Most Australians have enough to enjoy a comfortable retirement. But too many retirees who rent are being left behind.
Today, two thirds of retirees who rent privately live in poverty, including more than three in four single women. And a growing number of older Australians are at risk of becoming homeless.
With home ownership falling across the board, it’s only going to get worse.
On this podcast, host Kat Clay discusses Grattan’s new report, Renting in Retirement: Why Rent Assistance needs to rise, with authors Brendan Coates and Matthew Bowes.
Transcript
Kat Clay: Most Australians have enough to enjoy a comfortable retirement but too many retirees who rent are being left behind. Today two thirds of retirees who rent privately live in poverty, Including more than three in four single women.
And a growing number of older Australians are at risk of becoming homeless. With home ownership falling across the board, it’s only going to get worse. I’m Kat Clay, and today we’re discussing Grattan’s new report, Renting in retirement: Why Rent Assistance needs to rise. I’ve got two of the authors of the report here, Brendan Coates and Matthew Bowes, to explain their recommendations on improving conditions for retired renters. Brendan, I mean starting with you, why is it so difficult for renters in retirement versus people who own their own home?
Brendan Coates: You know, the challenge here is that housing most people’s largest expense and that has a huge impact on living standards in retirement if you are still paying for housing. So homeowning retirees, and that’s more than three in four retirees today, they’ve typically paid off their mortgage by the time they’re retiring, or they’re using some of their super at retirement to pay it down.
And they’re spending less than 5 percent of their incomes through those retirement years on housing, on things like council rates, on maintenance, insurance, and other things. Whereas renters are still paying, you know, more than 30 percent of their income on housing. You know, those over the age of 75, they’re spending a third of their incomes, if they’re renting, paying to keep a roof over their heads.
So that’s just an enormous draw on people’s resources. And at the same time, those that are renting in retirement tend not to have much in the way of superannuation or other savings. More than half have less than $25,000 squirreled away and that’s not going to pay for much in the way of rent over the course of a 20 25-year retirement.
And that’s why we see these stats where most retirees who own their own homes, they are pretty financially comfortable. On most surveys, they are the most financially comfortable cohort. In the community doing better, you know, than most working age Australians. The Age Pension’s not a particularly generous income, but it’s enough for most people to get by if they own their own homes, whereas the stats you mentioned at the intro that the story for renters in retirement, it’s just really bleak.
A lot of people are really struggling you know, and it’s not a comfortable retirement and certainly not something that people who are renting as they approach retirement will be looking forward to.
Kat Clay: So, it sounds pretty bad already, why is this going to get worse?
Brendan Coates: Well, the short answer is because housing affordability is getting worse. It’s becoming more expensive or more difficult for people to buy a home. And that’s meaning the home ownership is falling, particularly amongst the poorest 40 percent of all ages. So, if we go back, you know, four decades to 1981, you know, home ownership rates amongst the poorest 40 percent of those in their sort of forties and fifties, you know, more than two thirds own their own homes.
Now it’s just over half of that age group of between 45 and 54 in 2021 own their own homes today. So, more are going to be renting in retirement. You know, today’s low-income renters are tomorrow’s renting retirees. And while superannuation you know, has become more extensive, more people are retiring with super balances.
Those who are renting as they approach retirement, a lot of them don’t have much in the way of super or other savings either. So, you know, 40 percent of renting households age, you know, 55 to 64, so either just retiring now or on the verge of it, have less than $40, 000 in savings. And what our work shows is you need at least $40, 000 in super if you’re going to bridge the gap between what the income support system gives you today, the Aged Pension and the current rate of Rent Assistance, and what you would need to afford a relatively cheap one bedroom home in a major capital city, which rents for about $350 a week. So, to be able to afford basically the expenses and also afford that home, you need to have a reasonable amount of super savings. And the sad reality is a lot of people don’t have those savings either because they haven’t been able to work much during their working life. Maybe they’ve had a disability. Maybe there’s been some life events. There’s been a separation. In a lot of cases, particularly with women, we’re talking about, you know, a group who have historically raised kids that have taken time out of the workforce and then are finding themselves with little in the way of retirement savings when they’re hitting retirement.
And if they’re renting, then, you know, it’s, it’s, it’s not a great retirement that they’re looking forward to today.
Kat Clay: Matt, aren’t the age pension and rent assistance meant to help prevent retirees falling into poverty?
Matthew Bowes: Yeah, that’s right, Kat. So, we do have this age pension that is designed to prevent retirees falling into poverty. And as Brendan was saying, to a large extent, it does do that if you own your own home. So, when Grattan has previously looked at this, we found that the rate of the age pension in Australia compares pretty favourably both to various poverty lines and also to international benchmarks. But as Brendan has said, if you’re one of those more than 200, 000 aged pensioners who rents on the private market, you face much higher housing costs and the income support you receive just isn’t enough to get by in a lot of cases. And this is largely just because Rent Assistance, which is the payment that is meant to help these income support recipients with the cost of renting, that payment is just too low.
So, the way Rent Assistance is designed, it provides a subsidy of 75 cents for every dollar of rent that a pensioner pays above a minimum threshold. But there’s also a maximum payment rate, which limits how much you can receive. And that maximum rate is currently set at around 106 per week for a single pensioner.
Now to its credit, the federal government has increased that maximum rate by 27% in the last two budgets, but our research suggests that is still too low. So, in particular in our report, we draw on previous research that looks at budget standards. So, these are standards that estimate what’s the minimum amount that a person needs to spend on everyday items such as clothes, food, transport, and energy?
And based on these, we estimate that a typical single age pensioner needs about 380 per week for these essential non housing costs. But for someone on the full rate of the Age Pension and Rent Assistance, that means they can only spare about 300 a week for rent. And Kat, as many of our listeners would know, there’s very few rentals out there for that price.
So, we estimate that in Melbourne, only around 13 percent of one-bedroom homes are rented at 300 per week or less. And it’s even less if you look at Sydney, where it’s less than 4 percent of one-bedroom homes, you know, across all of Australia’s capital cities, it’s about 11 percent of one-bedroom homes that are available at that price.
So, it’s just not enough for most of these pensioners to find good quality accommodation in retirement.
Kat Clay: Yeah, it’s really not cutting it if you need to find a rental there. What do you recommend making renting affordable for retirees?
Matthew Bowes: Yeah, Kat. So, what we’re recommending is pretty straightforward. We’re recommending that the government increases the maximum rate of Rent Assistance by 50 percent for singles and 40 percent for couples. So that means that for the around 190, 000 Aged Pension households who receive the maximum rate of Rent Assistance, they would see an increase in their payment of up to $53 a week, or a bit more than $2, 500 per year.
Kat Clay: So, what would that enable for renters then?
Matthew Bowes: The reason we’re recommending that particular increase is because that increase would enable someone who lives alone to afford at least 25 percent, at least a quarter of the one-bedroom homes across our capital cities while covering that minimum budget for non-housing expenses that we outlined before.
So, for couples as well, that would also enable them to afford a quarter of all one- and two-bedroom homes across our capital cities. In total, that’s more than doubling the number of homes that are affordable for age pensioners in our cities, and it makes the housing choices that they’re facing a lot easier.
Importantly as well, for the many pensioners who are already paying very high levels of rent, this extra money would just be able to go towards everyday essentials. So, these things like food, transport and energy that they’re currently having to economise on, they would now have a bit more money to spend on, and that reduces the chance that they face those financial stresses and fall into poverty.
Kat Clay: Yeah, there’s a very telling chart in this report which just breaks down, you know, the cost of living and the cost of rent and it’s really easy to see how this is unaffordable for many people and you can see how many people would have to do without. You’ve suggested also in this report that Rent Assistance no longer be indexed to inflation but actually indexed to changes in rents.
Can you talk us through why and how that would work?
Matthew Bowes: Yeah, that’s right, Kat. So, like many social security payments, like JobSeeker say, Rent Assistance is indexed, is increased in line with the Consumer Price Index over time. The problem is that rents paid by low-income renters have risen faster than that. for the best part of the last two decades. So, since 2001, we estimate that the rents paid by recipients have grown nearly one and a half times as fast as the maximum rate of Rent Assistance.
And that just means that over time it’s not been providing the same level of assistance to renters as their housing costs have risen. So, what we recommend is that the government should instead draw on the increasing amounts of data that we have on the private rental market in order to index the maximum rate of the payment directly to the cheapest 25 percent of one and two bedroom homes on the rental market in our capital cities.
And what this means for renters is just in future, the payment shouldn’t decline as a share of their rent over time.
Kat Clay: And Brendan, although this is a report about retirees, you’ve suggested that increases should extend to all recipients of Rent Assistance. Why is that?
Brendan Coates: Yeah, that’s right, Kat. So, we are recommending that Rent Assistance rise across the board. So Rent Assistance is a payment that goes to income support recipients of both working age and in retirement. About a quarter of those getting the payment today are aged pensioners. And the other big groups we’re talking about are disability support pensioners, that’s about 21%. Job Seeker recipients, it’s about 20%. And then there are other payments like Youth Allowance for a lot of students and parenting payments. And the reason why we suggest this is because, well, while retirees are struggling while they’re renting, the rates of financial stress amongst working age Australians that are renting are even higher.
You know, the share of those working age recipients of rent assistance that are spending more than 50 percent of their income on rent, you know, it’s about half of those on youth allowance and on AusStudy. You know, it’s close to half for payments like JobSeeker, which is a higher rate than we see for aged pensioners.
There’s not really any justification for why we should be treating poverty amongst retirees who are renting differently to poverty amongst those that are renting while they’re of working age. That’s been the recommendation of various reviews like the Henry Tax Review and also the work of the Economic Inclusion Advisory Committee that’s been set up in the last couple of years.
They’ve both recommended across the board increases in Rent Assistance. It does add to the cost. So, you know, the cost is 2 billion a year to raise Rent Assistance the way we recommend. About a quarter of that obviously is going to aged pensioners. The rest is for those of working age.
But that really is, you know, the crux of it. Grattan has previously always recommended in our past work across the board Rent Assistance increases. We don’t really see any reason here to just go for retirees with this work.
Kat Clay: Brendan, apart from creating equity for the recipients regardless of age, is there a flow on effect for supporting low-income renters before they retire?
Brendan Coates: Yeah, the short answer is yes, Kat, there is. Because, you know, while Age Pension age is 67, a lot of people are forced to retire before that, you know, particularly if you’re doing manual labour or if you’ve got health issues. A lot of people struggle to keep working through their 60s. And so, there’s a lot of people actually on payments like JobSeeker or the Disability Support Pension who are on those payments because they’re unable to continue working.
And so, if we raise the rate of Rent Assistance for both working age and retirees, we’re essentially helping that group that is forced to retire involuntarily and before age pension age. Now it is worth keeping in mind though that when we’re doing these increases to rent assistance for working age Australians, if our recommendation was taken up, it doesn’t take away from the fact that those core payments for things like JobSeeker and Youth Allowance, the allowance level payments, they’re still too low.
So, someone who gets Rent Assistance at the rate we recommend but is on JobSeeker or Youth Allowance would still struggle to afford housing because their underlying income support payment is too low for there to be much in the way of a housing budget left once, you know, they pay for non-housing essentials.
We estimate that if we were to increase Rent Assistance the way we propose, someone on the single rate of JobSeeker they would need to see their core payment rise by 100 a week from where it is today for them to then be able to, you know, share a cheap two bedroom dwelling in one of our major cities.
So, there’s still work to be done to help working age renters to afford to keep a roof over their heads. It’s just not Rent Assistance that’s going to do all the heavy lifting there.
Kat Clay: Matt, one of the questions that often comes up when we’re talking about raising Rent Assistance, would this just be an invitation to landlords to increase rents across the board?
Matthew Bowes: You’re right, this is a common concern that we hear from people but ultimately when we look at the evidence, we don’t find a lot of reason to think that our proposed increase to Rent Assistance would have an impact on rents. So, part of the reason for that is that Rent Assistance is a cash payment that’s made directly to recipients, not to landlords.
So, it’s likely that a lot of the extra income that people receive under our proposal would be spent on things other than rent. Things like everyday necessities that renters currently can’t afford. But there’s also strong evidence from a range of high-quality research papers that suggests that the rate of pass through from housing assistance to rents is low.
So, when we’ve reviewed the literature, many of those research papers find no significant effects of housing assistance on rents. And those that do find an effect find very low rates of pass through. And one of the reasons for this is that even if increasing Rent Assistance causes people to spend more money on rent, that may actually be a good thing, because it may mean that these people are using their new income to move to better quality housing or housing that’s nearer to where they want to live.
And when we’ve looked at some of the recent data from New South Wales as well, where we’re able to compare the rents paid for new tenancies before and after the federal government increased Rent Assistance in September 2023. We don’t see any sign that rents were rising faster in areas where there’s higher concentrations of rent assistance recipients.
So that provides some indicative evidence as well from Australia that boosting Rent Assistance does actually benefit recipients.
Kat Clay: Matt, we’ve already talked about how expensive it is to rent in capital cities, especially for people on low incomes.
We are in a housing crisis so even if we increase Rent Assistance, are there enough rentals to cover demand?
Matthew Bowes: Yeah, Kat, talking about any issues relating to housing are really hard because the housing market is very complex. There’s lots of different changes we need to see to housing policy to make it work better for Australians. And in this report, we’re really focused on providing that immediate cash assistance to those renting pensioners who are doing it tough.
But the fact is, those pensioners would be doing a lot better if we had built more homes across the country over the past two decades. So, a big part of that is removing the planning barriers that make homes really difficult to build in our inner cities, as we’ve talked about on this podcast before. And in our report, we cite a range of research that shows that those kinds of barriers to new private housing are particularly damaging for low-income renters, because they’re the ones that most lose out when the rental market is really tight and when housing is most scarce.
But it’s also the case that we need to invest in more social housing, particularly targeting those renters who are most at risk of homelessness. And we need to continue the progress that governments across Australia have made on reforming our tenancy laws, particularly to narrow the grounds on which tenants can be evicted, to better enforce the tenancy protections we already have, and also to limit cases where tenants face really large, sudden rent increases that are particularly destabilizing.
So, as we’ve talked about lots here, housing policy is complex, there’s a lot of policy changes we need, but that complexity shouldn’t stop the Federal Government taking the simple step of boosting Rent Assistance to provide that immediate support to low-income renters and enable them to retire with dignity.
Kat Clay: So, Brendan, boosting Rent Assistance is all well and good, but the big question is, how are we going to pay for it all?
Brendan Coates: Thanks, Kat. So, it’s obviously a 2 billion price tag in order to fix this problem. Which is, you know, in the current budget environment, that’s a lot of money. We do propose or put forward some savings options that would help pay for this. Some of those relate to curbing superannuation tax breaks, so things we’ve talked about before, like lowering the Division 293 tax threshold to $220, 000 and increasing the rate to 35%.
You know, that’s basically a way of saving $1. 1 billion. We could cut some of those superannuation contribution caps that could save, you know, more than a billion dollars. The one that probably comes to mind is, if we do want to keep it in the housing basket, if we were to reform the capital gains tax discount, basically halve that rate from 50 percent to 25 percent as we’ve recommended previously, look, that’d save 5 billion a year.
So that’s much more than the 2 billion price tag here. And that would also incidentally boost home ownership without having much of an impact on house prices and rents.
And finally, we could include more of the value of the family home in the age pension assets test. So, you know, we’ve estimated previously if we included the value of the home above 750, 000, anything in excess of that in the assets test, you know, that would save taxpayers 4 billion a year, more than double or essentially double what we need to pay for rent assistance.
Kat Clay: Brendan, to sum up, why should the government raise Rent Assistance?
Brendan Coates: Well, I think the short answer is we’ve identified a problem, which is that retirees who are renting, you know, can look forward to a pretty tough life once they retire. And this is the most cost effective and immediate way to solve this problem. So, $ 2 billion price tag isn’t cheap, but it is cheaper than any other tool that we could use to try to solve this problem.
So, for example, if we wanted to do it via social housing, you know, to have even an extra 200, 000 social housing dwellings would be costing us an annual subsidy of close to 5 billion a year, which is, you know, more than double what we’re talking about here. This doesn’t obviously negate the fact that we need to build more homes, as Matt talked about, but even that will take time.
So, this is the only way we are going to solve this problem now and guarantee that it stays solved for those that rent into the future.
Kat Clay: Thank you, Brendan and Matt, for coming on the podcast today and discussing their new report. If you’d like to read the report, it is available for free at grattan.edu.au, and I’ll also put a link to the report in the show notes below. If you’d like to talk to us more about what’s been discussed in today’s podcast, please find us on social media at Grattan Institute. And please do take care and thanks so much for listening.