29 Oct, 2013 Gen Ys facing a lifetime of debt
It’s not looking pretty for Gen Ys. The UK Social Mobility and Child Poverty Commission this month warned of a gathering storm of graduate debt, lack of housing finance and job insecurity. All of this is equally applicable to Australia’s Gen Ys.
Another element is the longevity of this cohort, which will mean they have more years of life to finance. Average life expectancy for those born in Australia in the early 1980s is about 20 years’ longer than life expectancy at the turn of the 20th century.
Given this prospect of a relatively long life, a recent report by Deloitte argues Gen Ys need to start retirement planning early. Males aged 30 need to be saving 5.4 per cent more of their salary than they currently are; females need to put away an additional 7.5 per cent to account for the fact they live longer. These percentages are required on top of the superannuation guarantee rate.
But while it is true to say Gen Ys need to start saving for their post-work future, their ability to do this faces serious constraints. Accordingly, as Deloitte acknowledges, the “just save more” mantra is not particularly helpful or realistic.
GEN YS NOT IN A POSITION TO SAVE
Presently, people in this age cohort can contribute up to $25,000 per year in total to their superannuation fund without paying additional tax. So an individual on a median wage of $60,000 can contribute $19,450 in addition to the $5550 paid by their employer. Unfortunately, most people on $60,000 are not in a position to be putting additional money into super, particularly if they are in casual work with no employer contributions being made, or if there are more immediate financial priorities like a house deposit and then paying off the mortgage. It’s worth noting employers are not required to make any superannuation contributions to those – mostly women – on parental leave pay.
So if they can’t save more now, what other options will Gen Y have in retirement?
Well they could, as Deloitte suggests, look at purchasing a lifetime pension, or annuity, using superannuation savings. Such products guarantee a defined amount of income for each year of life. People who die younger effectively bear the longevity risk of those who live longer. However, the income that a person is able to afford through an annuity depends on their level of superannuation savings.
Second, if they own a home when they retire, they could buy a reverse mortgage that allows them to access a line of a credit using the value of the house as security. These products can be risky because they must be repaid in full when the owners move our or die. This can mean that people don’t have the requisite bond to access aged care when they need it.
However, many people in this generation will struggle to ever own homes, or have paid off their debt completely in order to qualify for a reverse mortgage in the first place.
The third option is to take a superannuation lump sum and watch it completely whittle away 20 years before they die, after which they will have to live off the aged pension. The maximum individual rate for the aged pension is about $19,000 year. That means less than $75 a week on food, less than $40 a week on health and less than $60 on housing. The “do nothing” option means a lower standard of living in later years – a much lower standard in some instances. It means that one-off payments like surgery or for other acute health events that occur more frequently in old age simply can’t be paid for. It also means more people relying on the aged pension. Taxes would need to be lifted in order to pay for this, and we know that no government likes to make the case for higher taxes.
In these circumstances, it would not be surprising if Gen Ys continue to live in debt for their entire lives. Indeed, they may even accumulate further debt in their later years.
The final option is to delay retirement.
The average retirement age is 58 years for men and 50 for women.
Working further into old age is not an attractive prospect for many, particularly having watched their baby boomer parents retire in their 50s. However, it is the option that most Gen Ys will have no choice but to fall back on, as long as their physical and mental health permits it.
The reality for Gen Ys may be a dystopian version of the “have it all” utopia they grew up believing would be theirs.
Gen Y's facing a lifetime of debt, Financial Review, 29 October 2013