Superannuation and debt: Inextricably linked

The types of debt held in Australian households shift through the generations, but the amount stays roughly the same - and this has important implications for the superannuation industry.

University of Limerick senior lecturer in economics Stephen Kinsella told delegates at the Australian Institute of Superannuation Trustees Super Investment Conference that, broadly speaking, debt "doesn't matter as long as you can service it from some kind of income and someone is willing to give you more. I think Australian households probably understand this on a genetic level at this point."

However, he continued, because debt levels in Australia are so high, and because interest rates appear to be rising, that will lead to "increase household fragility, which translates to increased political fragility, which is bad for business."

Kinsella illustrated the issue by pointing to research on Australian households which showed that from ages zero to 30, mortgages represented the majority (58.3%) of debt. From 30 to 50, mortgages rose to 62.8% of debt; from 50 to 65, they fell to 45.9% of debt, and from 65 onwards they occupied only 28.2% of debt. In all cases, investment debt represented the remaining majority.

"Your debt ages with you and you need to pay it down. But the 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 with DB and DC mixing. But then that, obviously, creates different issues," Kinsella said.

Ultimately, he said, the "humps of debt just move along" as a person ages, and things are unlikely to improve given Australia's ageing population.

Due to this, based on research, he said that if you have a super nest get between zero and $450,000, "you will likely end up becoming the state's problem. If you have $450,000 to $1.5 million, you're exposed to sequencing risk. And if you have more than $1.5 million you'll 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."

For this reason, he said, Australia should be taking advantage of relatively low interest rates to ensure its welfare system is as robust as possible. "You want a very, very developed welfare state, especially in these conditions where interest rates will rise," he said.

Read more: AustraliaStephen KinsellaAustralian Institute of Superannuation Trustees Super Investment ConferenceUniversity of Limerick
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