Economic policy

An economic policy expert explains how home equity could help in retirement

Finding a path to a secure retirement is becoming an increasingly tricky prospect for many retired or near-retirement Americans, and is the subject of accelerated academic scrutiny to help determine people’s pathways. aging – and the demographic changes that will increase this population in the future – to solidify a secure retirement. To that end, reverse mortgages have garnered additional attention from researchers and policy experts, as it is perhaps an underutilized tool that could facilitate such a retirement.

Shai Akabas, director of economic policy at the Bipartisan Policy Center (BPC), recently testified before the Senate Committee on Health, Education, Labor and Pensions (HELP) and mentioned how home equity could be a major helping factor in resolving issues related to a potential housing crisis. retirement. He specifically recommended that lawmakers aim “to improve this market and make it a simpler, more useful, and more profitable tool for older, ‘cash-poor’ Americans to utilize the equity in their property.”

To gain additional perspective on the issues surrounding American retirement and how home equity in general, and reverse mortgages in particular, may play a role in the future, RMD spoke with Akabas to share some of his thoughts on home equity and retirement landscapes. This is Q&A part 1, look for part 2 on RMD soon.

MDM: How would you describe the American retirement landscape today based on your research, and how has it changed the most over the past decade?

Shai Akabas: The United States has a well-functioning retirement system for many people, especially those with stable jobs, sufficient income, and opportunities to save throughout their lives. Although the structures in place can be improved, they translate into positive and financially stable results for millions of households.

Shai Akabas

But many fall through the proverbial cracks. “Cracks” is an understatement to describe America’s piecemeal pension system — in fact, it has gaping holes that cry out for reform.

Millions of Americans depend on Social Security for the vast majority of their retirement income. This is partly a result of the fact that about 1/3 of private sector workers do not have access to a 401K type plan, which has proven to be the most effective way to build retirement savings.

In terms of what has changed, if we stretch the period from the last decade to the last decades, the biggest change in the retirement landscape is the decline of defined benefit pension plans and the shift to defined contribution plans. , such as 401K. This change shifted much of the retirement risk to the individual saver. Beyond Social Security, we mainly have a “do-it-yourself” retirement system.

In case it helps, my colleague Jason Fichtner (Vice President and Chief Economist of BPC) has a co-authored article in which they describe the retirement landscape as follows:

“Although previous research efforts have come to different conclusions about the general state of adequacy of retirement savings, two strong conclusions emerge. First, retirement savings status varies from group to group. Members of racial and ethnic minorities tend to be less likely to save adequately, as well as single-parent households, younger workers, those with fewer years of formal education, those without a plan retirement and those with lower incomes. Second, while many households appear to be saving enough to expect to maintain pre-retirement living standards in retirement, virtually no one claims that many households are well insured against all risks.

What do you think is the common denominator of successful retirement funding plans today, if any?

I’m not sure what you mean by “retirement funding plan”. If you mean something like achieving household financial security, access to a 401K plan is really important. Data from the Employee Benefit Research Institute shows, all other things being equal, that those who have access to it do better in retirement than those who do not.

A common denominator is saving enough in a workplace retirement plan to supplement Social Security. But it’s not all about accumulation; there needs to be a strategy in place to make that income last. There is no right approach; it’s important to consider all options, including systematic withdrawals, annuities, and ways to take advantage of home equity.

Along with the idea that older people seem to have an aversion to tapping their home equity, there also seems to be a lack of awareness of the equity tapping options that exist. Is there a relationship between aversion and lack of awareness? In other words, does one affect the other?

There is definitely a lack of awareness. A residence is considered primarily a home and not a financial asset. So it’s far from the first thing that comes to mind when you think of retirement security. Many retirees also feel that borrowing against their home equity in any form reduces the essential asset they need to pass on to their children and grandchildren.

The aversion to equity mining seems particularly pronounced when the conversation is more specifically about reverse mortgages. Based on your understanding of the product, what barriers to acceptance exist for reverse mortgages that may not be present among other equity leverage options?

The history of problems with earlier versions of reverse mortgages has not helped perception, and there is concern about some of the parameters, with high upfront costs and low borrowing limits. Additionally, despite advertisements attempting to explain reverse mortgages, people find it difficult to understand the relatively complex product. HELOCs, for example, are easier to understand. HUD and other entities (Social Security, CFPB, and States) could better educate the public about this option.

The bequest motive is also strong – people often want to keep their residence in the family.

You recently spoke in general terms about the potential of reverse mortgages in the American retirement landscape. In terms of how you’ve developed your own perspective on the potential of reverse mortgages given the $21 trillion in home equity held by Americans, what do you think people might not understand not fully exploiting the potential of equity in general and reverse mortgages in particular that you have come to understand during your research?

Generally speaking, home equity is one of the most important assets held by older Americans, yet it is criminally underutilized for retirement security. There is a legitimate debate about whether the current iteration of reverse mortgages is the right key to unlocking home equity in retirement, but we need policymakers and the private sector to work together to meet this challenge.

Reverse home equity lines of credit are another tool in the toolbox that should be explored, as they allow people to withdraw only the funds they need and avoid accruing interest on the full loan amount. reverse mortgage.

Finally, the lack of consumer awareness of the multitude of options available to tap into their home equity in retirement indicates that we need to do a better job of educating the public about these options, including the pros, cons and compromises.