Financing urban growth in aging societies: Modelling the equity release schemes in the welfare mix for older persons

Abstract

The paper examines the role of Equity Release Schemes (ERS) in the welfare mix for seniors. The concepts for asset-based welfare, where the housing owned by the occupant is part of his portfolio comprised of defined contribution (private) pension and residential property, are examined. We present how the variance of expected senior's income is reduced by using residential property as the pillar of the pension system, as proposed in the EC Green Paper on Pensions (2010). The study is focusing on modelling the decumulation of the housing equity and the defined contribution private pension, incorporating insurance mechanisms for management of longevity. Development of longevity insurance in the framework of reverse mortgage products is important in European Union due to lack of government insurance of reverse mortgage products as developed in United States under the HECM insurance program. Here we propose a new model in which periodic payout that the beneficiary receives is the difference between the amount drawn and the annuity premium for longevity insurance. The paper shows how the drawing amount in the loan model ERS (reverse mortgage) is decreasing with the increasing interest rate, while the pension arising from defined contribution systems is increasing with the increasing interest rate. The optimal combination of sources in the portfolio which minimize volatility induced by volatile interest rate is derived and discussed. The paper intend to show that regarding his/her old-age welfare protection, young person when employed should consider buying a home instead of rent, to gain the optimal structure of pension portfolio in retirement.