Over 60s hangover
Boomers borrowed record amounts and now some face an uncertain future, writes Barbara Drury.
Boomers borrowed record amounts and now some face an uncertain future, writes Barbara Drury. Rumours of the death of debt and the rise of the new austerity are greatly exaggerated. Personal debt is on the rise and, despite the political rhetoric, it is not just working families doing it tough."We are getting more and more elderly people in debt," says a solicitor with the NSW Consumer Credit Legal Centre, Karen Cox.In a recent audit of calls to its mortgage-hardship service, the centre was surprised to find that 16 per cent of calls were from people aged over 60.From July 2009 to October last year, it logged 418 calls about credit-card debt, while a further 347 had problems with home loans and home-equity loan products and a smaller number called about car loans and personal loans."If it's a temporary hardship, we may be able to negotiate with the lender but at that age it is often not temporary and may be the result of illness or the loss of a job [see case study]," Cox says. "In those cases, we may help negotiate the sale of assets."Private debt rose by 2 per cent to $23,461 a person in the March quarter, according to the Australian Bureau of Statistics, with credit cards and mortgages the main culprits.According to the Reserve Bank, Australians owed a record $49.4 billion on credit cards in May. Just over a quarter of all household spending is now financed by credit-card debt. And the average mortgage is nudging $300,000 nationally but people in capital cities often borrow much larger amounts.It is hard to imagine but Australians have only had easy access to consumer credit since the 1970s.Australia's first credit card - Bankcard - was launched in 1974."Before Bankcard, people just lived on what they had," says the chief executive of the Australian Institute of Superannuation Trustees, Fiona Reynolds. "Women couldn't even get a loan without their husband's consent. Now it's just commonplace to get a credit card and soon you can't live without it."The practice of borrowing against equity in your home only took off in the 1990s, along with mortgage redraw, reverse mortgages and margin loans to tap into the booming sharemarket of the '90s and early Noughties.Debt is not always bad. Used wisely, it may fast-track wealth creation as long as you have assets to back it up and disposable income to meet your repayments. But once you retire, there comes a point for many where the runaway train of debt slams into the buffers of financial reality.The average super retirement benefit is still under $60,000 and the age pension is set at a relatively modest 25 per cent of average male weekly earnings.Reynolds says the age pension was viewed as adequate in the past because people didn't have high debt levels and they lived frugally. But that is changing rapidly with the retirement of the baby boomers.The oldest boomers turn 65 this year, becoming what a director of KPMG and trend forecaster, Bernard Salt, calls the first truly consumerist generation to move into retirement."Many haven't paid off their mortgage in their mid- to late 50s," Salt says. "They are part of a consumerist and materialistic generation that only knows life to get better. They haven't known [economic] depression like their parents and they don't see 60 as the end of their commercial contribution."In a 2008 report for AMP, the National Centre for Social and Economic Modelling found that the number of people aged 60 and over and still paying off a mortgage had doubled in 10 years, from 4.2 per cent in 1996 to 9.5 per cent in 2006. This figure is likely to increase along with the size of the average mortgage and the practice of dipping into home equity for a variety of spending purposes.One unfortunate consequence of debt in later life is that many people are earmarking their super to pay off the mortgage and credit cards. Recent research by the Australian Institute of Superannuation Trustees found that 54 per cent of retirees had taken all or part of their super as a lump sum."People use their super payout for a holiday, a caravan or a new car or a fridge to last through retirement," Reynolds says. "But I think for the vast majority of people it's used for repaying debt." Many baby boomers are working past 60 and they are comfortable with debt, for now. Salt says: "It's a new way of looking at life in the 60s and 70s. They see themselves as fit, young and healthy and they've still got some commercial life left. If you work beyond 60 you can carry debt over."But it's not just the boomers who have embraced debt. Reynolds also has concerns about Generation X, which has even more relaxed attitudes to debt and huge mortgages. "The chances of paying them off before retirement are slim and although they might have saved more in super, will they use that to repay debt?" she asks.At the other end of the age scale, Cox deals with calls of distress from everyone from wealthy self-funded retirees who have upwards of $1 million in debts over property, to pensioners with much smaller loans over their only home."One particular caller was nearly 80 and had a line-of-credit with over $150,000 owing," she says. "He had borrowed to modify his home to accommodate a disabled relative and his spouse had recently died. He could no longer make any payments at all and had to place his house on the market."If the caller has a credit-card debt and no assets, the centre can often negotiate with the lender. If they have assets, it becomes trickier."Sometimes family members chip in to satisfy the debt and sometimes we get an arrangement like a reverse mortgage, where the bank ends up with a claim on the estate," Cox says. "If you can show that there was something wrong with the lending practices you can often get a reduction. Sometimes people call and only have a small loan amount left and the lender will agree to a debt reduction or loan extension."Salt says: "Retirement is a 20th-century, pre-boomer concept. What we now call retirement can't really be called retirement. At 60, the average Australian can look forward to at least 25 years of living. Drawing down on equity in property must come to the fore."You might have a $2 million house in Hornsby without encumbrance but not enough super. You can draw down on [home equity], work on, or both. There is a re-calibration and re-engineering of that whole space between 50 and 65. [Debt] is an issue that will accelerate. We're looking at the cutting edge of the boomers retiring now."Generation X won't retire until the 2020s. By that time, if not before, governments and policymakers may be forced to act.The fallout from easy creditEasy credit has made it possible to live beyond our means but when the music stops and we die our debts live on. So who pays the piper?When you die, any money left owing on your family home, investment properties or other geared investments, credit cards and personal loans come out of your estate.Donal Griffin, a director at de Groots Wills and Estate Lawyers, says creditors generally write off small debts that can't be paid but where there are assets, they can enforce any security they have against the estate. For example, if you have money owing on your mortgage, the lender may sell the house to recover the debt."The debts of an estate do not otherwise pass to the beneficiaries," he says.If there are insufficient assets to cover debts the deceased estate can be made bankrupt and family members will not be held liable. "Prudent planning can keep at least life insurance and super proceeds out of the bankruptcy. Testamentary trusts can also help beneficiaries protect their inheritance from challenge," Griffin says."Most wills say the executor should pay off debts but this is not sophisticated if it is a bad time to sell," Griffin says.He gives the example of someone who had an investment in a timber plantation. "It was due to harvest the following year but the will said 'pay off all debts' so they were paid but the estate got a much reduced price [for the asset]," he says.Debt clockStart early to have a debt-free home and enough savings to retire on.Young adults- Have an emergency fund.- Pay credit cards debts fully each month.- Repay student loan.- Save a first-home deposit.Middle years- Reduce non-deductible debt.- Focus on repaying mortgage.- Maintain a cash buffer.- Borrow to invest.- Make contributions to super.- Have health and life insurance.Pre-retirees- Pay off home and other debts.- Boost super contributions.- Borrow to invest when home is paid off.- Review insurance needs.Job loss a disasterJohn*, 69, planned to work until his 70th birthday, collect $31,000 from the government's pension bonus scheme and retire debt-free. But a series of unfortunate events changed all that.Instead, John has a $62,000 debt and is on the brink of bankruptcy. John's plans began to unravel in October 2009, when he was retrenched from his job as a warehouse supervisor."I'd been at the company for seven years," John says. "But because I was a supervisor on a contract and not a member of the union, all I got was eight weeks [redundancy] pay ... I started to use my credit cards again to keep things going."At that stage I didn't have a lot of super but I had already drawn down $22,000 to start paying my credit cards," he says. John's credit-card debt first got out of hand years earlier when his wife had three operations for cancer.They fell behind in their mortgage repayments. In 1999 they sold their house to their son so they could continue living there and pay him rent."The banks were happy to give me the cards. I was earning good money, paid rent and made credit-card repayments. When the debt came down, I would get a letter offering to increase my limit. I spoke to the banks when I was retrenched and got a hardship agreement."John put off applying for the age pension after he was retrenched, preferring to live on his super and credit because he thought that would entitle him to the full pension bonus scheme payment. He only received a part-pension because his wife was still working and is now only entitled to part of the full pension bonus."We were going to retire in September and collect the pension bonus," he says. Now he won't get enough money to repay his debts.John wants to do the right thing and has offered his card providers a settlement of 20 cents in the dollar but they aren't biting. "It looks like I'll have to go bankrupt ... we don't have a thing. We've been living week-to-week for years. If I go bankrupt, they get nothing," he says.*Not his real name