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2023 Jun/07
The Role of Reverse Mortgages in Private Pension Income
Issue Papers 23-11
PDF
- Research Topic Asset Management/Pension
- Page 25
- Summary
- If the primary objective of public pension reform is financial stabilization, it naturally raises concerns about adequate retirement income. In practice, householders aged 60 or older, who are more likely to have already retired, often receive retirement benefits that are insufficient to serve as their primary source of income. This could lead to a serious decline in income even if a significant proportion of the elderly continues working in low-paying jobs in their late 60s. Conversely, they are less likely to see a decrease in the value of their illiquid assets, primarily consisting of real estate. As a result, most households may see their spending power decreasing rapidly, often leading to a decline in their overall standard of living. Those in their 50s are highly likely to face the same situation going forward as their asset portfolio is quite similar to that of householders aged 60 and over.
This report examined households led by those in their 50s and 60s as of 2020. We estimated their annual income, personal pension assets, net financial assets, and net housing assets when they turn the age of 60 right before the retirement, and analyzed whether each of the four types of assets is large enough to buy a plan that could replace 20% of their pre-retirement income. According to our analysis, only 0.2% to 0.4% of the examined households were able to attain a 20% income replacement rate through their personal pension assets. These findings held true even when the sources of income were expanded to include net financial assets. Nearly 94.3% of the households examined fell short of the 20% target when relying on their net financial assets, with an average income replacement level of only 3.5% to 4.1%. Nevertheless, a substantial improvement was observed when reverse mortgages on their own home were included. The households eligible for reverse mortgage could replace 16% to 18% of their income with their real estate assets, and the figure rose to around 20% if net financial assets were included. With reverse mortgage and net financial assets, the percentage of households that could achieve the 20% target jumped to 35% to 48%, depending on their income levels. Such high levels of income replacement are quite significant as those were achieved after housing and debt issues were settled.
Given the social value of housing pension, it is essential to implement further regulatory enhancements to attract a larger pool of prospective buyers. Additionally, it is important to assess whether an adequate number of accounts are available for public guarantees, especially as an increasing number of retirees may consider turning to reverse mortgages. Lastly, the present moment is an opportune time to devise additional strategies for establishing and promoting a private market for reverse mortgages, free from public guarantees.