Debt, super, Age Pension all linked

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?

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Is debt ruining your retirement?