In light of the many challenges faced by American seniors as they seek reliable sources of cash in retirement and when on a fixed income, the expanded use of the Home Equity Conversion Mortgage (HECM) program sponsored by the Federal Housing Administration (FHA) could present a potential tool for seniors struggling with their life after work.
That was a claim made by Shai Akabas, director of economic policy at the Bipartisan Policy Center (BPC) during testimony before the US Senate Special Committee on Aging late last month. Akabas testified before the Select Committee alongside Retirement Savings Project Director Dr. John Scott of the Pew Charitable Trusts, Director of the Retirement Security Program at the University of California, Berkeley, Dr. Nari Rhee and Retirement Clearinghouse Founder, President and CEO J. Spencer Williams.
How Reverse Mortgages Can Help
Akabas previously addressed Senate members in May, when he testified before the Senate Committee on Health, Education, Labor and Pensions (HELP) and mentioned how home equity could be a major helping factor in solving problems related to a possible retirement crisis. 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.”
Speaking to the Senate Special Committee on Aging in October, Akabas clarified that home equity is currently underutilized and could present a viable path for many retirees without necessarily relying on broader social programs.
“Americans have $21 trillion in equity, a sum that could significantly supplement the nation’s $35 trillion in retirement assets,” he said in his testimony. “For many retirees, home equity is a significant part of their wealth: half of homeowners aged 62 or older hold most of their net worth in home equity. Notably, the majority of people aged 62 or older without retirement savings or pensions are homeowners, which means many of these older Americans can — and will have to — rely on home equity to supplement their benefits. of social security.
While many older Americans may choose more conventional options for tapping into their home equity, including selling and downsizing to a smaller home while pocketing the rest of the proceeds from the sale, borrowing against the value of a home has potential advantages. While citing reverse mortgages, second mortgages, and home equity lines of credit (HELOCs) as possible mechanisms for borrowing against the value of a home, Akabas specifically called out reverse mortgages for having unrealized potential for assistance. .
“Reverse mortgages, in particular, offer a potentially useful tool for converting illiquid home wealth into cash to live on in retirement, but the market for them is currently quite small,” Akabas said, citing a June 2016 BPC. report to support the characterization. “Policymakers could work to improve this market and make it a simpler, more useful, and more profitable tool for older, ‘cash-poor’ Americans to use their home equity.”
Focus of the senators
Sen. Tim Scott (RS.C.), a member of the select committee, offered his perspective on critical retirement issues that Congress may be able to address, including the “leakage” of finances from the accounts of retirement and what he called “barriers” that could prevent small businesses from providing retirement accounts to employees.
“Helping small businesses launch retirement plans is crucial to boosting employee savings and closing the gap [between] how much money you need when you’re retired and how much money you can save along the way,” Senator Scott said in his opening statement. “Research shows that workers earning between $30,000 and $50,000 are 12 times more likely to save through employer-provided plans than on their own.”
Scott also denounced the Retirement Income Test (RET) – which limits the amount of Social Security benefits an elderly person can receive if they continue to work before reaching full retirement age – as being unnecessarily invasive.
“[The RET] confuses retirees and discourages work because it’s seen as a tax,” Scott said. “That’s why today I filed the Seniors Freedom to Work Act 2021 to scrap the RET and simplify the decision-making process for seniors.”
On the Democratic side, committee chairman Sen. Bob Casey (D-Penn.) characterized the headwinds facing retirees a little differently, focusing instead on the inadequacy of current programs that should be strengthened or expanded, did he declare.
“We must protect and strengthen Social Security, the foundation of our retirement system,” said Senator Casey. “We must also support caregivers, mostly women, who leave work, undermining their ability to save and plan for the future. That’s why my Better Care Better Jobs Act is essential – it will not only increase wages for home care workers, but allow them to save more for their retirement.
The problem of underutilization
After speaking to members of the Senate last summer, RMD asked Akabas about the issues of exploiting home equity in retirement, and he explained that his retirement job leaves a lot to be desired.
“Generally speaking, home equity is one of the most important assets held by older Americans, yet it is criminally underutilized for retirement security,” Akabas told RMD in July. “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.”
Describing reverse home equity lines of credit as “another tool in the toolbox,” Akabas said such prospects should be explored so that seniors who might benefit from such loans are aware of the option. However, awareness of these tools is a broader issue in itself, he said.
« Reverse Home Equity Lines of Credit […] allow people to withdraw only the funds they need and avoid accruing interest on the full amount of the reverse mortgage,” Akabas said. “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 benefits, drawbacks and trade-offs.”
Watch a video of the hearing to the Special Senate Committee on Aging.