The Graying of American Debt

Real aggregate debt in the hands of Americans age 50 to 80 increased by 59 percent between 2003 and 2015. Meanwhile, real debt held by Americans in their 20s and 30s was approximately flat. Using data from the Federal Reserve Bank of New York’s Consumer Credit Panel, we describe the extent of this debt increase and the distribution of debt growth by loan type. Real per capita home-secured debts held by older consumers show the steepest growth, though older borrowers have increased their obligations in all major debt categories. For long-held debts, these developments lead us to evaluate how such changes emerged.

Understanding the Macro-financial Effects of Household Debt

Higher household debt has been associated with lower future GDP growth across a broad set of 80 countries over the period from 1950 to 2016. Several institutional factors, such as flexible exchange rates, capital account openness, and higher financial development and inclusion, appear to mitigate this negative relationship between an increase in household debt and lower future GDP growth. Three mutually reinforcing mechanisms help explain this relationship. First, increases in household debt amplify the probability of future banking crises which significantly disrupt financial intermediation. Second, crash risk may be systematically neglected due to investors’ overoptimistic expectations associated with household debt booms. Third, debt overhang impairs household consumption when negative shocks hit.

Mortgage Foreclosures and Older Americans

Economic conditions improved since the 2008–09 mortgage market crisis, and home prices recovered in many areas. Nevertheless, over time, growing numbers of older households have taken on greater mortgage debt than in the past. These families are also carrying mortgage loans into retirement, far more than they did in the past. Foreclosure rates for all loans have decreased to pre-recession levels for borrowers under age 50, while for borrowers age 50+, foreclosure rates in 2017 were higher than in 2007. This means that many older homeowners may face the loss of their homes, despite the fact that the economy improved after the financial crisis.

The Risk of Financial Hardship in Retirement

This chapter explores the likely prevalence of hardship in old age for individuals now nearing retirement. We use longitudinal data from the Health and Retirement Study to determine what observable demographic, socioeconomic, and financial factors in late middle age predicted economic hardship in old age for the cohort nearing retirement in the mid-1990s. These findings are then used to predict economic hardship in old age for the cohort nearing retirement age in the mid-2010s. Our analysis suggests that the more recent cohort is likely to realize higher economic insecurity, particularly among men.

How Much Should the Poor Save for Retirement? Data and Simulations on Retirement Income Adequacy among Low-earning Households

A number of US states have introduced automatic enrollment retirement accounts as a means to raise retirement savings for lower-income households. The presumption is that such households, whose rates of formal retirement saving are low, would benefit from higher saving and higher incomes in retirement. Nevertheless, there has been little explicit analysis of how much lower-income households should save in excess of their social security contributions. There is also little evidence that many current lower-income retirees are unable to maintain their pre-retirement standards of living. To study this issue, this chapter builds a simple model of retirement saving, allowing for the inclusion of social security benefits, different standards of retirement income adequacy, and different assumptions regarding pre- and post-retirement investment returns. Interestingly, low-income retirees express less satisfaction with the adequacy of their retirement incomes than other retirees, but their self-assessed retirement income adequacy has actually increased in recent years. The chapter also shows that, for very low earners, little savings are necessary on top of social security payments.

Introduction

Around the world, people nearing and entering retirement are holding ever-greater levels of debt than in the past. This is not a benign situation, as many pre-retirees and retirees are stressed about their indebtedness. Moreover, this growth in debt among the older population may render retirees vulnerable to financial shocks, medical care bills, and changes in interest rates. Contributors to this volume explore key aspects of the rise in debt across older cohorts, drill down into the types of debt and reasons for debt incurred by the older population, and review policies to remedy some of the financial problems facing older persons, in the United States and elsewhere. The authors explore which groups are most affected by debt, and they also identify the factors producing this important increase in leverage at older ages.

Financial Well-being of State and Local Government Retirees in North Carolina

This chapter analyzes how low- and moderate-income retirees utilize retirement savings, and how financially fragile they are, relying on survey data on public employees in North Carolina. We investigate whether retirees make systematic errors when they manage their assets so as to maintain their standards of living, and whether there are notable differences in financial management skills across subgroups. We also ask whether financial literacy is positively associated with lower rates of committing such errors and, and whether low-income households have lower levels of financial literacy leaving them likely to make poor financial decisions. We show that many retirees have no emergency cash, and one quarter maintain high-interest debt while leaving low-return funds in retirement saving plans. Suboptimal debt holding is associated with lower household income and lower financial literacy.

Is Rising Household Debt Affecting Retirement Decisions?

Household debt among older Americans approaching retirement has increased dramatically over time. Older households have become increasingly more indebted and more leveraged. While mortgages remain the predominant type of debt among households in their 50s and 60s, student loan debt has also risen among these households in recent years. This chapter uses household survey data to show that more indebted older adults are more likely to work, less likely to be retired, and, on average, expect to work longer than those with less debt. Furthermore, the chapter examines how different types of debt such as mortgages, credit card debt, and student loans affect those decisions.

Paying It Back

This chapter uses a unique new dataset to answer some exciting and fundamental questions that have not been fully addressed previously, regarding the connection between Americans’ debt, income levels, and risk tolerance. In particular, we provide an overview of the debt service patterns of older consumers derived from de-identified Chase data. Moreover, we consider how debt profiles change dynamically, as people transition into and move through retirement. Our primary purpose is to explore how real-world debt service trends vary over the life cycle, and how this influences the ways in which they save for and live in retirement.

Financial Distress among the Elderly

Both the proportion of bankruptcy filings by the elderly and the proportion of foreclosure starts that affect the elderly have increased dramatically over the past 20 years, suggesting an increase in financial distress of the elderly relative to younger age groups. This chapter uses new data to examine whether these trends can be explained by either the 2005 bankruptcy reform or the 2008 financial crisis. Our results show that while these events made both the elderly and younger age groups worse off, they do explain the increase in relative financial distress of the elderly.