Housing Equity Release, Old-Age Income, and Public Finances

Abstract

Many elderly people could markedly increase they standard of living by releasing housing equity. Purchase of a life annuity would increase the benefits of this release. Focusing on the Finnish case, we analyze the fiscal implications of different forms of housing equity release. We take into account the fact that most households have most of their wealth in the form of owner housing and that housing enjoys a tax-favoured status relative to most other forms of consumption and savings. We find that even tax free life annuities may well increase aggregate tax revenue relative to a situation where private annuities are not available. This is because the possibility to annuitize financial savings increases the opportunity cost of housing wealth inducing households to increase non- housing consumption relative to (tax-favoured) housing consumption. Reverse mortgages, in contrast, are likely to decrease tax revenue. This is because they make housing consumption all the more attractive.