More People Are Approaching Or Already In Retirement With Deep Debt

By Mark A. Stein, Money & Policy Editor, Next Avenue

By almost any measure, more Americans are in or are rapidly approaching retirement with more debt than at any time in the country’s history. At the end of the most recent quarter, people aged 70 and over owed a total of $1.63 trillion, according to data from the New York Federal Reserve Bank/Equifax.

That is well over twice as much debt as people aged 70 and over had a decade ago, even after adjusting for inflation and the greater number of people living into their 70s today. On average, Americans aged 60 and over owe $55,197; a decade ago, the figure was $28,161.

The debts of only those people aged 70 and over exceed the total amount of all Social Security benefits that will be paid out this year.

These are certainly big numbers. Do they comprise a big problem?

More Debt, Fewer Assets

Jessica Johnston, senior director of the National Council on Aging’s Center for Economic Well-Being, said she sees rising debt as evidence that “older adults are struggling to make ends meet.”

Half of people aged 65 and over have not saved as much as they need to retire in comfort; almost one-third have saved nothing at all. At the same time, people live longer, requiring them to stretch their savings over more years or exhausting their reserves when age-related medical conditions develop.

Also, being in debt no longer has the stigma it once did, as the number of people who lived through the Great Depression declines. Public attitudes about debt are “surprisingly different than what we saw in the past,” Johnston said.

“Having debt . . . does not always signal financial fragility because debt can be used for various purposes,” Boston College researchers Anqi Chen, Siyan Liu and Alicia H. Munnell wrote in “What Are the Implications of Rising Debt for Older Americans?” “For example, households that take out a low-interest mortgage to buy a home, which typically appreciates in value, are likely making a savvy choice.

“In contrast,” they add, “households that carry unpaid credit card balances could see their debt snowball, leading to financial distress.”

Snowballing occurs when a person carries a large balance on a card with an interest rate so high that the biggest monthly payment that they can muster is not enough to pay even all the interest on last month’s balance. The unpaid interest is added to the total amount due and accrues interest of its own.

No Emergency Reserve

Whether debt is snowballing or simply rising steadily, increased debt burdens mean increased debt payments, potentially leaving less money for necessities like food, housing, health care and prescription drugs.

It also may make debtors less able to absorb the financial shock of a health crisis, the death of a spouse or a natural disaster, Barbara A. Butrica of the Urban League and Stipica Mudrazija, an assistant professor at the University of Washington, wrote in “Financial Security at Older Ages.” Lacking the financial wherewithal to survive such a jolt leaves them open to eviction, bankruptcy and other catastrophic outcomes.

Determining if an individual has a dangerous amount of debt — and drafting a plan to shed that debt — may require a professional financial counselor. Free counseling is available through the National Foundation for Credit Counseling in Washington, D.C.

Less and Less Liquidity

“People 70-plus is a population that has seen a tremendous growth in credit card debt in contrast to general debt,” said Hector Ortiz, Senior Policy Analyst in the Office for Older Americans at the Consumer Financial Protection Bureau in Washington, D.C. “There’s a relationship between debt and retirement security when people tell us their income is below their expenses.”

Among all people carrying debt, he continued, there is not much of an association between debt and liquidity, meaning having enough cash to make your minimum payments.

“That is different if you look only at people carrying credit card balances,” Ortiz said. “There you do see an association (between debt and liquidity). So, clearly, credit card balances are people accruing credit card debt to meet day to day expenses and potentially emergency expenses.”

Secured debt — mortgages, generally — are where economists see one of the lowest rates of problems. But even mortgages can become an area of concern if people have multiple debts — say, a car loan, student loan, mortgage and on top of that some level of credit card debt.

Signs of a Struggle

“Those are where you see higher payment-to-income ratios, higher leverage ratios and a higher percentage of debt to wealth in general,” Ortiz added, referring to economic tools used to gauge consumers’ creditworthiness. “Those are the indicators that tell us that this is a population that is struggling.”

Chen, Liu and Munnell at Boston College suggest classifying older households with debt as “low risk” or “high risk” of financial distress. They could then see which group accounts for more of the growth in the debts of older Americans. The final step would be to identify different types of high-risk households to help policymakers draft targeted ways to help them.

Help is definitely required. Based on the Elder Index, a cost-of-living tool developed at the Gerontology Institute at the University of Massachusetts Boston, almost half of Americans aged 60 and older don’t have enough income to afford basic necessities. Rising debt burdens increase households’ monthly expenses, potentially leaving even less for housing and other essentials.

Johnston said some cope by skimping on prescription drugs, skipping meals or scrubbing doctor visits. Many feel they have no option but to use a credit card to pay for groceries and other routine, recurring expenditures. “So, you put it on a card and tell yourself, ‘Just this once’,” she said. “But nothing changes, and it happens the next month and the month after that and the month after that.”