Pensioners can unlock more income

It is often said that Australians aren’t saving enough for retirement. Only last week the Chairman of Retirement Incomes at Challenger suggested that “…assertions that $500,000, or even $1 million, in super, in the current environment, will guarantee a comfortable retirement are suspect,”.

In our new report The Age Old Problem of Old Age: Fixing the Pension Simon Cowan and I argue that these bleak predictions fail to account for the income that could be earned from the asset in which pensioners have placed 70% of their savings: the family home. The problem is not that pensioners have failed to save but that they have put their savings in an asset that does not earn income.

This should come as no surprise. The pension means test completely excludes home equity – allowing even those living in million dollar homes to receive significant assistance from the government.

The solution is a government-backed reverse mortgage scheme to help pensioners unlock the $625 billion they have saved in their homes. This could increase the incomes of 2.3 million pensioners by an average of $5,900 and reduce age pension expenditure by $14.5 billion – almost a third.

Under this scheme, pensioners continue to own their home and receive payments from a reverse mortgage provider while a loan accumulates. The government would insure the mortgage provider against any losses in the unlikely event of default, but only if the pensioner is allowed to remain in their home until they are ready to leave. It is then that the loan is paid off – or from their estate if they pass on.

Government backing would make these assets risk-free for the mortgage providers, allowing them to offer lower interest rates. An expanding reverse mortgage market would increase competition and drive interest rates down further.

Lower interest rates mean higher reverse mortgage incomes for pensioners. Means testing that income reduces the burden of the age pension on the taxpayer.

Australia can have a fairer and more sustainable age pension – but only if we stop ignoring pensioners’ biggest asset and help them put all of their savings to work.