Homeownership, Social Insurance, and Old-Age Security in the United States and Europe

Relatively few Americans have accumulated substantial savings outside of their employer-sponsored retirement plans, yet most own their homes. The traditional view of the retirement income system as a three-legged stool supported by Social Security, private pensions, and savings may be better viewed as being supported by Social Security, pensions, and homeownership. Country-specific economic, social, and political developments throughout modern history mean that homeownership rates and the relative importance of homeownership for old-age security vary widely across developed countries. Many countries, however, are increasingly promoting homeownership as an effective way of building assets, a de facto self-insurance mechanism for old-age security, and a substitute for various social transfers. This paper uses data from the Health and Retirement Study (HRS) in the United States and the Survey of Health, Ageing, and Retirement in Europe (SHARE) to better understand the role of homeownership in retirement before and after the Great Recession for the United States and nine Western European countries: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Spain, and Sweden. It begins by comparing trends in homeownership rates among older adults and the key characteristics of housing-related policies and regulations that potentially impact home acquisition. It then examines home equity trends, the prevalence and burden of housing debt, and the relative importance of housing as a source of retirement wealth. Next it provides an overview of equity release options and estimates how much older households could increase their incomes by fully monetizing their housing equity. Finally, the paper discusses the prospects for and limits of home equity release and asset-based welfare policies. The paper found that: • Most older adults are homeowners, and homeownership rates generally increased between 2006 and 2012; however, there is substantial variation across countries. • Housing-related policies in the Netherlands, Sweden, and Denmark provide comparatively high levels of support to both homeowners and non-homeowners, while those in Italy and Spain provide little support to either group. In contrast, housing policies in the United States provide some of the highest levels of support for homeowners and lowest levels of support for non-homeowners. • Older American homeowners have substantial housing wealth, but compared with their European peers, housing represents a somewhat smaller part of their net total wealth. • While the prevalence of housing debt among older adults is somewhat lower in the United States than in the Netherlands, Denmark, and Sweden, among older homeowners with housing debt, Americans have the highest loan-to-value ratios and the highest proportion of homeowners whose homes may be at risk of going underwater. • If the housing equity of older Americans were completely monetized, median household income would increase by over a third – more than in countries like Sweden and Denmark, but well below countries like Spain and Italy. Across all countries in this study, tapping into housing equity could substantially reduce the share of older adults with household incomes below 50 percent of the median – the threshold for relative poverty. • However, even after annuitizing housing wealth, the share of poor older Americans would remain as high as, or higher than, the share of poor older Europeans before accounting for annuitized housing wealth. • Despite the potentially large impact of monetizing home equity on household incomes and the economic security of older Americans and Europeans, there remain impediments to tapping into home equity that may explain its low use. Objective obstacles include the high costs of withdrawing housing equity, uncertainty about life expectancy and the amount of financial resources required to support retirement, the adverse impact on eligibility for social benefits, and the concentration of housing wealth among (upper) middleand higher-income individuals who are less likely to need additional resources in old age. Subjective obstacles include an aversion toward assuming additional debt in old age, different (often emotional) attitudes to housing compared with other types of wealth, bequest motives, and a lack of trust in financial institutions. The policy implications of the findings are: • Home equity has a potentially important yet limited role in supporting old-age security. Even if objective obstacles related to the design and pricing of home equity release products were fully addressed, subjective reasons for avoiding home equity withdrawal and compositional differences in the concentration of housing wealth would still limit the scope of asset-based welfare. • These limitations notwithstanding, using home equity to supplement retirement incomes and improve retirement security remains a potentially attractive option for a substantial number of older adults who have built housing wealth over their life course, but may either have insufficient retirement incomes or face unexpected and expensive life events (e.g. long-term care needs). • What remains more uncertain and difficult to predict, though, are the long-run prospects for using home equity to support old-age security since younger generations of Americans and Europeans may find it more difficult to build home equity than their parents’ generation. Introduction Relatively few Americans have accumulated substantial savings outside of their employer-sponsored retirement plans, yet most own their homes. The traditional view of the retirement income system as a three-legged stool supported by Social Security, private pensions, and savings may be better viewed as one supported by Social Security, pensions, and homeownership (Social Security Administration 2016a). Indeed, homeownership has long been recognized as a source of retirement security because it provides a rent-free place to live after a mortgage has been paid off. Less commonly, housing wealth has been used directly to pay for unexpected events (e.g., health emergencies) and to support consumption more generally, by using various mortgage products to tap into the home’s equity or by selling the property and pocketing the net proceeds. Country-specific economic, social, and political developments throughout modern history, mean that homeownership rates and the relative importance of homeownership for oldage security vary widely across developed countries (Mudrazija 2013; Toussaint 2011). Many countries, however, are increasingly promoting homeownership as an effective way of building assets, a de facto self-insurance mechanism for old-age security, and a substitute for various social transfers (Ronald and Doling 2012). In this context, this study compares the United States with Western European countries to better understand the role of homeownership in retirement security. We explore trends in homeownership among older adults in different countries before and after the Great Recession, and examine how the link between homeownership and old-age financial security differs across these countries. We also examine and evaluate housing policies and institutional frameworks with respect to their impact on retirement security for homeowners and non-homeowners across Europe and the United States, highlighting possible policy lessons. More specifically, we first document homeownership rates and recent trends for older adults in the United States and Europe using longitudinal data from the Health and Retirement Study (HRS) and the Survey of Health, Ageing, and Retirement in Europe (SHARE). We then compare key characteristics of housing policies across countries in the context of the distribution of homeownership and the resources and needs of different segments of the population. In the United States, for example, more than three-quarters of federal housing spending goes to homeowners (Sard and Fischer 2013; Reynolds 2007). This is primarily from mortgage interest