Australia's hidden treasure: The immense potential of baby boomer housing equity in averting a retirement cash flow crisis

Abstract

Maintaining an acceptable standard of living through to the later stages of retirement for the baby boomer generation (those born 1945 to 1964) is one of the most important policy challenges for policymakers and industry in many developed countries with a rapidly ageing population, including Australia. With an increasing emphasis on personal responsibility for fiscal management and increased self-funding of retirement, concern is growing among retirees, the community, and policymakers regarding how these citizens will manage financially while ageing in their own homes for as long as possible. With increasing pressure to arrest the increase in government-funded age pension obligations, reforms to sources of retirement income has become an imperative, particularly with increasing rates of income poverty in retirement, and future generations of Australians unlikely to be able to meet the taxation impost to sustain current age pension entitlements. In response, consumers and stakeholders are considering all potential sources of income to fund everyday living expenses, healthcare, and aged care, as well as potential changes to age pension policy. In some countries with high levels of home ownership among retirees, including Australia, there is the argument that homeowners are not adequately drawing on the equity in their home as a means to support retirement consumption. As such, this thesis examines the role of the two main assets of Australian retirees—superannuation and housing–-and the contribution these assets make to retirement income in the context of Australia’s current age pension policy, and in particular, for the baby boomer generation. The hypothesis tested in this thesis is that, ‘The majority of Australia’s baby boomer retirees will be able to modestly supplement their retirement incomes, for a minimum term of 25 years, by drawing on less than 50 per cent of the equity of their owner-occupied property’. Consistent with this hypothesis, this thesis poses four research questions to address the primary research question (PRQ) of: Could the housing equity of Australia’s baby boomers supplement their retirement income? The first research question (RQ1) is: What is the financial position and wealth holdings of current and emerging retirees in Australia? The second research question (RQ2) is: What is the income of Australians aged 65 and over in Australia? The third research question (RQ3) is: What is the level of financial stress and risk of poverty at retirement for retirees in Australia? Finally, the fourth research question (RQ4) is: How is retiree property wealth currently, and potentially, able to contribute to retirement income and lifestyle in Australia? The empirical part of this thesis uses Australian Bureau of Statistics (ABS) data and data from the Household, Income, and Labour Dynamics in Australia (HILDA) Survey. The HILDA survey provides information on more than three thousand Australians already aged over 65 years, and over 15,000 younger Australians and is population weighted to account for gender, location and other individual profiles and differences. The subsequent aim of this thesis is to provide evidence of the potential ways home equity can be utilised (leveraged or withdrawn) to support wealth accumulation and retirement income, particularly for baby boomers. Overall, the thesis demonstrates that targeted home equity drawdown products can supplement retiree income and relieve financial stress in retirement through provision of modest income supplementation for baby boomer retirees. This thesis suggests that integrating theory from behavioural economics alongside life cycle theory is a better option to help people participate more in dissaving in retirement in a way that will be in their interests, including by driving development of financial products for dissaving in retirement that are aligned with policy levers. The findings of this thesis contribute to the literature in a number of ways. First, the thesis extends the literature on retirement income policy and home equity withdrawal in Australia. Second, the thesis illustrates the current and potential role of housing equity in portfolio composition. Third, the thesis proposes a framework for a new, securitised home equity withdrawal product to supplement retiree income for baby boomers. Finally, the thesis contributes to a case for scaled financial advice for retirees for retirement income planning.