Finding a way forward to a secure retirement is becoming an increasingly difficult prospect for many Americans who are or are about to retire, and is the subject of an accelerated academic review to help determine the pathways. for the aging population – and the demographic changes that will increase this population in the future – to consolidate a secure retirement. To this end, reverse mortgages have drawn additional attention from researchers and policy experts as a possibly underutilized tool that could facilitate such a retreat.
Shai Akabas, director of economic policy at the Bipartisan Policy Center (BPC), recently testified before the Senate Committee on Health, Education, Work and Pensions (HELP) and mentioned how home equity could be a major helping factor in addressing 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 profitable tool for older and” money-poor “Americans to use their home equity.”
To gain additional perspective on retirement issues in the United States and how home equity in general, and reverse mortgages in particular, might play a role in the future, RMD discussed interviewed Mr. Akabas to share some of his thoughts on home equity and retirement landscapes. This is part 1 of the Q&A, look for part 2 on RMD soon.
RMD: How would you characterize 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 retirement system that works well for many people, especially those with stable jobs, sufficient income, and lifelong savings opportunities. Although the structures in place can be improved, they translate into positive and financially stable outcomes for millions of households.
But many fall through the cracks. “Cracks” is a euphemism to describe America’s piecemeal retirement system – in reality, it has gaping holes calling for reform.
Millions of Americans depend on Social Security for the vast majority of their retirement income. This is partly due to the fact that around 1/3 of workers in the private sector do not have access to a 401K type plan, which has proven to be the most efficient way to build up retirement savings.
In terms of what has changed, if we extend the period from the last decade to 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 has shifted much of the retirement risk onto the individual saver. Beyond Social Security, we mainly have a “do it yourself” retirement system.
In case it is helpful, my colleague, Jason Fichtner (Vice President and Chief Economist of BPC), has a co-authored article in which they describe the retreat landscape as follows:
“Although previous research efforts lead to different conclusions about the general condition of the adequacy of retirement savings, two solid conclusions emerge. First, the retirement savings status varies between groups. Members of racial and ethnic minorities tend to be less likely to save adequately, as well as single-parent households, young workers, those with fewer years of formal education, those without a retirement plan. and those with lower incomes. Second, while many households appear to be saving enough to hope to maintain their standard of living before retirement after retirement, hardly anyone claims that many households are well insured against all risks.
What do you think is the common thread among successful pension funding plans today, if there is one?
I’m not sure what you mean by “retirement funding plan”. If you mean something like achieving household financial security, accessing a 401K plan is really important. Data from the Employee Benefit Research Institute show, all things being equal, that those who have access have better retirement outcomes than those who do not.
A common denominator is to save enough in an occupational pension scheme to supplement social security. But it’s not just about accumulation; there has 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.
In addition to the idea that seniors seem to have an aversion to exploiting equity in their home, there also appears to be a lack of awareness of the equity exploitation options that exist. Is there a relationship between aversion and lack of awareness? In other words, does one affect the other?
There is certainly a lack of awareness. A residence is primarily considered a house and not a financial asset. So it’s far from the first thing that comes to mind when thinking about retirement security. Many retirees also feel that borrowing against their home equity in any form reduces the key asset they must pass on to their children and grandchildren.
Aversion to equity investments seems particularly pronounced when the conversation is more specifically about reverse mortgages. Based on your understanding of the product, what are the barriers to accepting reverse mortgages that may not be present among other equity utilization options?
The history of issues with earlier versions of reverse mortgages hasn’t helped the perception, and there is concern about some of the metrics, with high upfront costs and low borrowing limits. Moreover, despite the advertisements attempting to explain reverse mortgages, people find it difficult to understand the relatively complex product. HELOCs, for example, are easier to understand. The HUD and other entities (Social Security, CFPB, and States) could do a better job of educating the public about the option.
The motive for bequests is also strong: people often want to keep their residence in the family.
You recently spoke in general terms of the potential of reverse mortgages in the US retirement landscape. As for how you developed your own views on the potential of reverse mortgages given the $ 21 trillion in home equity that Americans own, what do you think people can’t understand? -Be fully about the potential for exploiting equity in general and reverse mortgages in particular that you have come to understand through your research?
Generally speaking, home equity is one of the most important assets held by older Americans, but 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 retirement home equity, but we need policymakers and the private sector to work together to address this issue. this challenge.
Reverse mortgage lines of credit are another tool in the toolkit 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 regarding the multitude of options available to tap home equity in retirement indicates that we need to do a better job of educating the public on these options, including the pros, cons. and compromises.