To What Extent Can You Include Your Home as Part of Your Retirement Income? Supplementary Retirement Income Written in Stone
The current transition underway in the Netherlands from the old welfare state to a new participation society means that households must bear an ever-greater share of personal financial responsibility. The government is gradually withdrawing from providing such services as healthcare, pensions, education, and housing and demanding that individual citizens both contribute more and take more initiative. It is an interesting time, in which old systems and services can be replaced by or supplemented with new concepts and structures. There is now, for instance, greater leeway for innovation in pensions and retirement. The four pillars of the existing Dutch pension system are being questioned ever-more explicitly. Reservations about the affordability of universal social security, the drop in funding ratios preventing indexation, and the recent increase in the number of independent contractors obliged to arrange their own retirement income have thrown that system into a new light. A “good” pension is no longer considered a given – neither by the government nor by the people.
Recent studies, such as those by Van der Cruijsen and Jonker (2016) and De Bresser et al. (2016), provide a refreshing new view of what a good retirement might look like. They demonstrate that it requires a better understanding of the expected expenses in retirement and that retirement goals and assets vary greatly among various types of households. Uniform pension schemes based on the standard of 70% are decreasingly realistic against the background of these results. The calls for greater flexibility, customization, and more individual contributions are growing – and that is especially true for the rapidly growing number of independent contractors who must already assume greater responsibility for saving for their old age. A recent study by Mastrogiacomo (2016) showed that fewer than half of the independent contractors surveyed thought it was important to proactively save for retirement and that only a small fraction had actually managed to build good retirement savings. This category is, however, accumulating wealth in the form of home ownership and other assets.
The question of the extent to which people should include their home as part of their retirement income is perfectly suited to this era of change. After retirement, home ownership is the largest equity component for Dutch households. It is a form of wealth built up over time through advantageous increases in home prices and dutiful mortgage payments, but which to date has only minimally been tapped into to pay for a comfortable old age. Inspired by the SER’s exploration of the personal pension savings option in 2016, the Dutch cabinet has now incorporated greater freedom for using home equity to accrue assets for retirement in the form of personal savings. The details of how this new freedom can best be utilized still need to be worked out by the current administration.
In this study, we will therefore examine the risk and return of this potential fifth pillar to our pension system from the perspectives of both individual households and pension funds.
Read paper here.