Saturday 27 October 2007

Pic of the day: You have grown old. Now the fun begins in earnest.

Elderly borrowing

Perhaps it was unavoidable. We live in a civilization where a very long life is the rule. Impossible as it may sound, for the last decades life expectancy has risen by roughly 5 hours a day, and still does. (This pulled from a recent article in New Scientist.) Not only do people live longer, but they stay healthy longer. Even so, it is common to have some years of severely reduced life quality after the healthy years and before actual death. The deciding factor is, more often than not, Alzheimer's and a few competing mind destroyers, brain stroke being the second in command. What has any of this to do with economy?

In the old days when my generation grew up (I am in my late 40es now), there was an established pattern of the generations. We had left behind the society in which people were bound to a farm or a workshop, and where successive generations lived in the same house. (Actually my childhood was still in that agrarian society, but it was no longer the rule.) The new rule was that children moved out, married (or some facsimile thereof) and started a new family in a new house. They were beset by debt at the outset, since they came practically right out of school. This is still the case. But in the old days, when you reached middle age, your parents died, and you inherited their wealth, which was usually in the form of a house mostly but also some bank deposits. You got this pretty much at the time you had finally paid off your own loans and your income was approaching zenith.

These days, people just live and live. So you don't inherit your parents until you are old. (This may rebalance again over time since many people now get children late in life.) Inheriting money has become essentially meaningless. If you don't get the money before your parents die, you may as well forget it. It is not like you probably won't earn more than they did anyway.

In light of this, it makes sense for old people to forget saving for the children. The generation of your descendants that are financially struggling when you finally expire are your great-grandchildren, whom you barely knew ever. By the time you die, you don't even know your children, since your brain has already rotted away some years ago.

It makes more sense then to enjoy your life while you still have the health and the mind to do so. This is where "senior loans" come in. They are spreading rapidly here in Scandinavia, with Sweden seemingly in the lead for now. (The expression "senior loans" has a completely different meaning in English, amusingly enough. I don't know whether America has advanced as far yet, but friends tell me that this kind of financing is known even there. I forgot to ask what it was called.)

In Scandinavia, you own a house. Well, I don't, but I am very nearly unique in holding a job and not owning my own home. Usually even the disabled own their own home. It is what good people do. Obviously it takes a long time to pay off a house, especially since the standards for building here are ridiculously high. Our homes have to be able to resist a big earthquake, even though we live on a thick continental plate far from any geologically active zones. If we have a major earthquake here, it is a safe bet that most multicellular life on Earth will be wiped out by whatever event causes it. But that's just the kind of people Scandinavians are. So almost everyone owns an expensive home. By the time they grow old, it is usually paid off.

These "senior loans" are given against the house. You can either get a large lump sum, or a monthly "pension" based on the value of the house and your age. In either case, you are not going to pay it back. When you die, or when you move permanently to a nursing home, the bank inherits the house and presumably sells it. Your heirs get nothing. We already agreed that they don't need it, right? So why not take the money, go to Spain and drink continually. You know you want to, if you are Scandinavian. Or at least get some new stuff and enjoy life for the rest of your healthy years, then forget it all when Alzheimer's takes you. Since we have public health care, there is no need to spend the accumulated treasure on life-saving surgery or medication, like in less developed countries. You can have fun for it and then you are carted off. Fire and forget.

The conditions of these loans are clearly inferior to ordinary mortgages. Realistically, you could get a better deal by taking out an ordinary loan against your house, then put most of the money in the bank to pay the interest and payments. Even if you drew the same "pension" from that bank account, you would have enough left to easily make every payment, unless you stayed alive and alert much longer than the average.

Presumably nearly everyone thinks they are going to stay alive and alert much longer than the average. This is not surprising. After all, nearly everyone is a better driver than the average, and nearly everyone's children are doing better than average in school. Nearly everyone is also going to Heaven, although there is some doubt about Mother Theresa.

The interesting scenario however is what happens if you can't live in the house for the remainder of your lucid years. What if the sea levels rise? What if a new highway or high voltage line is drawn through your house, or close enough that you can't live there? What if some medical condition prompts you to move to a one-storey home? A lot of things could happen. What do you do THEN? You cannot sell your house – or if you do, you don't get the money; the bank does. You look for another place to live and you compete with the 25 year olds who don't have much starting capital either. The difference is, of course, that they can look forward to a lifetime of income. You can look forward to a couple decades of slowly dying. This will not impress moneylenders.

The way this is solved is likely to vary. Please read your contract very carefully before you sign it. And probably get some second and third opinions on it too... just not from your descendants.