted home wealth, including non-owners) CA99 USS01 FI98 NO02 SE02

4 5% of adjusted own-home wealth relative to disposable of age group Housing-related and consumption concepts Component (DI) DI plus imputed rent Full Saving Consumption Expenditure Housing consumption of home owners = 5% of house value Rent Non-housing consumption Mortgage interest and maintenance costs Mortgage principal repayments Non-housing saving Capital gains Housing consumption (H) relative to total consumption (T) H = 5% of adjusted own-home value + rent T = H + (disposable housing expenditures) Conclusions: Australian patterns Some evidence of asset test influencing wealth-holding patterns but only weak No evidence of running down own-housing assets in retirement Most cohorts following (the average) housing wealth track of previous cohort But possible break at beginning of baby boomer generation (those currently in their early 60s) 0.10

5 Cross-national summary: 70s vs 50s (Ratio of average for people aged to average for age 50-59) Conclusions: Cross-national Own-home wealth Own-home wealth/ disposable Housing consumption/ total consumption CA99 USS01 FI98 SE02 The average Australian older person has both a relatively low and a relatively high level of own-housing wealth v Compared to other countries, they are indeed asset rich but poor Convergence likely in the future v Some countries (eg UK and Italy) may catch up with Australian home ownership rates v Australian retirement s will increase (superannuation) Australia is less distinctive in terms of the share of the total consumption of the elderly devoted to housing though the increase in housing consumption with age is larger than in most countries The asset test exemption and housing wealth A clear correlation between an unusual treatment of housing wealth in the pension system and an unusual pattern of housing wealth holding in retirement But it would be premature to conclude that the former caused the latter Historically, the two features developed together, and can best be seen as complementary components of an overall retirement package. However home-ownership is not a particularly effective way of financing consumption in retirement Making the best of housing wealth in retirement Can we increase the ability of the retired to derive nonhousing consumption from housing wealth? v Reverse mortgages etc. If they are going to work anywhere, they should work in Australia v Reduce transaction costs for trading down v Ensure supply of suitable trade down dwellings Should we continue the privileging of own-home wealth under the pension asset test? These results are about averages. How do those at the bottom cope?