The pension vs property debate
07 April, 2015
Nothing makes a young person's eyes glaze over faster than the words superannuation or retirement. Trust me, I have spoken to countless young people — and by young I mean under 35 — and I've yet to meet one who gets excited about the thing that happens when they turn 65.
It has therefore been encouraging to read recent articles from Australia and the UK, where youth and retirement get equal billing.
The other common denominator in these discussions has been housing. In both the UK and Australia, it has been suggested young people should be able to dip into their retirement savings to buy a first home. In Australia, the suggestion from Treasurer Joe Hockey was immediately rubbished — one commentator described it as "the dumbest thought bubble ever emitted from an Australian treasurer". The British response was somewhat kinder, probably because the suggestion emerged from a pension survey rather than from a politician.
In Australia, Hockey thought he should throw the topic open to debate because he apparently gets inundated with young people asking how they'll ever be able to afford their first home. It is hard because Australia is in the midst of a property boom, at least in the major cities, and rising house prices mean higher deposits are required if young people want to get into the property market.
Much of the resistance is because such a change would be yet another example of a politician fiddling with what is supposed to be a retirement savings scheme helping older people rather than those starting out, who arguably have plenty of time to build their savings. The Australian superannuation industry responded to the idea, saying that a young person using $A40,000 from their superannuation for a home deposit could reduce the amount of super they retire on by $A140,000.
A lot of young people hitting an already hot property market with cash in their pockets will likely drive prices even higher, exacerbating the problem. While housing affordability is certainly a problem, the solution will not be found in increasing the demand but by reducing the demand or increasing the supply of housing.
The discussion in the UK arose from a consumer survey which found that some 58 per cent of 18-35 year-olds aren't saving anything for retirement but 54 per cent said they would either start saving, or save more, if they could also use that money to get on the property ladder.
Because the UK government has already introduced some flexibility in superannuation — allowing over-55s to take their entire lifetime savings to spend, save or invest as they wish — some wonder whether other innovations could follow to help the younger generation. One supporter said the younger generation now faces unaffordable housing, university debts, fragmented careers and likely thinner government and employer pensions than their parents. Anything to help them balance their financial ambitions should be a good thing.
Other supporters cited our KiwiSaver as a working example with one saying "a similar initiative has worked well in New Zealand with savers in the country's KiwiSaver workplace pension scheme having the option to receive a first home subsidy after three years of saving."
The other country that has been held up as a shining example is Singapore. Like Australia, Singapore has a compulsory superannuation system and the goal is for each member to have sufficient savings to fund retirement, a paid-off property in retirement and sufficient savings to meet medical needs in old age.
The Singaporean fund has three sub-accounts which are broadly used for home ownership, investments and healthcare. A slight fly in the ointment is the fact that contributions must be between 11 per cent and 35 per cent of each member's salary, depending on age. I can't imagine Australians liking that very much when they grumble at 9 per cent contributions.
This structure has nevertheless resulted in a home ownership rate in Singapore of 87 per cent versus 69 per cent in Australia.
I'm not sure any existing superannuation system is perfect but it is encouraging structural issues are being considered and debated, and the needs of the young are being considered alongside those of older people.