NZ needs to look at decumulation in retirement income debate, expat economist says; 'How do you convince retirees to start selling down their homes?'

NZ needs to look at decumulation in retirement income debate, expat economist says; 'How do you convince retirees to start selling down their homes?'
How do the retired cash out of their house? Image by

By Alex Tarrant

The retirement income debate of 'pay more, work longer, get less' needs a fourth point: 'sell your home,' according to an expat economist at a London think-tank.

Reform chief economist Patrick Nolan told a Treasury-Victoria University conference on the government's long-term fiscal projections this week that the topic of decumulation, particularly via housing equity release, needed to be brought to the front of the retirement income conversation in New Zealand.

There was currently a lot of talk in New Zealand about accumulation of financial assets for retirement, but the other side of the coin received little attention (Auckland University's Susan St John was an exception).

As well as equity release, more needed to be done creating an annuity market for the draw-down of pensions, Nolan said.

“I think New Zealand has a massive opportunity in that a big part of any [retirement income] funding solution is already there, in the sense that there is a lot of housing wealth in this country," he said.

“So we’re going to have to think quite seriously about how we start to use housing wealth. I understand that could be one of the most unpopular things that anyone could ever say; a message to sell your home does not go down well.”

But equity release was a massive issue in the UK, while in Australia a lot was being done on the annuities side of things.

Health insurance

Another topic that needed to be discussed more in New Zealand was private health insurance, which was more widespread in Australia.

“Something like 83% of health funding in New Zealand comes from the government, and in Australia it’s only about 69%. There’s much more contribution from the use of private insurance," Nolan said.

While there were some problems in Australia surrounding private health insurance, these largely stemmed from the cost of government subsidies in place to encourage more people into it, which could be avoided here.

'John Key absolutely wrong'

On top of decumulation and private insurance, discussions in both Australia and the UK comfortably involved talk and action on raising the pension age.

“There are also proposals to link this to longevity. Now that’s a relatively uncontroversial policy, both in the UK and in Australia, and I think this is one area where New Zealand does stand out at being behind the curve," Nolan said.

“I think the Labour Party here have been very bold, and are quite right to talk about lifting the age, and – someone has to say it – I think Prime Minister John Key is absolutely wrong to rule it out," he said.

“If you look around the world, increases in retirement age are included in packages of reform. It’s not a controversial policy in most countries.”

Different treatment

Ring fencing certain benefits from the agenda merely made reforms harder.

“Politicians tend to think they’re clever by ruling changes to certain areas out in order to make the short-term politics a bit easier. But generally, what it does is it just weakens your case for change," Nolan said.

"The first question you’re asked is, ‘if they’re not facing reform, then why should I?’ This is particularly relevant in the New Zealand Superannuation debate, because why should that benefit be outside the value-for-money agenda?" he said.

“If we’re going to increasingly ask quite hard questions about working-age benefits, why aren’t we going to start asking the same question about New Zealand Superannuation?"

The path forward would continue to grow more difficult, Nolan said. He quoted the European Commissioner: ‘Effectively what we’re telling people is to pay more, work longer, and get less.’

“An extra dimension is that, you’ll also have to sell your home,” Nolan said.

“Now you can imagine how hard politically that is ... but people do actually understand that," he said.

“There is one way you can make your life easier, and that’s by moving quickly. As soon as you do, the cost of change is less."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Annuities are fine in a normal interest rate market. With interest rates being suppressed at least through 2015, the Federal Reaserve creating at least $85 billion a month and inflation consistently understated since the Clinton era......very risky.
My father retired in 1995 and with annuities, since converted to an RRIF (registered retirement income fund) has seen his income more than halved.
This is the paradox that many of us will face, borrowing to the limit is driving price now but when the demographic bulge of the "baby boomers" starts to sell down what happens to the "value" then.
Is high immigration the solution to this? 

Good point,
Patrick did note in his presentation (I didn't include it above, but quote is below) that the low interest rate envioronment made it tough for annuities at the moment:
"...In particular, we’re seeing very low interest rates in countries like the UK. Very bad time to be taking that money out an buying an annuity."

A 1yr term deposit in Canada is 1.3%!! Retirees are in real trouble......

My rework of the quantity theory of money to accomodate interest (M.V)+i=P.Q was an interesting process as from that I worked out that interest rates have to trend down and eventually reach zero. When you look back that is exactly what it has done since peaking in the 80's, albeit with a few peaks and troughs. 
Sooner or later it will be a matter of selling your house so you can eat, those who get in first will be best off of course. Just as well we have a steady stream of Chinese buyers helping to mop up the surplus eh?

Yes good point, just who will they be selling to, and at what price. If renters cannot get onto the first home ladder, and feed through over time into upgrading, maybe they will have to wait for the flood of retirees properties to bring the prices down. Same issue with small and medium sized businesses. Unless as mentioned we sell to wealthier new immigrants. But this does not help the first home buyer.

I am a baby boomer, i will never leave Auckland.
You nedd to think again if you want to leave Auckland since we need health care. No other places can provide health care as Auckland, for instance aaaaambulance.

If your nom de plume is anything to go by , I would say that you're the ideal person to live in Auckland City ......
... and I hope that you never nedd one of their aaaaambulances .... Good Health !

Now Patrick, there's a word "decumulation" Wow, just think Obama could fool the Republicans by telling them he's going to have a detax-cut for the rich

Don't you just wish these fellows coming home for the holidays would do just that and stop lecturing us with their far right neo-liberal adgenda?
Without the welfare state these same fellows who tell us to allow the the private sector into our wallets would already be on the dung heap of unemployment.
Indian and Chinese economists are dirt cheap so let's start importing them into the country right now - same with doctors and lawyers - then listen to the guilds squeal. I am all for exposing the population to the benefits of private enterprise market forces but not just for the poor and helpless.

Indian and Chinese economists are dirt cheap so let's start importing them into the country right now Are they not already here? Go door knocking in Epsom and you are bound to trip over one or two. :-)

Lets invent a problem. ie  'How do you convince retirees to start selling down their homes?'
Answer is easy.  Don't worry about it.  When they want to or have to scale down they will.  And if they don't want to or don't have too they won't.  Always was and still is a good plan.
We don't have to make them do anything. 

Careful KH,  with thinking like that you are going to give social engineering a bad name!  Another option, which we will probably do when the nest is finally empty, is to take in boarders or even rent out part of the house to another family (sorry PDK, us EQ refugees are building what you would term a McMansion). Advantages: no major transaction costs, ongoing income, little financial risk. No middlemen clipping the ticket either. Your home can be an income generating ASSET.

From the Reform website
Dr Patrick Nolan is Reform’s Chief Economist. Patrick joined Reform from New Zealand in March 2009. Since joining Reform Patrick has focussed on welfare, health and taxation issues.
Prior to Reform he was a Senior Economist at the New Zealand Institute of Economic Research (NZIER), where he worked with clients in the private and public sectors, a major trade union and with senior political figures. Before this Patrick served as the economic advisor to a frontbench Minister in a Labour Government and worked for the New Zealand Treasury in tax and regulatory policy.
That's what i call a typical bureaucrat
Hey Patrick, lay all your wealth and assets on the table so we can tell you what you should do with them, I bet not. Let's all have a debate about Patrick's life and what insurance he should have and so on.

No problem that i can see here.
The only problem i see is when the oldies sell,buy cheaper and smaller and then innvest in finance companies and relatives of blue chip etc.

"invest in finance companies"....Oxymoron....

It must be tough being in the financial sector trying to sell products that are almost guaranteed to not pay off for your annuities in a low interest rate world with moderate inflation.

Snippy, if you have a plan for your retirement which means you will be able to live as comfortably as you wish without resorting to the equity in your house, then good for you.
Unless that plan is to expect that the taxpayer will shell out for whatever you need.  If that is your plan, then it's you that needs to think again.

Back the bus up, pensioners did not pre-fund their retirements, that is why we have the issue now, where a generation (pick one) at some point has to fund it's own retirement and also those who didn't have to.

This is the reason why overseas countries are looking like a better option. In New Zealand I have to pay for my own University education, my own retirement and someone elses on not fantastic income.

Gareth Morgan stated that the NZ pension scheme was affordable , but that it just needed tweaking a tadge , raising the age of entitlement , and means testing it .... the whole Cullen fund & KiwiSaver malarky has been a total waste of time ( except for bureaucrats , accountants , and fund managers !!! ) ...
......... if you can find an overseas country which is a better option than NZ , please let us know .
I've lived in Australia & in the Philippines .... they're different from NZ , but I wouldn't say " better " ..

Snippy, it seems you are already a pensioner, or very close to being one - in which case please, please understand that this debate is not about you and your generation.  It is about future generations of pensioners and the future generations of taxpayers who will pay for them.  
Your pension is affordable at present.  Five taxpayers are paying for it.  But in future there will be only two taxpayers per pensioner.  They may be quite happy to go on paying, out of respect and gratitiude for their elders' hard work and contribution to New Zealand life and society.  But it would be unwise to bet on that.

Poor guy's nevah encountered trusts?

yay, more financial instruments, how many people clip the ticket on an annuity?
The sellor, the fund manager, the manager, the brokers, the actuaries, taxman. but the advertising will generate sales.
If my super scheme can't make a buck an annuity investment for 20 years is going to get e less.

Annuities are DOA......low rates and moderate inflation for years.....

On retirement:

  • The question isn't at what age I want to retire, it's at what income (George Foreman)
  • There is an enormous number of managers who have retired on the job (Peter F. Drucker)
  • I have never liked working. To me a job is an invasion of privacy (Danny McGoorty, Irish Pool Player)

A young man saw an elderly couple sitting down to lunch at McDonald's. He noticed that they had ordered one meal, and an extra drink cup. As he watched, the gentleman carefully divided the hamburger in half, then counted out the fries, one for him, one for her, until each had half of them. Then he poured half of the soft drink into the extra cup and set that in front of his wife. The old man then began to eat, and his wife sat watching, with her hands folded in her lap. 
The young man decided to ask if they would allow him to purchase another meal for them so that they didn't have to split theirs. 
The old gentleman said, "Oh no. We've been married 50 years, and  everything has always been and will always be shared, 50/50." 
The young man then asked the wife if she was going to eat, and she  replied, "It's his turn with the teeth."
A young man asked an old rich man how he made his money.
The old guy fingered his worsted wool vest and said, "Well, son, it was 1932. The depth of the Great Depression. I was down to my last nickel."
"I invested that nickel in an apple. I spent the entire day polishing  the apple and, at the end of the day, I sold the apple for ten cents."
"The next morning, I invested those ten cents in two apples. I spent the  entire day polishing them and sold them at 5:00 pm for 20 cents. I  continued this system for a month, by the end of which I'd accumulated a fortune of $1.37."
"Then my wife's father died and left us two million dollars."

Selling down is a fantasy while you can park income generating assets in a trust and draw national super.

"“I think the Labour Party here have been very bold"
"Patrick served as the economic advisor to a frontbench Minister in a Labour Government"....
Was that in NZ or the UK...does it matter!
So Patrick had plenty of scope to advise the awful Labour raise the retirement age...remember the 9 wasted he thinks they are being "very bold"....humbug

What a mess.....
Pensions have been underfunded for years based on fantasy predicted returns.
Of course it is in the "interest" of the contributers to overstate the returns to minimize the true cost.....plonkers....

Instead of raising the age of entitlement from 65 and/or introducing a punitive means test, I advocate a review of the length of qualifying residency.
There should be a large increase in the total numbers of years resident in NZ prior to age 65 before a full pension is received. This would also prevent the people like me paying the taxes throughout their whole working lives which kept the system going having to work extra years as a punishment for staying here and keeping the country going.
My own younger brother is a perfect example of this, calculating the exact length of time requred for his return, having paid precious little towards our tax system since he was in his early twenties.
Also, in my job I talk to people who have returned to NZ after many years of living and working in Australia in order to have operations in our public hospitals, gratis. Yes, they may have worked here prior to their initial departure, but I think after say two years (as in UK emigrants overseas) they should no longer qualify for totally free medical care in their homeland.

Not a game changer financially to small to worry about.
But, yes I agree on your comments.  Indeed I think you have a valid point on limiting what you can get if you have not lived here and paid taxes.
So say been abroad for 5 years? get no WINX DPB for a similar period, minus time with a multiplier (say 2) if you have worked here in between though.
So say 5 years away, worked 1 year and lose job, cant get WINZ for 1 year.  Cant get public healthcare for 3 years, straight forward enough to pay for a private policy for that period....

there'll be no surplus of general housing stock when/if the retiree bulge decide to sell. They're not going to sell then disappear off the map, they'll still need to be housed.
They'll either sell and buy a smaller home, or sell and start renting - probably the former is more likely. Either way they will still take up space in the housing market.
So retirees selling down won't create a surplus of stock, they'll probably create a demand for cheaper 2 bedroom homes while supplying the market with badly needed stock in the 3-4 bedroom market.
If there's going to be a housing stock surplus, it'll be when that age-group start to die. Even then if they've previously sold down, their 2 bedroom units will be ideal for first time buyers to get into the market. And depending on the timing and age range of these retirees selling down, and subsequently dying, the effect of housing market may be neutral.
When the bulge people die off, perhaps the surplus will be in retirement villages - which is very much a cordoned-off part of the housing market. Perhaps it's the likes of Ryman and Summerset that need to do forecasts based on the aging population? Perhaps in years to come we'll see the odd retirement village converted to some sort of gated community marketed toward younger people?

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