American taxpayers are already footing the tab for somebody else’s retirement and that bill is expected to grow considerably. While some lawmakers have expressed a willingness to bail out underfunded private pensions many oppose the continued subsidization of the Home Equity Conversion Mortgage program.
Despite a healthy economy and a generally bullish stock market, several private pension funds are facing insolvency and top lawmakers are considering legislation that would have taxpayers fill the gap. A special bipartisan Senate Joint Select Committee headed by Senators Orin Hatch (R-Utah) and Sherrod Brown (D-Ohio) is looking for solutions for the mounting pension crisis with a report expected by November 30. Previously the idea of the government backstopping private pension plans had been avoided for fears of a voter backlash. However, the mounting crisis of multiemployer pension funds facing default has led some to reconsider. The taxpayer backing pensions is not a new concept. Created by Congress in 1974, the Pension Benefit Guaranty Corp. financially backs failing pensions but the pooled multiemployer portion is underfunded with $67.3 billion in liabilities and only $2.3 billion in assets. Outside the private sector, many local municipalities and state governments are not immune facing cuts to essential services such as public safety to help meet their rising pension obligation payments.
Despite housing wealth being the largest asset for most senior homeowners, its influence pales in comparison with the political clout that private and public employee unions hold with state and federal lawmakers. Much of that influence differential can be attributed to the way that defined benefit plans or pensions are viewed compared to reverse mortgages. Ironically both have participants who have made consistent monthly payments over several years; the key difference being that reverse mortgages have no defined benefits or promised payouts once the participant begins drawing upon the home’s value.
It’s no accident that some of our international counterparts call their reverse mortgages the ‘home pension plan’. After all the accrued mortgage payments and equity built allow the homeowner to tap into a portion of their home’s value, in essence, annualizing it over time.
For HECMs, not unlike countless troubled pension funds, the government is looking for ways to restore financial solvency through increased contributions by employees (or increased ongoing premiums), reduced benefits (or principal limit factors), and more realistic assumptions of projected returns. Also the Home Equity Conversion Mortgage, much like Social Security, has depended upon its younger participants to pay the bill for older taxpayers who have begun to draw their benefits- both which are not a sustainable strategy. “Younger borrowers with forward mortgages continue to subsidize senior borrowers in our HECM program to an unsustainable degree”, said FHA Commissioner Brian Montgomery in a recent statement on the health of FHA’s MMI fund.
The Home Equity Conversion Mortgage and pension funds face the challenges of shoring up their funds, stemming future losses, and adjusting to a new sustainable economic model that accounts for increasing longevity and a rapidly growing senior population.