Chapter 2 - Wealth and debt
Asset accumulation
2.1
There is a common public perception that the current generation of
retirees and those approaching retirement have substantial wealth. Certainly,
older people have a high and growing—due to the ageing of the population—percentage
of total household wealth. According to Kelly and Harding, the current
generation of older Australians are the wealthiest yet.[1]
Other research has similar findings, noting that the share of wealth held by people
aged 65 and over rose from 17 per cent in 1986 to 27 per cent in 1997, while
the proportion of the population in that age group increased by a much smaller
margin—from 10.5 per cent to 12.1 per cent.[2]
This represents an increase in the average wealth of older people of 90 per
cent in this period.[3]
More recent research has noted the continuation of this trend, with those aged
65 and above possessing 22.9 per cent of total household wealth, with those
aged 55‑64 possessing 24.3 per cent.[4]
2.2
Research into the financial circumstances of older people has noted that
between 1999 and June 2004, 30 per cent of partial-rate age pensioners
increased their total assets in real terms, including three per cent that lost
eligibility for the pension due to assets growth. Another 30 per cent maintained
80-100 per cent of the value of their assets in real terms, with most of the
devaluation due to inflation rather than drawing down on the nominal value.[5]
2.3
In its submission to the inquiry, FACSIA reported similar findings. It cited
ABS data that indicated households headed by a person aged 65 or older hold
$778 billion in net assets. The average and median wealth levels of older
households ($566 600 and $355 800 respectively) exceeded those of
younger households ($355 800 and $282 900 respectively). These patterns
were also reflected in terms of comparisons of couple households and single
person households.[6]
2.4
Older people enjoy a comparatively high rate of home ownership with 82.1
per cent owner occupiers, and an average home and contents value of
$409 900. Older couples enjoy a comparatively higher rate of owner occupancy
than older singles with 90.4 per cent compared to 74.5 per cent. The home
ownership rate for age pensioners was lower at 70 per cent. Home ownership
helps the living standards of those in these circumstances by reducing costs,
compared to those in rental accommodation. In addition to the financial
benefits, older people that own their homes enjoy greater stability and housing
reliability. FACSIA reported that many older people prefer stability of
housing, with a familiarity and attachment to their local area, its facilities
and friends in the area, more than the house itself.[7]
2.5
The assets exemption for home-ownership for eligibility for the aged
pension means that some retirees have a valuable asset combined with a limited
income stream. However, FACSIA submitted that there was little evidence to
suggest older people were asset rich and income poor. In particular, FACSIA
noted that only 16 per cent of older households are in the top half of the
wealth distribution but the bottom half of the income distribution. Further,
only 1.3 per cent of the older population had wealth in the highest quartile
and income in the lowest quartile.[8]
2.6
Other evidence considered by the inquiry suggests that a focus on
average or demographic wealth accumulation belies the fact that the
distribution of wealth is often uneven.[9]
For example, in 2002, 80 per cent of those aged 65 and above only possessed 37
per cent of the wealth in this age bracket.[10]
Consequently, many older people remain financially and socially disadvantaged.
2.7
Although some pensioners are able to generate income additional to their
pensions such as through investments in other assets, the Combined Pensioners
and Superannuants Association argued that the capacity to do so declines with
age. By the age of 75, the age pension tends to be the only income received.[11]
Also, the National Institute of Accountants (NIA) warned that changes to
accounting standards have resulted in more conservative investment strategies
for pension funds, which means that returns are not being maximised.[12]
Realisation and conversion of asset
value
2.8
Consideration of wealth in determining capacity to afford cost of living
pressures can be misleading. Research by AMP and the National Centre for Social
and Economic Modelling (NATSEM) has highlighted that a large proportion of the
wealth of older Australians is preserved in illiquid assets, most notably the
family home.[13]
The growth in the share of total household wealth experienced by older people
over the past decade has been attributable largely to the housing price boom.
Therefore, although many older people are wealthy on paper, utilisation of that
wealth would require sale of the family home, which many would be highly
reluctant to consider.
2.9
The Australian Housing and Urban Research Institute (AHURI) reported
that older people are most likely to move as they age as a result of increasing
problems with house and garden maintenance, particularly with the death of a
spouse or declining health.
2.10
According to a survey by AHURI, 82.8 per cent of respondents viewed the
family home as an investment for the future, 86 per cent believed
home-ownership increased choices about lifestyle and 74.8 per cent argued that
it was an investment that could be sold or borrowed against to fund
requirements in old age. AHURI considered that this underlined the common
perception of home ownership providing an important enabler to a person's
future lifestyle choices.[14]
The survey found that the attachment of home-owners was more likely to be to
their neighbourhood than the home itself. AHURI argued:
The symbolic dimension of the home as the foundation for
personal identity is now somewhat blurred as the values of consumption and
lifestyle begin to take precedence.[15]
2.11
However, according to the Brotherhood of St Laurence, many retirees actually
find it very difficult to convert assets into a means that can enhance their
standard of living. This is because the boom in property values has also
proportionally increased the competition, availability and costs associated
with purchasing retirement villages and lifestyle apartments. Consequently, an
increasing proportion of homeowners are being financially excluded from these
housing options due to the lower value of their family homes. According to the
Brotherhood of St Laurence, many homeowners have now joined non-homeowners in
suffering the problem of affordable housing options for older people.[16]
Debt levels
2.12
FACSIA argued that older households possess much lower levels of debt
compared to other households. Further, it maintained that only 2-3 per cent of
older people (aged 65 and over) are still repaying a mortgage, which is a tenth
of the national average.[17]
NATSEM and AMP research has also reported that debt levels decrease with age
and retired households generally have fewer debts than households where there
is continuing employment. The debt levels of retired households are almost a
quarter of those of employed households, but it is probable that superannuation
is used to reduce debt.[18]
2.13
However, while other evidence considered by the inquiry confirmed these
arguments, it also highlighted that older people appear to be taking greater
debt into retirement than previously was the case. Almost 90 per cent of older
Australians aged 60-64 have paid off their mortgages on the family home,
according to AMP and NATSEM.[19]
This represents a fall from over twenty years ago. In 1986, 98 per cent of
retiree households and 94 per cent of households with one person in the older
age bracket had paid off their mortgage.[20]
2.14
The submission of the Brotherhood of St Laurence reported similar
findings. It argued that while 79 per cent of 65 year old households own their
own homes, this includes only 57 per cent of those aged 55 to 64. In 1982, 56
per cent of those aged 50-59 owned their own home without a mortgage and by
2003-04 this had fallen to 46 per cent. The percentage living in a home where
they are paying a mortgage went from 28 per cent in 1982 to 38 per cent in
2003-04.[21]
Those on fixed incomes have greater difficulty servicing loans that accrue
compound debt.
2.15
The higher proportion of retired households that own their own homes
suggest superannuation has been used to pay off mortgages.[22]
This is also reflected in research by FACSIA[23]
and evidence provided by Hobsons Bay City Council. The latter's community
profile has indicated home ownership levels increase consistently with age, but
drop for persons aged 85 and over. Similarly, the proportion of those renting
or paying off a mortgage decreases with age, but increases for persons aged 85
and over. The submission does not draw a definitive conclusion for this
phenomenon but speculates:
This may be due to persons aged 85 years or more having used up
their retirement benefits and being forced to sell or re-mortgage their home
when their funds run out.[24]
2.16
The FACSIA research formed a similar conclusion. But both the FACSIA
research and the Hobsons Bay City Council raised the other possibility that
this age group simply reached retirement in a less affluent and
superannuation-focussed period and accumulated fewer retirement funds over the
course of their lives than younger retirement cohorts.
2.17
The Association of Independent Retirees (AIR) also reported a significant
decline in home ownership after the age of 85, based on a survey of its
members. It concluded that this was due to the increasing cost of maintenance
due to loss of a male partner, reduced physical capability to conduct
maintenance and increased age of homes.[25]
Dependents and financial pressures
later in life
2.18
Whether or not older people continue to have dependents appears to be a
key influence on lifestyle choices that affect retirement. Typically,
Australians who have retired or are of retirement age have had no dependent
children. However more recently, according to research by AMP and NATSEM, many
in this demographic still have dependent children. More than half of people
aged 50-54 have dependent children and 13 per cent of those aged 65-69. The
research noted the financial freedom associated with not having dependent
children is not necessarily felt by this age-group, especially the younger
members.[26]
This has been reflected in the debt settlement among people in retirement or of
retirement age, as aforementioned with respect to house ownership and mortgage
liquidation. The National Institute of Accountants made similar observations noting
that the increasing trend towards delayed marriage and child-birth, and
subsequent marriages, are resulting in extended periods into later ages of
associated financial obligations.[27]
2.19
Consequently, the proportion of couples aged 60-64 with children who own
their homes outright is 75 per cent, which is lower than for couples in this
age group without children. AMP and NATSEM concluded that this reflects the
greater financial strain suffered by those who continue to have dependent
children. This trend is also reflected in the level of broader debt experienced
by older couples compared to older singles in Australia. Whereas a majority of
single people aged 60-64 report that they did not have any debt, two-thirds of
couple households and three-quarters of couple households with dependent
children report still having debt. Most of this debt is attributable to credit
cards. Further, while most Australians aged 60-64 have little higher education
debt, almost one quarter of those with children reported having such a debt.[28]
2.20
Since 2002, the workforce participation rates of older men have
increased. Although there are various explanations for this trend, it could
partly be the result of people having greater financial responsibility,
expenses and debts in the lead up to retirement. These responsibilities are
partly the result of having children later in life and, consequently, those
children undertaking secondary and tertiary education later. Also, the increase
in the real prices of housing has meant that mortgages have increased and the
time taken to pay off the mortgages has similarly increased.[29]
AMP and NATSEM reported similar findings that greater financial burdens imposed
by having children also influence the decision to take retirement and the
potential phase-out from the workforce. People without children and of
retirement age are three times more likely to retire than those with children.[30]
Reverse mortgages and equity
conversion
2.21
During the inquiry, NIA and Australian Seniors Finance (ASF) highlighted
the increasing use of reverse mortgages - or home equity conversion loans - by
older people. These allow the retiree to exploit equity in their house while
living in the family home, but do not require repayments until the owner leaves
the home to enter aged care, sells the home or dies. NIA reported that the
average reverse mortgage was $30 000 to $40 000, and that the
industry had grown from nothing five years ago to being worth $647 million
2006 and is projected to reach a value of $3 billion by 2010. Home reversion
schemes are also becoming increasingly popular, which involves the sale of the
family home to a third party and then leasing the property back.[31]
2.22
ASF pointed to various reasons for reverse mortgages including financing
renovations, capital purchases, vacations and accommodation bonds for
residential care. However, ASF also argued that the pension was inadequate to
help older Australians meet cost of living pressures and noted that some
retirees were being forced to rely on credit to finance their living expenses. This
included health expenses, dental care, local government rates and taxes, credit
card debt and assisting with the education of grandchildren.[32]
At the public hearing in Melbourne, ASF reiterated its concern that reverse
mortgages were primarily being used to supplement the incomes of older people
and meet needed expenses such as house maintenance and repairs. It maintained
that this finding was the result of annual independent research into the
attitudes and needs of older people. ASF asserted:
Seniors who have accessed reverse mortgages are doing it for
life needs. Sadly, some of them are doing it just to make ends meet. The
majority of our loans and the majority of the industry’s loans are to do things
like renovate houses—not for lavish things, but to allow seniors to stay in
their own homes and access some of the federal and state government care
schemes.[33]
2.23
ASF also provided evidence that some older people utilise reverse
mortgages to fund lifestyle choices, such as visiting overseas grandchildren or
holidays, but that this constituted a minority. Others, often with limited
incomes but valuable home assets, seek reverse mortgages to distribute their
estates to their children at the time of need, rather than death.[34]
2.24
NIA highlighted the potential adverse effects of reverse mortgages,
notably the impact of compounding interest, which can erode or exceed the value
of the asset. However, it noted that most providers include 'no negative equity
guarantees' to prevent this situation.[35]
2.25
ASF noted that despite initial reluctance, since 2004 a greater
proportion of older people had accepted reverse mortgage and other equity
release products. ASF provided evidence that as at December 2006 there were
27 500 reverse mortgages in Australia, constituting $1.6 billion. Further,
ASF expected that as of August 2007 there were approximately 30 000
reverse mortgages representing $2 billion. The average reverse mortgage is
about $50 000, with older people generally being prudent about their level
of debt incurred through reverse mortgages. Some lenders, such as ASF, provide
a maximum loan value ratio to cap the amount that can be borrowed at certain
ages to prevent too great an escalation of debt. Repayment is required either
on the death of the last resident or five years following the relocation of the
last resident to permanent care.[36]
2.26
Mr Michael O'Neill from National Seniors Australia emphasised that many
older people have limited options for generating additional income to meet cost
of living rises. He argued that this can lead to poor or risky decision-making
where immediate pressures take precedence over longer-term needs. Within this
context Mr O'Neill noted the growing interest in reverse mortgages.[37]
Along these lines, Mrs Maida Lilley from Older People Speak Out told the
committee that many senior organisations are concerned about the future
financial situation of older people accessing reverse mortgages.[38]
Conclusion
2.27
The evidence before the committee clearly demonstrates the complexity of
assessing the financial situation of older people. Irrespective of their
incomes, generally many older people are in a more advantageous financial
position than much of the rest of the population with respect to assets and
debt. Therefore, measures of the capacity of older people to afford the cost of
living must take into consideration factors such as rates of home ownership and
the consequently lower housing costs associated with these rates. But this also
highlights the importance of ensuring there is adequate assistance for the
large minority who, for whatever reasons, find themselves in a disadvantaged
financial position with respect to their peers. For example, the Government
needs to ensure adequate policies exist to assist the 30 per cent of aged
pensioners who rely on the private, public or community housing rental market.
2.28
It is also apparent that, increasingly, people are having greater
financial responsibilities later in life. This is the result of various factors
including having children later in life, servicing greater mortgages as a
result of higher house prices, financially supporting children through higher
levels of education and growing instances of older Australians taking on
'kinship care' responsibilities. These factors will probably increase in
emphasis with future cohorts of retirees, as housing prices have escalated over
the past decade, access to tertiary education has improved and the cost of
education has shifted much more to private individuals. These factors have
resulted in greater debt being incurred at a younger age and the delay of entry
into the workforce.
2.29
The committee considers that home-ownership is a key enabler for older people
in realising greater future lifestyle choices. It provides an investment for
future life-style decisions and increases the flexibility of decision-making
because homes can be sold or borrowed against to provide for needs in old age.
However, the form with which that equity is accessed must be carefully
considered to avoid forcing older people into a perpetual cycle of debt that
could result in a reverse mortgage debt compounding to greater than anticipated
levels, particularly as life expectancy continues to increase.
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