Brendan Burgess
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There is an excellent paper here on the integration of pensions and housing
It says what I have been saying for some years.
It has two main points:
Many current retirees have high home equity but at the same time are income-poor. A reverse mortgage on the family home can in some cases provide a valuable means of supplementing an inadequate post-retirement income. While reverse mortgages have not been popular in the past, there is a combination of factors that may lead to greater uptake: inadequate post-retirement income from other sources, high rates of home ownership among retirees and recent significant surges in property prices in many areas. There are, however, many barriers to the use of reverse mortgages, some of which are explored in this paper.
At the other end of the age spectrum, many young people are experiencing difficulty in raising a deposit to purchase a home, because of recent house price increases and low wage increases. If using pension funds can make the difference between a person being able to purchase a home rather than missing out, then the application of the balance in this way may improve the person’s retirement outcome, compared to retaining the balance in the fund to accumulate to retirement. The advantages of gaining access to housing in this way must be balanced by the disadvantage of
a reduced pension balance at retirement.
In respect of using pension balances for assisting people to buy houses, there are a number of issues to consider.
1. As stated earlier, one of the core aims of Retirement Income Systems is to provide retirees with an adequate income in retirement. Outright home ownership, which generally significantly reduces housing costs, is consistent with this objective[providing retirees with an adequate income in retirement]. In a number of countries, home ownership also enhances dignity in retirement.
2. Financially, outright home ownership is an income stream in retirement, in the sense that it
reduces expenditure that is otherwise payable by people renting or paying off a mortgage. In this sense it [home ownership] is a mitigant against
3. Potential participants need to be provided with relevant education/financial advice. Any financial plan developed needs to consider important expected financial factors, including tax and social security of the relevant jurisdiction.
4. An assessment needs to be made as to whether the implied rate of return of using pension monies for housing is satisfactory. This assessment will need to take into account financial and economic conditions, and the tax and social security environment, as well as the individual’s job situation.
5. Generally, young people have not been engaged with pension funding. However, most young people do have an interest in obtaining a home. Hence, allowing pension monies to be used for a housing deposit is likely to achieve interest in pension funding throughout working lifetimes.
6. Investment in a house enables leverage to be obtained (i.e., people borrow a high proportion of the purchase price of a home), whereas this is generally not possible in a pension fund. This leveraging is likely to increase both investment return and the member’s overall level of saving. However, as always, leveraging increases investment risk.
7. Restrictions should be applied to any arrangement where pension fund balances can be used for housing purposes. The aim of such a feature is to help people enter into the home ownership market, and hence eligibility should generally be restricted to first-home buyers/occupiers. Also, the amount that can be utilized should be capped, so that end retirement balances are not overly reduced.
8. It is sometimes argued that allowing members to use pension balances for housing will not benefit members; rather, it will increase house prices and hence benefit existing home owners and developers. Counter-arguments include:
(1) this is a relatively minor impact, as there have been many housing booms and busts that have occurred independently of any housing grant schemes;
(2) the class that the proposal will apply to – first-time owners/occupiers – is less likely to precipitate a material increase in housing prices compared to other groups such as investors and owners upsizing and downsizing;
(3) in the view of the Productivity Commission (2004) there are not only benefits to members in the short term, but also in the longer term – the price impact will be reduced as higher demand will lead to more production that will lead to a stabilization of prices; and
(4) housing will be needed, whether for rent or for purchase.
9. Another argument often put forward by those opposed to the idea of using pension accounts for housing purposes is that there will be pressure for other purposes (e.g., repayment of education debts). The counter-argument is that housing has a particular niche, in that it becomes part of a person’s assets that can be used in his/her post- retirement framework.
10. Policymakers considering the introduction or amendment of a scheme to allow pension accounts to be used for housing need to take into account the above factors. In addition, extensive modelling of different structures should be undertaken before determining the preferred approach. The modelling needs to take into account a range of issues, including:
• The macro effects on pension cash flows and funds under management;
• The micro effects for a range of individuals’ retirement outcomes;
• The effect on government revenue (including taxes and social security);
• The macro effects on the housing market;
• The micro effects for individuals in respect of their housing, income and savings outcomes; and
• Any other economic flow-on effects.
There is full integration of pensions and housing in Singapore
3) In particular, it documents how Singapore has fully integrated pensions and home ownership as a core part of their housing strategy. I have extracted this piece and attached it to this post.
It says what I have been saying for some years.
It has two main points:
Many current retirees have high home equity but at the same time are income-poor. A reverse mortgage on the family home can in some cases provide a valuable means of supplementing an inadequate post-retirement income. While reverse mortgages have not been popular in the past, there is a combination of factors that may lead to greater uptake: inadequate post-retirement income from other sources, high rates of home ownership among retirees and recent significant surges in property prices in many areas. There are, however, many barriers to the use of reverse mortgages, some of which are explored in this paper.
At the other end of the age spectrum, many young people are experiencing difficulty in raising a deposit to purchase a home, because of recent house price increases and low wage increases. If using pension funds can make the difference between a person being able to purchase a home rather than missing out, then the application of the balance in this way may improve the person’s retirement outcome, compared to retaining the balance in the fund to accumulate to retirement. The advantages of gaining access to housing in this way must be balanced by the disadvantage of
a reduced pension balance at retirement.
In respect of using pension balances for assisting people to buy houses, there are a number of issues to consider.
1. As stated earlier, one of the core aims of Retirement Income Systems is to provide retirees with an adequate income in retirement. Outright home ownership, which generally significantly reduces housing costs, is consistent with this objective[providing retirees with an adequate income in retirement]. In a number of countries, home ownership also enhances dignity in retirement.
2. Financially, outright home ownership is an income stream in retirement, in the sense that it
reduces expenditure that is otherwise payable by people renting or paying off a mortgage. In this sense it [home ownership] is a mitigant against
- longevity risk (lasting through life),
- investment risk (the savings are less volatile; the value of residential property has traditionally been relatively stable compared to many financial assets) and
- inflation risk (i.e., protection against rents rising, although inflation risk still exists through property taxes, insurance, utilities and cost of maintenance).
3. Potential participants need to be provided with relevant education/financial advice. Any financial plan developed needs to consider important expected financial factors, including tax and social security of the relevant jurisdiction.
4. An assessment needs to be made as to whether the implied rate of return of using pension monies for housing is satisfactory. This assessment will need to take into account financial and economic conditions, and the tax and social security environment, as well as the individual’s job situation.
5. Generally, young people have not been engaged with pension funding. However, most young people do have an interest in obtaining a home. Hence, allowing pension monies to be used for a housing deposit is likely to achieve interest in pension funding throughout working lifetimes.
6. Investment in a house enables leverage to be obtained (i.e., people borrow a high proportion of the purchase price of a home), whereas this is generally not possible in a pension fund. This leveraging is likely to increase both investment return and the member’s overall level of saving. However, as always, leveraging increases investment risk.
7. Restrictions should be applied to any arrangement where pension fund balances can be used for housing purposes. The aim of such a feature is to help people enter into the home ownership market, and hence eligibility should generally be restricted to first-home buyers/occupiers. Also, the amount that can be utilized should be capped, so that end retirement balances are not overly reduced.
8. It is sometimes argued that allowing members to use pension balances for housing will not benefit members; rather, it will increase house prices and hence benefit existing home owners and developers. Counter-arguments include:
(1) this is a relatively minor impact, as there have been many housing booms and busts that have occurred independently of any housing grant schemes;
(2) the class that the proposal will apply to – first-time owners/occupiers – is less likely to precipitate a material increase in housing prices compared to other groups such as investors and owners upsizing and downsizing;
(3) in the view of the Productivity Commission (2004) there are not only benefits to members in the short term, but also in the longer term – the price impact will be reduced as higher demand will lead to more production that will lead to a stabilization of prices; and
(4) housing will be needed, whether for rent or for purchase.
9. Another argument often put forward by those opposed to the idea of using pension accounts for housing purposes is that there will be pressure for other purposes (e.g., repayment of education debts). The counter-argument is that housing has a particular niche, in that it becomes part of a person’s assets that can be used in his/her post- retirement framework.
10. Policymakers considering the introduction or amendment of a scheme to allow pension accounts to be used for housing need to take into account the above factors. In addition, extensive modelling of different structures should be undertaken before determining the preferred approach. The modelling needs to take into account a range of issues, including:
• The macro effects on pension cash flows and funds under management;
• The micro effects for a range of individuals’ retirement outcomes;
• The effect on government revenue (including taxes and social security);
• The macro effects on the housing market;
• The micro effects for individuals in respect of their housing, income and savings outcomes; and
• Any other economic flow-on effects.
There is full integration of pensions and housing in Singapore
3) In particular, it documents how Singapore has fully integrated pensions and home ownership as a core part of their housing strategy. I have extracted this piece and attached it to this post.
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