A third of young Australian homeowners aren’t making any progress in repaying their mortgages from one year to the next, and are instead increasing their home debt, raising serious concerns over whether they will ever have enough superannuation to fund their retirement.
The 2017 Housing, Income, and Labour Dynamics in Australia Survey also shows that about 10% of those retiring with a superannuation balance are already spending most of it on repaying outstanding debts.
Combined with data showing stalled income growth and a rising number of young people being priced out of housing — a key vehicle for retirement savings — the HILDA report points to an emerging crisis in the sustainability of Australia’s retirement system, reflecting a stark wealth divide between well-off baby boomers and younger generations.
There is also a big divide between men and women at retirement, with men having almost double the superannuation of women, putting single women at a significant disadvantage.
Younger generations financially vulnerable
“At this stage, the message from the HILDA numbers is that the generations coming up are not going to have quite the same living standards in retirement that many of the baby boomer generation will have,” says survey leader and University of Melbourne economist Professor Roger Wilkins.
“You have to wonder whether these young homeowners who aren’t paying down their mortgages, will have paid off their loans by the time they retire.
“They may be thinking, perhaps unconsciously, that they are going to use their superannuation to pay off their homes and then simply go on the aged pension. So it really raises questions about the sustainability of the retirement income system.”
Under Australia’s Superannuation Guarantee employers are required to make payments towards a worker’s retirement savings (superannuation fund) equivalent to at least 9.5% of their pay.
Compiled by the Melbourne Institute, Applied Economic and Social Research at the University of Melbourne, HILDA is a unique longitudinal study of the economic and social well being of Australians going back to 2001. It has grown to include over 17,000 people, and is a key source of information for policy makers.
This year’s report also includes analysis on gambling, showing that almost 40 per cent of adults gamble at least once a month, punting an average $115 a month. There is also an analysis on social attitudes showing that Australians are becoming more progressive. In particular there is rising support for same sex couples to have the same rights as heterosexual couples.
Professor Wilkins says this year’s survey is the first time he has gone back through the HILDA data to track the progress of homeowners in repaying their debts, and he was shocked by the results. “I had to keep double checking it because I thought it must be wrong,” he says. “You tend to think of people buying their house and then paying off their loans over time, but for many that just isn’t happening.”
He found that every year between 2002 and 2015 some 30-40% of homeowners aged 18-39 increased the debt they owed on their home. While some of that may represent young homeowners buying more expensive houses, Professor Roger Wilkins says the proportion is too large to be simply explained by “upsizing.” Instead he suggests that significant numbers are using equity in their homes to raise additional debt for other expenses.
|Housing debt and superannuation – key HILDA statistics (Dec. 2015 dollars)|
|Growth in average household incomes has slowed since 2009 and fell in 2015 from $89,940 to $89,341 — first fall since HILDA began in 2001|
|Average housing debt of 18-39 year old almost doubled in real terms since 2002 from $169,201 to $336,586 in 2014|
|Proportion of 18-39 year old homeowners in negative equity up from 2.4% in 2002 to 3.9% in 2014|
|Proportion of 18-39 year old homeowners increasing their home debt from yr-to-yr was 32% in 2015, but down from 42.3% in 2002|
|Home ownership rates among 18-39 year olds has slumped from 35.7% in 2002 to 25.2% in 2014|
|Average superannuation of people of people at retirement in the four years to 2015 was $454,221 for men, $230,907 for women|
|Proportion of these retirees using bulk of superannuation to pay off debts was 9.9% for men, 13.1% for women|
Concerns over the sustainability of the retirement system are compounded by the increasing indebtedness of 18-39 year-old homeowners. On the positive side, the debt is offset by home values, so less than 4 per cent have negative equity (when house debt exceeds the value of the home borrowed against). But Professor Wilkins says it still means that the economic wellbeing of young homeowners is “highly vulnerable” to house price falls and interest rate hikes.
While young homeowners appear to be increasingly financially vulnerable, Professor Wilkins says falling home ownership rates among 18-39 year olds suggests many are being priced out of the market. And he warns that creates an additional uncertainty over future retirement savings.
“The decline in home ownership among young people is concerning because buying a house has traditionally been the primary way people have saved for retirement. But that model appears to be breaking down.
“On current trajectories many 18-39 year olds don’t look likely to own their own home. Obviously if house prices fall that will change, but even then, because many will then be buying later in life, they will have less time to pay off their homes.”
He says new policies for addressing the generational wealth divide need to be considered, and these could include reducing tax concessions on superannuation and negative gearing, as well as possibly including the family home in the assets test for the aged pension.
“These aren’t politically easy policy solutions because they will hurt the large baby boomer generation that is now retiring, but I think we do need a more equal treatment of income in the tax system.”
The challenges of single parenthood
At the low-income end of the scale, HILDA starkly reveals the persistent disadvantage faced by single-parent families, who have experienced no improvement in their high poverty rates. Over 20 per cent of single parent families are in relative poverty, more than double the national average.
“Child poverty is a particular concern for policy makers because of the damage poverty may do to children’s future productive capacity and life prospects,” warns the report.
Professor Wilkins says the poverty of single parent families demands a renewed policy focus around the adequacy of child support arrangements, and polices to make it easier for single parents to earn an income while looking after their children, targeting items like childcare costs and flexible work hours.
It also raises the question of whether divorced women, who traditionally will have had more child-care duties and less opportunity to build remunerative careers, should have some ongoing claim to their ex-partner’s superannuation. Under current laws, superannuation is split evenly at the time of the break up, but from that point the earning and saving capacity of the woman is likely to be significantly less than that of her ex-partner.
“There is this question then of whether these women should have some ongoing claim on their partner’s superannuation to reflect that,” says Professor Wilkins.
Overall rates of poverty in decline
But in terms of overall poverty in society, HILDA shows that relative poverty has reduced slightly over the period 2001-2015. Relative poverty is defined as an income that is less than half the median (or middle) income. The proportion of Australians in such relative poverty has steadily fallen since 2007 from 13.2% to 9.7% in 2015.
And holding the real value of the poverty line at its 2001 level, the poverty rate has dropped from 13.1% in 2001 to 3.7% in 2015. “Even among the poor, average living standards have increased over the full 15 year period,” the report notes.
“It is a good sign that the slow down in income growth hasn’t led to a mass increase in very low incomes,” says Professor Wilkins. “The broad picture is that Australian society is still working well.”