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Do potential future health shocks keep older Americans from using their housing equity?

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  • Murray, Tim

Abstract

Many retirees retain housing equity and do not utilize it to help finance spending on consumption. In this paper, I examine how older Americans (age 55+) may engage in precautionary savings where households would sell their house in the event they face an increase in out-of-pocket medical expenses due to a health shock. Using a counterfactual experiment, I find that older households are 13-percentage points less likely to own a home in their late retirement years when they know they will not have any out-of-pocket medical expenses. This indicates that many older households prefer not to own a home but choose to do so knowing they may get sick and thus are engaging in precautionary savings using their house. I conduct a policy experiment to examine how an insurance policy that would cover all out-of-pocket medical expenses would impact home ownership. I find that when an insurance policy of this nature is offered that costs four percent of income, the baseline economy has the same homeownership and moving rates as the counterfactual experiment where households do not have to pay for out-of-pocket medical expenses. This suggests that if seniors had more adequate health care coverage, they would be more willing to use the equity in their house to increase consumption in retirement.

Suggested Citation

  • Murray, Tim, 2019. "Do potential future health shocks keep older Americans from using their housing equity?," MPRA Paper 94463, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:94463
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    References listed on IDEAS

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    More about this item

    Keywords

    housing; equity; precautionary savings; Medicare; insurance;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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