Reducing default rates, the wealth gap, and inequality in access to housing by lending pension funds

[En Chile se ha discutido algo sobre el problema de que los trabajadores están forzados a cotizar en los fondos de pensions (AFPs) y después tienen que tomar prestado ese dinero para vivir, gastando mucho en los altos intereses, especialmente de las tarjetas de crédito de grandes tiendas. ¿No sería posible buscar mecanismos para devolver ese dinero a las familias para que puedan acumular riqueza sin perder su pensión? Comparto en este post una idea al respecto, se agradecen de antemano los comentarios, así como sugerencias de posibles colaboradores para desarrollar más el argumento. La propuesta está escrita de modo traducible a varios países, incluso aquellos con sistema de reparto en las pensiones, como EEUU. Mi idea es seguir desarrollando el argumento para luego mandarlo al foro de alguna revista de vivienda y urbanismo para estimular el debate al respecto.]

Think about this paradox: Low-income families put money into the financial market as pension savings, and they pay interest and mortgage insurances to obtain those savings, or rent to landlords who access those savings. Basically, by having their savings locked until retirement, they contribute to capitalists’ accumulation while they cannot accumulate wealth. Or put this the other way around. Low- and middle-income families cannot accumulate wealth, among other reasons, because (a) they cannot afford a down-payment to buy a home and drain their income in their rent, without accumulation; (b) if they can buy a home, they pay high interests because they are considered risky; and (3) may lose their home by defaulting on their mortgage. Yet, they have often saved more money than they needed to get the loan, prevent the default, and make them less-risky subjects of credit. Is there a way to prevent this cycle of capitalist appropriation of wealth by renting other people’s money?

I want to propose a policy solution to this problem that, while apparently reformist, challenges a major pattern of capitalist accumulation in our financialized economy. Hopefully this could amount to something like what André Gorz called “non-reformist reforms.” The key of the idea is to allow families to use their social security savings (or other pension savings, depending on the country) as down-payment and/or backup fund to pay their mortgage in moment of unemployment or illness; simultaneously, the gaps they leave in their social security can be securitized by the home (like a home equity loan). In the US, this should allow people to avoid the cost of Private Mortgage Insurance (PMI, an insurance required for those who buy with less than 20% down-payment). In the US and other countries it may also grant access to lower interest rates. And families would be able to buy a home earlier in their life without the difficulty of saving and throwing out their money in rent. After they pay their home, people should pay back the gaps that they leave in their social security contributions. If they cannot pay the social security debt, the value of the home is used to pay for it after the homeowner dies, unless her inheritors take over the home and the debt. That way, the pension system recovers the money similar to how a home-equity loan works, and the inheritors have a chance or inheriting some of their parents’ wealth.

Overall, this policy should generate a transfer of wealth from landlords, banks, and insurance companies to first time homeowners. It should especially impact those who cannot buy because they cannot save and those who pay high interests and mortgage insurance or who may default. Of course, there are several issues to consider for its economic viability. In what follows, I explain a few details and discuss some possible concerns.

First, I will clarify the role Private Mortgage Insurance (PMI) plays in the proposal. In the U.S. PMI is currently a mandatory insurance that covers the lender for homes with a down-payment of between 3.5% and 20% of the home value. The coverage is in case the borrower defaults and the foreclosure auction does not cover the debt balance. It ends up being about 15% of the total cost of the loan. This makes it harder for low income people to buy homes and does not offer them protection in case they cannot pay; they still lose the house. They can buy a (voluntary) Mortgage Protection Insurance to help them in case of job loss or disability, but that is an addition cost. The main point of the policy proposal (in the case of the US) is to reduce the cost of the PMI to make home buying more affordable and to decrease the risk of losing the home. Some sort of PMI might still be necessary with my proposal, but the cost would be smaller because the risk of default will be significantly decreased. The policy also generates a sort of Mortgage Protection Insurance that is almost free (by making pension funds available in case of unemployment), thus reducing the chance of default and the monthly payments, as well as the transfers towards finance capitalists. So even if the PMI is not reduced much, the policy can be helpful to reduce inequality.

Now for how the system would work. We can think of social security as individual savings that are recorded. This is how pensions work in some countries like Chile, but you can imagine a variation for countries with PAYGO systems like the US. For a moment, think about pension savings like a private savings system such as the IRA or 401K in the US, or a savings account. Whether and how individuals get that money back later is a second step that I will discuss later. When I say a home owner can use her social security savings, I mean that she can immediately use some of the money saved, before her retirement age. Of course, since the Social Security Administration (SSA, or equivalent in other country) may be counting on those funds to pay current retirees, the SSA would have to get a low-interest loan to pay cover its current expenses if a future retiree/current home owner decides to withdraw her money early to pay her mortgage. The home owner would take the money from her savings, but that would create a gap in her SSA contributions, which she should pay back with the added low-interest. By doing this, the SSA does not have to change much, in that retirement amounts should continue to be the same; the only difference is that some funds would come in at different times, but the interests to adjust for those differences would be paid for by workers. Thus, the home owner could pay the gap by making higher contributions in the coming years, by paying from the retirement benefits, or by giving the house as payment when she dies. Either way, the SSA has a very good chance that the value of the gap will be covered (unless the homeowner defaults while having the option to use social security savings, or if the value of the home when the person dies is less than the value of her gap in her social security savings). The SSA might have to charge a slightly higher interest to compensate for this risk, but it should still make the cost of paying back that money much smaller than a Private Mortgage Insurance (PMI, which in the US now is about 18% of the total loan), not to mention the additional savings of a consumer loan or of losing a home (PMI only insures the lender in case the foreclosure auction does not cover the remaining debt, but the homeowner still loses the home).

The point of thinking of the use of social security savings as a debt to the SSA is that the SSA can continue to count on the money, so not much of a reform regarding pensions themselves is needed (people will generally contribute and receive the same as they do now). Considering this, the lender does not care about how long the borrower will live after retirement age. If the lender is to receive anything from the SSA it is before the borrower retires, if she loses her job or some other special circumstance. That should be only for a short period. They will still need a PMI in case the person dies early, but that is only a small part of the default risk, so the PMI should be smaller.

There are still two other problems, but I believe they have workable solutions. The first problem is what happens in case of permanent disability. In such a case, the homeowner might want to collect a disability pension but might have a hard time paying her mortgage. In this case, she could choose to have the SSA pay the remainder of the loan on the condition that the SSA keeps the house when she dies. However, this may only work if the debt-to-value ratio is low. Again, some sort of PMI would still be necessary, but since the risk of permanent disability is only a small part of the default risk the PMI should be significantly smaller too. Importantly, the policy proposal is not only meant to save the cost of a PMI, but to also reduce the default rate of low-income families. So even if the PMI is not much smaller, if the family can save the home because of this new option, the policy still works.

The second problem is that for homes bought with a 3.5% down-payment (the current minimum in the US), it is easy to be underwater if prices drop, so there is more of an incentive to default. The major concern is not only that homeowners default (which they do now), but that they end up with a gap in their pension without a home to back it up. This is not likely to be an issue if we assume that people underwater tend to default mostly when they cannot make the payments, not when they are underwater but they can pay. This is probably as safe assumption, because being in default would make it harder to buy a house in the future and is thus generally not a good choice. So, again, there is a risk of default to include in the PMI, but if the person has the support of the SSA to pay in case of job loss or an illness, the risk is smaller than the one currently considered by the PMI.

Finally let us look at some numbers to put more meat into this idea. The median house price in the US is $188,900, which currently requires a minimum down-payment of 3.5% or $6,690. For a young person, earning $42,000, it may be hard to save that money, but it does not represent a huge gap in her social security savings. In the next 30 years it would be only about $30 more in her Social Security taxes. But if she can buy the house a few years earlier because of the option of using her social security savings, she saved herself a lot more in rent transfers. Or if she pays it back to the SSA at 4% instead of paying it to the credit card company at 15%, she also saves a lot. Furthermore, there are additional options. First, some states and cities offer some subsidies for a down payment in the first home ($15,000 in NYC, $12,000 in NJ). While that subsidy may cover more than 3.5%, it does not cover 20%. If the borrower can take enough from her social security savings, she might not need a PMI at all. It may not work to make the leap from 3.5% to 20%, but if a borrower has cash savings for $7,000, a state subsidy of $12,000 and can use her social security savings for the remaining 10% to be paid as added social security taxes over the next 30 years, she could save herself about $1,800 a year (the cost of a PMI). Maybe a small PMI should be added to account for the risk that the SSA is taking on that 10% in case she dies young, but that should probably be less than $200 a year (the risk of dying young is smaller than the risk of default and the amount is 11% of the mortgage amount).

Of course, a more careful quantification of some items and consideration of the characteristics of each country’s pension system is necessary to assess its viability or the specific conditions for this proposal to work. But my goal here is not to offer a full proof detailed proposal but to stimulate debate about a policy in the suggested direction. It is time to think about reforms that can challenge finance-based capitalist accumulation and hopefully this idea points in the right direction. Thus, I would greatly appreciate your thoughts about it. And if you are interested in helping me work it out more thoroughly, that would be even better.

Sebastián G. Guzmán

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  • joseossandon  On October 30, 2017 at 1:10 pm

    Gracias Sebastián. Bueno tener una discusión así de aplicada alguna vez acá en EdlE. Tu post me dejó pensando en algunas cosas.

    Por una parte, no se si entiendo bien, pero, es esto similar a lo que ya se hace en algunos países? En UK, hasta donde se, es posible usar anticipadamente las pensiones, lo que genera otro tipo de problemas, claro (al menos esto es lo que me acuerdo de una presentación de Ismail Erturk de Manchester). Acá en Dinamarca, hay subsidios que lo que hacen es reducir impuestos a los pagos del crédito immobiliario. La lógica de tu propuesta me dejo también pensando en las fantasías de H. de Soto (tal como son analizadas por T. Mitchell en Egipto y Peru). En el sentido de que hay muchos supuestos lógicos pero no necesariamente empíricos. Pero quizás es que no los estás haciendo explicitos y no estoy entendiendo bien.

    De hecho, como explicas empíricamente que ” los trabajadores están forzados a cotizar en los fondos de pensions (AFPs) y después tienen que tomar prestado ese dinero para vivir, gastando mucho en los altos intereses, especialmente de las tarjetas de crédito de grandes tiendas”?

    En términos de las discusiones del tipo de investigación discutidos normalmente acá en EdlE. Uno podría preguntarse por el tipo de prácticas financieras que ya existen que permiten pensar en la plausibilidad o implausibilidad de este tipo de idea. Por ejemplo, en Argentina (un caso es el trabajo etnográfico N’ de Avella) se ha estudiado el tema de la conversión entre “ladrillos” y dolares; la interacción entre multiples formas de ahorro y financiamiento formales e informales y la inversión en propiedad. De hecho, en Chile es muy común que la gente trate a la inversión en propiedad como un equivalente autogestionado de los fondos de pensiones. Mi visión al respecto, sería intentar aprender de las prácticas financieras existentes antes de generar una política como esta. De hecho, si ya existen prácticas informales que hacen lo que dices, un podría pensar en los riesgos de hacerlo formal.

    Otra cosa. Puede uno asumir como sociólogo o cientista social que los fondos de pensiones son ahorro individual? Al menos a partir de mis cosas sobre las isapres, mi sensación es que la idea de que estos fondos (de seguros de saludo, pero también de pensiones) son equivalentes a una cuenta de ahorro de propiedad del trabajo es una construcción política. Es la idea básica de la constitución del 80, pero no es un hecho pre-social. De hecho, varias de las controversias en estas areas tienen que ver con que la propiedad del 6 o 10 % que se ‘earmark’ cade mes para estas cosas es privado o no. Mi punto es que la ‘ontología’ del fondo de pensión es un producto en cuestión y abierto a ser transformado.

    slds y gracias por el post,

  • sebastianguzman  On October 30, 2017 at 5:38 pm

    Gracias por tus comentarios, José. Voy a ver qué es lo que se hace en UK y Dinamarca al respecto. Creo que si no se diseña bien, la idea podría ser riesgosa, por lo que ver cuáles son los problemas de políticas similares sería importante.

    En el forrmato corto, obviamente muchos supuestos quedan implícitos y habría que desarrollarlos. En cuanto a la explicación empírica de la pregunta que me haces, 14,4% de las inversiones de AFPs se van a bonos en el sector financiero, que en buena parte se transforma en créditos. Pero lo importante realmente no es que sea exactamente el mismo dinero del mismo prestamisma. Lo importante es que los trabajadores tienen un ahorro forzado por un lado y esos ahorros son usados por el capital financiero y otros capitalistas, pero los trabajadores también tienen que tomar préstamos por otro lado para vivir, y pagar intereses quizás no a los mismos individuos, pero sí a la misma clase.

    Me gusta la idea de ver las prácticas informales. Mi impresión es que es más rentable comprar casas y arrendarlas para la jubiliación en vez de ahorrar en las AFP. Pero lo que hay que comparar más bien es si es más rentable para aquellos que no pueden comprar hoy pero que se ahorrarían el gasto en arriendo.

    Me parece buena también tu pregunta sobre si los fondos de pensiones individuales o no. El punto acá creo que es que los fondos se han construido como individuales para promover un cierto modelo. En teoría, si estamos de acuerdo con un sistema de reparto, debiéramos promover otra visión sobre los fondos, como propiedad colectiva. Pero si una tercera alternativa permite reducir la desigualdad, puede ser válida. Mi idea es que los fondos se entiendan como contribuciones individuales a una propiedad colectiva. Pero una vez que se contribuye al pozo común, todavía podemos tomar de vuelta individualmente, bajo la condición de que recordemos que en ese caso generamos una deuda con el pozo común. Algo así como que un grupo salimos a tomar cervezas y repartimos la cuenta por igual, pero María no tiene plata. El resto la subsidia, pero en una próxima oportunidad María debe invitar a todos una ronda de cervezas para pagar su deuda con el grupo. No sé si es muy buena la analogía, pero el punto es que podemos encontrar formas intermedias de entender una propiedad, a ratos privada, a ratos pública. Te encuentro la razón en que hay que aclarar eso.

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