Welfare Effects Of Developing Reverse Mortgage Market In China: Individual And Social Perspectives

Population aging and inadequate social security have introduced serious problemsfor China. As a result, seeking alternative solutions is becoming increasingly important.Some developed countries, such as the U.S. and Canada, have developed reversemortgage markets to relieve related financial pressures. A natural question is whether ornot the reverse mortgage system should be implemented in China to deal with the agingand social security problems. From the perspective of welfare economics, it amountsto asking that, can reverse mortgage markets help improve both residential and socialwelfare in China?Based on a dataset which reflects the current status of China’s population andeconomy, this dissertation explores the above question. Firstly, building on thelife-cycle model, we investigate the role of reverse mortgages in improving the welfareof elderly retired residents. The simulation results show that, owing to high transactioncosts, reverse mortgage markets are not the optimal solution for house-poor andcash-poor residents. It is found that correct timing of reverse mortgage participation canhelp residents attain a higher level of welfare. For house-rich and cash-rich residents, itis better for residents to wait until after the age of65to participate in reverse mortgages.The sensitivity analysis indicates that reverse mortgages can mitigate the adverse effectson residential welfare caused by longevity risk; however, it would exacerbate thenegative effects caused by moving risk. This implies that maintaining transaction costsunder a pre-specified level is necessary for reverse mortgages to retain theirwelfare-enhancing function in different economic conditions.Secondly, building on the overlapping generation model, we investigate howreverse mortgages influence the equilibrium allocation of social capital. The simulationresults reveal that reverse mortgages provide substantial income for elderly residents.This, in turn, reduces the burden on younger pension taxpayers, and promotes andsmoothes their life-cycle consumption. As a result, in equilibrium, the optimal pensiontax is reduced and social welfare is improved. We further demonstrate that the intensityof the bequest motive determines whether residential welfare improves in equilibrium.The sensitivity analysis indicates that the welfare-enhancing role of reverse mortgageswill become more significant as the severity of the aging problem increases. Finally, drawing on our theoretical analysis and international experience, weprovide policy suggestions for developing an effective reverse mortgage market inChina.