A new phenomenon has been noted in the Australian home loan market, and that is a marked increase in the number of 50-somethings who have taken on significantly more mortgage debt than has ever gone down on record. An economic report states that debt levels for the baby boomers have reached record highs for the last decade as property ownership increased by 45% between 2002 and 2010. This goes against logic which dictates that by this age baby boomers should be looking to settle debt as they get ready for retirement. Some reports are indicating that Aussie baby boomers are also keen on saving independently, with products such as those at www.bankwest.com.au/personal/savings-term-deposits/savings-accounts-term-deposits readily available to them. However, the actual situation is nowhere near that simple.
Making global comparisons property debt for baby boomers in the United States has also increased since 2002, but only by 20%. In the last decade in Australia, property debt among the 55 to 64 year old age group has increased by 123%, compared to 70% in the United States. The difference, it appears, lies in the context that property owners are stacking their debts up on. In Australia your primary residence is excluded from your asset wealth, giving many people a big incentive to invest a lot of their wealth into their home, or homes as is the case in some situations, and still be able to claim the Age Pension.
The increase in debt has also been attributed to higher property prices, which have gone up by about 60% and a more relaxed credit environment. One report suggests that many Aussies are increasing their property debt and then using their super pay-outs to settle it, instead of using the funds from the savings account for their retirement years. They can then claim the Age Pension once they have spent their super.
It would be challenging to spend your savings as an upper middle or wealthy class citizen, but around 76% of local retirees claim Age Pension. Because the super has only been introduced fairly recently many retirees did not have enough years to save up a sizeable enough investment.
The federal government hopes that in time citizens will not rely on the Age Pension as significantly as they do now. The means test has gone through reforms as it used to be much less encouraging for savings, but experts say that if the system instituted one form of lump sum taxation or another, people would have a harder time manipulating the system.
In the pipeline for that taxation, is news that $2.5 million could be the point at which the government states to tax super pay outs. The Association of Superannuation Funds of Australia has made a formal submission to parliament ahead of the May budget speech. The news comes in the wake of the debate over whether super concessions would be axed or whether new taxes should be introduced to allow the government to compensate for its budget deficits. In January alarm bells were raised over the possibility that super pay outs of $1 million would be taxed. Julia Gillard vowed that super withdrawals for people over 60 would not be taxed but analysts say the Prime Minister was strategic with her wording, as there would still be scope for investment earnings to be taxed, not just the benefits, and she would still remain true to her words.
The promise is in line with the Labour Party’s positioning of itself as supportive of middle and low income earners, but starting tax at $1 million may be too low and may alienate the Labour Party from the folks it is trying to appease.
The new taxation system or decision to eliminate super concessions is estimated to affect one third of the country’s $1.4 trillion retirement kitty. There are approximately 100,000 self-managed super funds with balances totalling $1 million right now.