CHRIS LOKER: Ever-growing lifespans force us to rethink how we fund retirement
One way is to help the elderly tap into the wealth that is tied up in their property
It is barely comprehensible how much life expectancy increased since the Industrial Revolution. It doubled between 1900 and 2000, and the average age is still rising at about three years per decade. Hundred-year lifespans are no longer unusual. The UN describes it as a “human success story” — a reason to celebrate public health, medical advancements and economic and social development.
However, almost every institution (government, insurance and finance, medicine, religion, financial advice/planning) remains orientated around prior longevity expectations, and society is still stuck in a three-stage life model (learn, earn, yearn). This model was redundant even before gig economy employment and the Covid economic effects struck.
We should value the gift of these added years with loved ones, while taking on the challenge of financing these extra years so that we do not become a burden or suffer in our old age. To do so, retirement fund trustees must balance market uncertainty, lower returns and inflation on the horizon with an increasing cohort of retired members who are battling with the rising cost of living and incomes that are not keeping pace.
These members have limited levers of influence over the ability to earn income or reduce costs. This unhealthy cocktail of factors requires systemic and urgent consideration, particularly for the 5-million South Africans who are already retired.
In the UK more than 200 pensioners per day tap into the equity in their homes, using post World War 2 government policy interventions designed to promote home ownership. Many people have the majority of their wealth tied up in their homes, limiting their ability to react to cover unforeseen circumstances such as medical costs.
According to the UK Equity Release Council: “The need to improve older people’s access to housing wealth was widely recognised by industry and policymakers ... [this] is essential so people who are asset rich but cash poor can benefit from the wealth they have built up over their lifetimes and also support those around them.”
In Australia the federal government recently reinvigorated a Home Equity Access programme that offers homeowners over the age of 65 the ability to borrow against the equity in their homes, without needing to sell, as a way of improving the health and wealth of older citizens. This is an ongoing problem for many people whose wealth is tied up in property while they become increasingly cash poor.
Under this plan if a 66-year-old took up the proposed offer and lived until 91, he or she could receive a total of A$295,000 worth of ongoing payments, which would simultaneously reduce the equity in their home. This represents more than 60% of the real additional wealth of the household of a 65- to 74-year-old over the previous 12 years.
The focus on helping older people “age in place” — that is, in their own homes — is consistent with US research indicating that over 90% of retirees want to have that option rather than having to downsize or move to a different area. It is often forgotten that developed-world governments encouraged and incentivised home ownership decades ago for this very reason: an additional saving mechanism in the event of financial difficulties caused by shocks or planning anomalies such as outliving available capital.
From about 1870 until the 1950s house prices were stable, and renting was standard practice. In the US, for instance, government policies in the wake of World War 2 were designed to make home ownership more attainable as an alternative to building public housing. Congress enacted new federal policies and programmes that institutionalised long-term, fixed-rate, fully amortising mortgages, which in turn fuelled a housing boom. As a result, residential property is now the largest asset class in the world.
Even the tiny Mediterranean island of Malta, home to just 460,000 residents, has a fledging home equity release sector — consistent with a 2020 World Bank report that concludes supply rather than demand is the market constraint. The paper further states: “The academic literature on the topic suggests that reverse mortgages can be a welfare-enhancing tool to supplement pension income, or as a form of insurance. In particular, low-income senior homeowners may tap into their accumulated housing wealth to smooth consumption and increase their resilience against financial shocks.”
Much divides the world, but we are united by ageing. A redesign of the retirement framework is essential to build the financial resilience necessary for longer lives and to defuse this time bomb. Financial wellness requires an all-encompassing view of a person. This means considering their tangible assets (including savings and property), but also less tangible assets such as health, skills and readiness to work longer. This will also require co-ordinated efforts across multiple stakeholder groups, including individuals, employers, financial services providers and governments.
With 50% of babies born in the developed world expected to live past 100 and the first person to live to 150 years likely already born, it is clear that a fundamental reset of the notion of lifespan is desperately required. As longevity increases so too does stress for a growing population of retirees.
While retirement ages are gradually increasing, on average people are spending longer not working, without the concomitant savings to justify it. The societal clock is ticking, and so too is the pension time bomb.
• Loker is executive director of home equity release finance company Water Financial.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.