In July, the Economic and Social Research Institute, commissioned by the Pensions Council, published a study examining the impact of declining home ownership rates on the adequacy of pensions in retirement.
Currently, 90 percent of pensioners own their own house. ESRI estimates that, based on current trends, only 50 percent of people between the ages of 25 and 34 will own a home when they retire. That means 50 percent of these people will rent from either the state or private landlords.
Retirement home ownership is one of the best guarantees for a comfortable retirement. Not only does it drastically lower a person’s housing costs, but it also means they have a valuable asset to borrow on when they need to supplement their income.
The ESRI paper looked at the policy options facing the government. They concluded that people either need to contribute more to their pensions to ensure they have enough to pay the ever-rising rents, or the government needs to subsidize rents.
But the paper didn’t address the much more obvious solution, which is the subject of my pre-budget proposal this year. Saving the approximately €30,000 for the deposit is the biggest hurdle to getting on the apartment ladder. I suggest that the first buyer can borrow it from their own pension fund.
It’s important to note that they pay this money back to their pension fund, so they won’t reduce their overall size. They pay it back either from their income or when they sell their home to upgrade it.
And if they haven’t repaid it by the time they retire, the loan will be deducted from their tax-free capital balance. It’s strange that we allow 65-year-olds access to a large lump sum in retirement when they probably don’t need it, but we don’t allow younger people access to the money when they need it.
Typically, people in their 20s and 30s have little interest in pensions as they will not see any benefits for at least 30 years. Her pressing concern is how to get up the apartment ladder. When they see that contributing to a pension will help them move up the housing ladder, they will be much more excited to contribute.
Retirement and home ownership are two sides of the same coin
Retirement and home ownership are two sides of the same coin. Together they ensure long-term financial security. Without both, a person will not have a comfortable old age.
But it’s not just about retirement. In general, mortgage payments are lower than rent. The earlier a person climbs the ladder of housing, the lower the housing costs during their working life.
This leaves them with more disposable income that they can pay into their pension fund. It’s highly likely that someone who buys their home in their 20s will actually not only have a mortgage-free home in retirement, but also a larger retirement fund than someone who’s spent their entire working life on rent.
The government suffers from isolated thinking on this issue. The Department of Social Welfare deals with pensions. The Housing Department takes care of housing construction.
They work in isolation from each other. The Department of Social Welfare is introducing an auto-enrollment pension scheme that will effectively force workers to pay 8 percent of their after-tax earnings into a pension fund.
This could be great for achieving this department’s strategic goal of improved pension coverage. But it will make it even harder for people to accumulate the deposit and homeownership rates will continue to fall.
We drive in the opposite direction to Singapore
Giving first-time buyers the ability to borrow the deposit won’t solve the housing problem on its own. It’s only part of the solution. At the same time, the government needs to focus on encouraging more homes to be built and lowering housing costs for first-time buyers.
This is not a short-term solution to the current problem. It is a long-term reform of the pension and housing system. The supply of mortgage financing goes through booms and busts.
At the moment Irish banks have plenty of money to lend to homebuyers. But that cycle will change, and from time to time we will face mortgage financing shortages.
When this happens, housing construction slows due to the lack of home buyers. Allowing people to borrow from their retirement funds would smooth out the overall financing supply so we wouldn’t see such pronounced booms and busts in home finance and housing.
Singapore increased the home ownership rate of the population from 30 to 90 percent in just 20 years. In the same period, they doubled their housing stock. The integration of pension provision and home ownership was an essential part of this strategy.
We drive in the opposite direction to Singapore.
The prospect of 50 percent of our retired citizens depending on the goodwill of the state or the goodwill of private landlords for a comfortable retirement is daunting. We should fix this issue now.
Brendan Burgess is the founder of Askaboutmoney.com, the Irish consumer forum
https://www.independent.ie/business/it-is-time-to-integrate-home-ownership-into-our-pension-savings-schemes-41924376.html It’s time to integrate home ownership into our retirement plans