Economic Security in Retirement: Does Borrowing from Home Equity Moderate the Impact of a Health Shock on Health Outcomes?

TitleEconomic Security in Retirement: Does Borrowing from Home Equity Moderate the Impact of a Health Shock on Health Outcomes?
Publication TypeConference Paper
Year of Publication2021
AuthorsMoulton, S, Joseph, J, Loibl, C, Haurin, D
Conference NameRetirement and Disability Research Consortium 23rd Annual Meeting
Date Published08/2021
PublisherCenter for Financial Security, University of Wisconsin-Madison
Conference LocationVirtual Event
Keywordshealth shock, Home equity, Retirement

Health shocks pose a significant risk to economic security in retirement. About 35
percent of older adults are diagnosed with a major disease by age 65, rising to 65 percent by age
90 (Poterba et al. 2018). These health shocks are costly. While the majority of older adults
receive Medicare, nearly 20 percent of health expenditures are paid out of pocket (DeNardi et
al. 2016). Older adults often self-insure against these risks by accumulating wealth, including
home equity. In this study, we ask: To what extent does home equity mitigate the economic
burden created by a health shock, ultimately leading to better health outcomes?
In contrast to a life cycle model, older adults tend to only spend down home equity
following an expense shock (Davidoff, 2010; Nakajima & Telyukova, 2019; Poterba & Venti,
2017a). Several recent studies document a decline in home equity after a health shock (Gilligan
et al. 2018; Gupta et al. 2018; Poterba et al. 2018), with home equity being second only to
formal health insurance for financing health related consumption after a health shock in older
age (Dalton and LaFave 2017). These studies do not identify the extent to which liquidating
home equity improves the older household’s health following a shock.
An existing body of literature estimates the causal relationship between housing wealth
and health outcomes generally, not limited to individuals with a health shock (Angrisani and
Lee 2016; Costa-Font et al. 2019; Fichera & Gathergood 2016; Hamoudi and Dowd 2013;
2014). Similar to our approach, these studies rely on geographic and intertemporal variations in
house prices to isolate the exogenous component of housing wealth, either through reduced
form specifications that directly model the relationship between changes in house values or
house prices on health outcomes (Angrisani and Lee 2016; Fichera & Gathergood 2016;
Hamoudi and Dowd 2013; 2014) or by using geographic changes in house prices as an
instrument for housing wealth (Costa-Font et al. 2019). While these papers tend to find a
positive relationship between increases in housing wealth and health outcomes, they do not
model the mechanisms through which this occurs—which is critical to inform policy. We
expect that it is not simply the stock of home equity held by older adults that leads to better
health outcomes, but the liquidation of home equity through borrowing following a health shock
that leads to improved health outcomes.

Citation Key11807