Pensions for millionaires
A recent ABC story quotes the Brotherhood of St Laurence’s recommendations for counting the family home amongst net assets while calculating pension entitlements, with the recommendation that retirees who have valuable homes take out a reverse mortgage, eg, rather than getting a pension. I somehow suspect we’re going to see a lot of ideas along those lines over the next twenty years as the baby-boom becomes the retiree-boom. Here’s roughly how that one works out:
- work all your life to pay off your mortgage
- retire
- find out there’s been a housing boom and your home is now worth over a million dollars
- find out that means you don’t get a pension
- take out a reverse mortgage, so that you get paid a pension-equivalent of $24,500 pa
- hope you don’t get taxed on that, and that home loan rates stay at about 6% for the rest of your life
- put up with losing other benefits that are tied to your pension
- live for another twenty years, getting a total of about $490,000 in pension payments
- leave your estate to your kids who get to find out that your fake pension has eaten up $943,000 of home equity, and if they want to keep the home, they get to start with almost a million dollar mortgage to pay off
- or, more likely, end up with whichever bank was generous enough to pay you your pension, getting a half-million dollar discount when buying the rest of your house from your estate
I wonder if that’s really the social contract folks thought they were signing up to when they were paying taxes and their mortgages over the past forty odd years.
And you know, somehow I don’t think the recent drops in superfund balances are going to be the last thing to screw over retirees.
For the record, the formula for equity loss given n regular payouts of $p, at a rate of r% is:
l = p/r * ((1+r)**n-1)
Plug in fortnightly figures of p=$940, r=0.06/26, n=20*26 and you get l=$943,192 in lost equity, with p*n=$488,800 worth of payouts over the 20 years.
Yeah but the boomers’ social contract was based on there being an ever-rising population to fund all this, and them dying off by 70 on average. That’s not happening anywhere near enough and we’re the generation who has to pay for it.
What’s more, why should the boomer’s kids (and I’m one of them) be entitled to inherit a million dollar house, when they did no work for it?
So here’s the deal, choose one. At least the first option lets the retirees choose.
* No pension for millionaire retirees
* Inheritance taxes for millionair retirees
Well, I’d say the deal was more “we collectively provide for our parents retirement, and our children collectively provide for our retirement”. That’s why it’s “social” security. Not having enough kids to grow the labour force is an ongoing issue, Costello’s “one for mum, one for dad, and one for the country” not withstanding.
If the hypothetical “millionaire” boomer had not bothered buying a house, and just spent their wages on rent, beer and cigarettes, they’d be in the same position: they wouldn’t be able to pass their house on to their children, and they’d be living in something pretty close to poverty. Maybe it’s practical to renege on the reasons you gave people for working hard and saving in the first place after they’ve gotten too old to work, but it’s not very just.
If it turns out the lesson to be learned from the baby boom generation is you end up better off avoiding paying taxes as best you can, and making sure all your income and savings exclusively benefit yourself before either your parents or children, well, that doesn’t seem ideal either.
Of course, screwing over retirees just isn’t that easy: the reason it’s hard to pay for them is that there’s so many of them, and that also means they’re a large voting bloc. In a minimal government, free market paradise, that wouldn’t be a problem, because the people who generate the income get to choose what to spend it on; in a democracy, whoever gets the most votes gets to control not only the 30% of GDP that goes through the government, but gets to raise or lower that 30% figure too.
(And *you* aren’t “entitled” to inherit anything; but your parents are entitled to give away anything they earned to whoever they choose, whether that be you, charity, or their cat)
I suspect you are seeing the superannuation contributions in action. The increased savings forced down interest rates, which in turn created the housing boom. That leaves the more baby boomers sitting on an asset which they can now use to pay for their retirement.
So the scenario you describe is superannuation doing the job it was meant to, albeit perhaps not in the way its makers intended. However the mechanism isn’t sustainable. It depends on rising asset prices, but the asset price rise is a bubble and is going the way of all bubbles. It will be interesting to see what happens to all those super savings next. They are like a pig moving through a python.