It used to be (relatively) simple. You got a job, scrimped and saved for a deposit, bought a home, then, when you retired, your cost of living plummeted as you had no mortgage or rental costs. Indeed for many, thanks to the benefits of earnings growth, your mortgage was paid off years before you retired. In conjunction with this, your employer offered an income in retirement which was not just fixed to a percentage of your final salary, but was also guaranteed.
Contrast this with today, when buying a home has become increasingly difficult, while private pensions face significant shortfalls.
The model has been broken.
The outcome is that thousands of people in their 20s and 30s today, the so-called Generation Rent, who don’t manage to buy their own home, face the possibility of seeing their income plummet by potentially 80 per cent as they turn 65 or 68, while at the same time trying to deal with a rental market that is not fit for their purpose.
"It's a huge crisis coming down the road," says Sarah McGurrin, a tax and financial adviser with Orca Financial. "There will be a huge risk of poverty and homelessness when people get to retirement."
Declining homeownership rates
However you get there, it’s hard to fault the advantages of homeownership in retirement. For one, it means that if you own it outright, you won’t have to worry about the costs of keeping a roof over your head, most likely in a home and area you are comfortable in.
"We know that we're under-provided for in terms of pensions; this relies on us to buy our own home at a time when we're earning the most in our life cycles, so that the property is paid for by the time we retire," says Aideen Hayden, chairwoman of Threshold. "It has gone in the past a long way to make up a pension deficit."
Owning such an asset gives you flexibility should you need to realise some of its value. You can take in a lodger, for example, through the rent-a-room scheme; you can avail of a home equity loan to release some of its value; or you can sell it and look to downsize, and live off the difference.
If you hold on to it, it also means that you have an asset to pass on to your children.
“Our system is designed around the idea that most people will be homeowners in retirement,” says Barra Roantree, an economist with the ESRI.
Pension expert Standard Life, for example, estimates that a pensioner would need income of €12,400 a year to pay for a basic standard of living. This figure may include four weeks in the sun, but does not include housing costs.
But this model may not apply for a growing proportion of renters.
A combination of factors has seen the proportion of people who buy their home plummet in recent years. Indeed latest figures show that Ireland’s homeownership rate is about 68 per cent, down from almost 82 per cent in 2004.
There are some signs that this trend may have started to slow; last year saw an uptick in homeownership levels in Dublin for example, with 65 per cent of Dublin dwellers owning their own home at the end of 2020, compared with 60 per cent a year prior. However, the caveat on this is that the figures, from the Central Statistics Office, were compiled in a time of Covid-19 and thus may be subject to change.
The question is, then, is the rental sector suitable for people in the longer run? It's not and there are clear problems around affordability
While homeownership levels are falling for every generation since the 1940s, the biggest shock may be felt by today’s Generation Rent, a cohort who feel locked out from the housing market.
“You would expect that for people in their 20s it [homeownership] would be lower, and the key question is how much lower,” says Roantree, who is examining the extent of the issue in conjunction with the Pensions Council in a forthcoming report to be published late this year/early 2022.
An earlier report this year from the ESRI warned that people in their 20s and 30s will be the first generation to be worse off than their parents – and falling homeownership is a key factor behind this.
Of those born in the 1960s for example (or those largely in their 50s), 61 per cent would have owned their own home when they were aged 30 – falling to 39 per cent for those in their 40s. But this figure has dropped to just 32 per cent for those born in the 1980s, largely people in their 30s.
Roantree says the age of 40 is key; by this time, most of those who will purchase a home have done so.
And of today’s 40 year olds, ie those born in the 1970s, about 61 per cent own their own home; but this compares with closer to 80 per cent for those born in the 1950s and 1960s.
For Hayden, this could be the source of intergenerational strife.
“Younger people haven’t had the same chances as their parents had. It’s very clear that is something that people will resent,” she says.
Renters are getting older
Unsurprisingly then, with fewer people buying their own home, more people are renting – and renting for much longer than used to be the case.
The latest census, for example, shows there were more than 100,000 people aged 40 or over renting in 2016, up by 20 per cent from 2011. Within this, the greatest increase was seen in the 55-59 age group, up by 26 per cent on 2011.
“What we’ve seen over the last decade is an ageing profile of people who are renting,” says Hayden. Indeed of respondents to Threshold’s latest tenant sentiment survey, some 54 per cent were over the age of 34.
“That’s very representative of what we’ve seen over the past number of years – a growing number of people in the rental sector for the long term. They don’t see options to go anywhere else,” says Hayden.
And expectations are that this will only increase further. A report from Alone, for example, has forecast that there will be 358,001 people aged 60 and over living alone by 2026, and 406,963 by 2031.
Hayden agrees: “The group in this cohort will increase every year that goes by.”
As renters get older, they are also spending more of their take-home income on housing costs. According to Threshold’s survey, more than 50 per cent of people spend more than 30 per cent of their income on rent, while about 12 per cent give up between 40 and 50 per cent on rent.
Research in the UK from Development Economics for Scottish Widows suggests that within 15 years, retirees who don’t own their own homes will be paying an average of 42 per cent of their income in rent.
“The question is, then, is the rental sector suitable for people in the longer run? It’s not and there are clear problems around affordability,” says Hayden.
While many people suggest that countries such as Germany have managed the issue of long-term renting in old age, Hayden says “it’s not a comparison really”, pointing out that it too has issues with rent inflation and affordability, and has found “no magic bullet” to its challenges.
As if entering retirement with an insecure housing arrangement wasn’t bad enough, this is likely to be further exacerbated by the inadequacy of pension savings.
Advice around how much you need in retirement is typically based on people owning their own home; and most people fall short of these expectations. But what if you don’t have a home to begin with?
As McGurrin points out, the average private pension in Ireland is only about €90,000, which would give an income of about € 4,000 a year. Add this to the State pension, of about €12,911 a year, and you’ll still fall short of private rents, never mind have enough to live on.
After all, the State pension is worth € 1,075 a month; but average rent stood at €1,745 in Dublin and €904 outside the greater Dublin area at the end of 2020, according to the Residential Tenancies Board.
In many instances, people could be looking at 80 per cent of their income going to rent in retirement. It’s a vicious circle, as McGurrin notes.
“If you can’t afford to buy a property and about 40 per cent of income is going on your rent, then you don’t have disposable income to fund that large nest egg to be able to continue to pay that rent in retirement.”
Many long-term renters may also be in employment which is not permanent or pensionable, and which may mean they do not qualify for the full rate of the State pension.
With inadequate pensions, and bullish rents, the only option for many may be to rely on the State. As Roantree notes, for those already in social housing before they retire, remaining in this housing is a good outcome.
“There is no issue of affordability,” he says.
There is something wrong with a system that allows you to pay twice as much money in rent as a mortgage, and doesn't take that capacity to pay into account
It may be more challenging, however, for those who find themselves on a waiting list for social housing or trying to access the Housing Assistance Payment (HAP). This offers assistance to individuals on incomes of up to €35,000 across the Dublin area and Cork city, or income of up to €42,000 for a family with children. You have to be on a local housing authority list to qualify.
But this may see an overwhelming increase in the cost to the State of keeping a generation of retirees out of poverty.
“Those limits were set in 2017 and rents have gone up significantly,” says Roantree.
Indeed at present, the most a single applicant can claim from HAP is €660 a month in Dublin. But with the average price of a one-bed at €1,428.70 a month, according to the Residential Tenancies Board, this leaves a substantial shortfall that must be topped up by the pensioner. And at today’s prices, a €768 top-up will wipe out much of the State pension in one fell swoop, leaving the pensioner dependent on their own private pension to fund much of their living costs.
It is an issue that there is no simple solution to, but rather a number of approaches that may mitigate the impact.
Stronger State support is one.
“That cost will inevitably have to come back to the State,” says Hayden. “A more expansive system of supports is likely to be needed,” agrees Roantree, while Hayden suggests extending the Rebuilding Ireland Home Loan so there is greater burden-sharing between the State and individual.
Another factor that could help mitigate the problem is extended working lives. At present, banks will typically lend on a mortgage only up to the age of retirement, or about 65, and in some cases 70. This can make a mortgage less affordable as someone buying a home at age 45 may only be entitled to a 20-year term, which can make monthly repayments significant.
But if people stay working longer, their income won’t fall as fast when they turn 65, and a mortgage may be more affordable. “That’s one thing that might offset some of the current trends,” says Roantree.
An adjustment of Central Bank lending rules might also help. Hayden, for one, queries the extent of the response to the banking crisis by clamping down so hard on mortgage lending.
“There is something wrong with a system that allows you to pay twice as much money in rent as a mortgage, and doesn’t take that capacity to pay into account,” she says.
Bumping up pension coverage through initiatives such as auto-enrolment, which has been put on the long finger for some years now, may also help.
Moving out of Dublin or other expensive urban areas may be another solution, but this is not an easy thing to do at any age, let alone in retirement.
“You don’t want to be faced with the prospect of having to move in your 80s,” says Roantree, while McGurrin agrees. “As you get older all you want is security.”
And in the current retirement model, this security is perhaps best served by owning your own home.