Finding a way forward for a secure retirement is becoming an increasingly tricky prospect for many Americans at or near retirement, and is gaining accelerated academic scrutiny to help determine paths for the aging population – and the shifting demographics that will increase that population in the future – to solidify a secure retirement. To that end, reverse mortgages have been gaining some additional attention from researchers and policy experts as, perhaps an underutilized tool that might be able to facilitate such a retirement.
Shai Akabas, director of economic policy at the Bipartisan Policy Center (BPC), recently testified before the Senate Health, Education, Labor, and Pensions (HELP) Committee and mentioned how home equity could be a major assistive factor in solving issues related to a potential retirement crisis. He specifically recommended that lawmakers aim to “improve this market and make it a simpler, more useful, and a more cost-effective tool for older, ‘cash poor’ Americans to utilize their home equity.”
To get additional perspective on the issues surrounding American retirement and how home equity broadly, and reverse mortgages specifically may play a role in the future, RMD sat down with Mr. Akabas to share some of his thoughts on the 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 most within the last decade?
Shai Akabas: The United States has a retirement system that is working well for many people—particularly those with stable employment, sufficient income, and opportunities to save throughout their life. While the structures in place have room for improvement, they result in positive, financially stable outcomes for millions of households.
But many are falling through the proverbial cracks. “Cracks” is an understatement when describing America’s piecemeal retirement system—in reality, it has gaping holes crying out for reform.
Millions of Americans rely on Social Security for the vast majority of their income in retirement. This partly results from roughly 1/3 of private-sector workers lacking access to a 401K-type plan, proven to be the most effective way to build retirement savings.
In terms of what has changed, if we expand the timeframe from the past decade to the past few decades, the biggest change in the retirement landscape is the decline of defined benefit pension plans and the switch to defined contribution plans, such as 401Ks. This change has shifted much of the retirement risk onto the individual saver. Beyond Social Security, we mostly have a “do-it-yourself” retirement system.
In case it’s helpful, my colleague, Jason Fichtner (BPC’s Vice Presdent and Chief Economist), has a co-authored paper in which they describe the retirement landscape as follows:
“Although previous research efforts reach different conclusions on the overall status of retirement saving adequacy, two robust conclusions emerge. First, retirement saving status varies across different groups. Members of racial and ethnic minorities tend to be less likely to be saving adequately, as well as single-headed households, younger 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 expect to maintain preretirement living standards in retirement, virtually no one claims that many households are well insured against all risks.”
What would you say is the common denominator among successful retirement financing plans today, if there is one?
I’m not sure exactly what you mean by “retirement financing 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 else equal, that those with access have better retirement outcomes than those without.
One common denominator is saving enough in a workplace retirement plan to supplement Social Security. But it’s not all about accumulation; there must be a strategy in place for making that income last. There’s 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 tapping their home equity, it also seems that there is a lack of awareness about equity tapping options that exist. Is there any relationship between the aversion and the lack of awareness? In other words, does one affect the other?
There is definitely a lack of awareness. A residence is viewed principally as a home, not a financial asset, so it’s far from the first thing that comes to mind when people think about retirement security. Many retirees also feel that borrowing against home equity, in any form, reduces the key asset they have to pass on to their children and grandchildren.
Equity-tapping aversion seems particularly pronounced when the conversation turns more specifically to 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 tapping options?
The history of problems with earlier versions of reverse mortgages has not helped the perception, and there is a concern about some of the parameters, with high up-front costs and low borrowing limits. Additionally, despite ads attempting to explain reverse mortgages, people struggle to wrap their heads around the relatively complex product. HELOCs, for example, are easier to understand. HUD and other entities (Social Security, CFPB, and states) could do a better job of educating the public about the option.
The bequest motive is also strong—people often want to keep their residence in the family.
You recently spoke in broad terms about the potential for reverse mortgages in the American retirement landscape. In terms of how you developed your own perspectives on the potential for reverse mortgages given the $21 trillion in home equity owned by Americans, what do you think people may not fully understand about the potential for equity tapping in general and reverse mortgages specifically that you came to understand over the course of your research?
Broadly speaking, home equity is one of the largest assets held by older Americans, yet it’s being criminally underutilized for retirement security. There is legitimate debate about whether the current iteration of reverse mortgages is the right key to unlock home equity in retirement, but we need policymakers and the private sector to be working together to tackle this challenge.
Reverse mortgage lines of credit are another tool in the toolbox that should be explored, as they allow people to only draw the funds they need and avoid accruing interest on the full reverse mortgage loan amount.
Finally, the lack of consumer awareness surrounding the multitude of options available to tap into home equity in retirement indicates that we need to do a better job educating the public on what these options are, including the pros, cons, and tradeoffs.
