A new analysis paper has questioned whether encouraging those over retirement age to spend all their retirement savings in their lifetimes is a good idea.
In his analysis paper, Terrence O’Brien states that the Australian Government’s Retirement Income Review implies policy directions that will encourage retirees to spend their life savings, including the equity in their homes, during retirement.
At this point in time, the Government’s Retirement Income Review is just a report. It’s purely a proposal looking at forward-moving measures and there’s no promise that any proposed policies will be initiated just yet.
Let’s look closer at what information the government report and the analysis paper contain.
What does the government’s report contain?
The Australian Government’s Retirement Income Review is an overview of the Australian retirement income system. It has found the system to be effective and broadly sustainable. Though, it has offered a number of suggestions to strengthen it.
Three of the report’s suggestions are as follows.
Firstly, the report notes that the rate of super paid to employees is sufficient. But, retirees’ income from their super should be taxed more.
Next it states some of its contributors believe the equity in a retiree’s home should be taken into account when applying for the age pension.
Finally, it suggests retirees might purchase a longevity protection product to avoid running out of money in retirement.
The report says people worried about outliving their savings may make financial decisions which diminish their quality of living. Instead, retirees could purchase longevity protection plans that would provide them with an income after a certain age.
O’Brien says these measures come a long way from what is a common Australian belief – that owning a home allows you financial freedom in retirement.
Would these measures be fair? O’Brien thinks not
O’Brien states that, if adopted, policies within the Retirement Income Review would encourage retirees to spend their entire life savings.
It would do so by placing higher taxes on superannuation withdrawals and decreasing access to the age pension for those who own their own homes. Thus, encouraging retirees to purchase new longevity protection products and spend the equity in their homes.
According to O’Brien, these measures combined might diminish retirement savings and inheritances.
O’Brien says if a house’s equity is taken into account when applying for the age pension, accessing the equity within their homes may become a necessity for retirees.
Further, purchasing a longevity protection product would rarely be necessary if policies don’t encourage more spending. O’Brien said:
In effect, preferred policy directions would incline each generation towards consuming fully its own lifetime savings.
Policies would be shaped by the idea that retirement income of 65% to 75% of the average of post-tax income earned in the last 10 years of work is adequate for the final 30-or-so years of life.
O’Brien goes on to say the government’s attitude to saving and placing equity in property has changed in recent times. To outline this shift, O’Brien quoted Robert Menzies’ 1942 argument for frugality and homeownership: “Frugal people who strive for and obtain the margin above… materially necessary things are the whole foundation of a really active and developing national life.”
O’Brien’s criticisms outline a question for the future.
Are policies shifting away from the idea of the ‘forever’ home – one to leave to those we love? Maybe, in the future, retirees will routinely downsize early in retirement.