The type of debt may change, but the amount stays the same

The type of household debt in Australia may change, but the amount stays the same.

stephen kinsella

It seems that the type of household debt held by Australians changes with each generation, but the amount stays the same – and it has important implications for the super industry.

University of Limerick senior lecturer in economics, Stephen Kinsella, spoke about the demography of debt last week at the Australian Institute of Superannuation Trustees Super Investment Conference.

He revealed how debt types may differ by country, although property remains high in all countries. Credit card debt is high in the UK and the US, but student debt is highest in the US.

Australian household debt varies by age. Unsurprisingly, people younger than 30 and up to 50 years old have large mortgage debt, with those over 65 people owning their homes but having larger investment debt.

This will change over time, with housing affordability preventing many younger Australians from owning a home in future.

Regardless, debt ages as you age, says Mr Kinsella, and it "doesn't matter as long as you can service it from some kind of income and someone is willing to give you more".

He points out that debt levels in Australia are currently high, and because interest rates have been low, they’ve been able to service their mortgage debt. But this will change when interest rates rise and could spell trouble for many households.

Because interest rates appear to be rising, this will lead to increased household fragility which will destabilise the political landscape and be bad for business across the board.

"Your debt ages with you and you need to pay it down. But the demographic structure and debt structure are deeply related. If the people in your funds happen to have a young cohort, that's fine. Your demography there is a different animal to someone whose fund has older members. But then that, obviously, creates different issues," said Mr Kinsella.

He believes that Australians who have up to $450,000 will end up relying on an Age Pension in retirement, and those with up to $1.5 million could still be at risk. Retirees with $1.5 million will “probably be fine, but if you invest in some silly banks and do some silly things, you may lose all of it. In which case, whose problem do you become? The state's".

And it’s not just an economic issue, said Mr Kinsella. Looking at this on a human level, increased debt leads to increased stress. In fact, studies showed that stress levels caused by debt are comparable to that caused by war.

This, in turn, puts more burden on the federal health system – which again, returns to being an economic problem.

Mr Kinsella suggests that Australia needs to take advantage of the current low interest rates to bolster its welfare system.

"You want a very, very developed welfare state, especially in these conditions where interest rates will rise," he said. “If interest rates are very low, and they will be low-ish for a relatively long time, the welfare state should be able to invest seriously in upgrading its capacity to deliver some services.”

How did you manage your debt? Do your children have similar debt to what you had at their stage in life? What recommendations do you have for younger people, or fellow retirees, who have debt?



    To make a comment, please register or login
    18th Sep 2017
    Learn the difference between want and need and act accordingly. Instant gratification has its consequences so learn to prioritise and live within your means.
    18th Sep 2017
    And invest the rest
    19th Sep 2017
    It's okay to make money. The young need to learn that working for someone else doesn't cut it any longer and start setting up themselves or joining the gig economy. Brave new world does not favour labour. The idea of working hard and getting ahead will work but not if your working for The Man or the Bank.

    Some of the young I know have cottoned on to currency plays including the current fad for cryptos and are making money trading.

    Wheeling and dealing and setting up something to flog off makes money. With deregulation come possibilities with less risk to you.

    Volatility is back in commodities too so there will be possibilities there.

    I'd never advise a kid to go get a job now but go make a job might work.

    Even nursing, teaching and police work is casualised and far too dangerous for the money being paid.

    The unions have stuffed up and business has done workers over.

    Yes KSS there are always consequences.

    And Raphael is right too. Saving and investing 10% from the first dollar earned to the last will give you investment money to play with but then again at 3% using other people's money isn't a bad option either.

    Just don't work for a boss and you'll do okay.
    19th Sep 2017
    I didn't work for a boss in my later working years, but legal restrictions on contracting make it hard now to do what I did.

    A friend who started a business in the US wants to engage others as contractors to work from their homes. No can do! First, they would have to work for the business owners' competitors (potentially creating a major disaster as they could take all the clients across to the competitor on a whim!), but worse than that, for them to work from their homes (which they WANT to do, as it is a much better lifestyle), the business owner has to have a ''health and safety audit'' of THEIR home every 6 months. The home must have a separate office with adjoining toilet and washroom facilities, storage facililties, approved car accommodation (why? They aren't driving to work!) and the list of safety provisions that have to be verified is endless. The legislation quotes a case where someone working from home fell over their own dog in their hallway, sued the employer (whose business was located in another state!) and won huge compensation. Sublime to ridiculous! And Australia seems to follow the US in implementing these absurd regulations. My friend came up with the idea of franchising as a solution, but the cost is prohibitive - starting at $50K if it's a simple franchise and you get a cheap lawyer.

    We owner-built houses to save money. Now there are hideous restrictions on owner-building.

    There are just so many barriers to earning and saving that one wonders if the intention is that we should all live in poverty.
    18th Sep 2017
    Has there been a recent article on the downside of getting the pension. That is, what sorts of obligations does Centrelink put on pensioners? Are they onerous and confining/controlling of a pensioner's life?
    18th Sep 2017
    Yes. Sadly, our welfare/pension system is extremely oppressive - quite cruelly so, in fact. Also, it's highly discriminatory and unfair. In particular, it discriminates against the more honest and responsible and in favour of those who are prepared to manipulate to get around the unfair restrictions. Australia would do well to not only strengthen the system to lift pensioners out of poverty, but also to make the system less punitive and controlling.

    What is disturbing, currently, is that there seems to be an unrealistic expectation that people should have saved enough to not need a pension in old age, but that's absurd given the immaturity and inadequacy of the superannuation system, the losses sustained in the ''Recession we had to have'' and the GFC, and the fact that many currently retired come from a generation that didn't typically educate children from lower classes and in which many worked for very low wages. There is also an unrealistic concept of how much is needed to fund an independent retirement. I think $1.5 million is about right for a couple retiring now. The current assets limit of $823,000 for a homeowner couple may be adequate for older retirees and those who can achieve high returns, but many retiring now would have to be able to obtain very high levels of return to avoid draining their capital quickly and resorting to a part pension. Contrary to what some suggest, it is not reasonable to expect that the less well educated, the sick, the disabled, and those who suffer emotional and psychological disadvantage due to deprivation or abuse in early life will attain decent levels of return. Nor is it reasonable to assume everyone's needs are equal. This makes the asset test extremely inequitable and economically harmful.

    Our pension system needs a total overhaul, but although the government committed to an overhaul to secure the Greens' support for changes to the assets test, the promise hasn't been and isn't likely to be fulfilled.
    18th Sep 2017
    What irritates me about our welfare/pension system, Rainey, is the fact the unfunded superannuation and pension liabilities of government workers of well over $100 billion. Every day the government and media complain about the cost of the age pension but the very generous welfare/pension payments of government workers never gets a mention.
    19th Sep 2017
    Triss only the federal government. State public servants have funded superannuation. You can't believe the MSM about this as they have no idea how it works.

    That neighbour ex nurses you envy paid hundreds of thousands of after tax dollars into a fund for 45 years to get that piddling pension and no concessions.

    You could have worked and save like that too if you'd set up a direct debit from your after tax income into an investment fund when you started work.

    The government has no problem paying pensions as they control the currency. They can create money if the need to just like banks do to create debt.
    19th Sep 2017
    Regardless of the amount nurses, teachers, etc have paid into a fund, Rae, the fact remains that there is an unfunded superanuation pension liability which grows every year. This is a serious concern.

    18th Sep 2017
    When I was young, people seemed to subscribe to the view that you borrowed ONLY to buy a house, and you lived frugally until you paid it off. By retirement, you owned your home and had no debts, and therefore could get by on a pension. If you had been able to save a little as well, so much the better, but you had to be debt free by retirement and remain that way through old age. And it seemed just about everyone could achieve that if they tried. Today, it seems expectations are unrealistic, but perhaps that's because the young have recognized that you only live once and if you live frugally while you are young, life passes you by. You are tied down by children and a mortgage, and then suddenly you aren't, but you are too old and tired and unhealthy to enjoy your new-found freedom and wealth. So a lot of young folk seem to have decided to live it up while they are young and worry about financial security later. Might work for some! I'm just glad I am debt free and have savings and an independent income. I'd hate to be answerable to Centrelink for every cent earned or spent.
    18th Sep 2017
    Yes, that's right, but also we bought a home that we could comfortably afford, even if it wasn't flash or in a flash area. Nowadays kids seem to want to start where we left off.
    19th Sep 2017
    Yes Rainey. I think they realise too that the old plan of selling and moving up three or four times won't work now and costs too much anyway so are buying the best house they can at the beginning.

    That is the case here in my neighbourhood. Young families have bought, renovated and are planning to stay there.

    They saw mum and dad upgrading and ending up in debt at an older age and don't want to work their whole lives for the real estate industry and bank.

    Travelling and having fun while young is a great idea. It's not unrealistic as so many under 40s are doing it.
    19th Sep 2017
    And times have changed for the better. I remember in the late sixties I coulndn't get a mortgage without a male guarantor, even though I was running my own business successfully. And when I married I was told I couldn't open a bank account in my married name without my husband's permission, even though my business account was in the same bank
    19th Sep 2017
    Kinsella has the "It's okay if people can continue to service the debt and liquidity allows more borrowing".

    If our love of other people's money dries up then business, our sharemarket and bond market and property market are in trouble and so are the balances in our super funds.

    At $2 trillion of debt now we are using up the income we'll earn in ten years time today. Let's hope wages start rising soon or it could get tricky.

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