The temporary’s key findings are:

  • The share of older People with debt has been rising for the reason that Nineties, however holding debt in retirement just isn’t essentially unhealthy.
  • The query is, what number of older debtors are at excessive threat of economic misery as a result of sort and dimension of their debt?
  • The evaluation finds that almost all of older debtors are at excessive threat, however not all high-risk debtors are alike.
  • The high-risk fall into 4 teams: 1) financially constrained; 2) bank card debtors; 3) an excessive amount of home; and 4) rich spenders.
  • Therefore, no one-size-fits-all answer exists, so focused coverage interventions can be only.

Introduction 

The share of older People with debt has been on the rise during the last a number of many years.  Having debt, nevertheless, doesn’t at all times sign monetary fragility as a result of debt can be utilized for numerous functions.  For instance, households that take out a low-interest mortgage to purchase a house, which usually appreciates in worth, are probably making a savvy alternative.  In distinction, households that carry unpaid bank card balances might see their debt snowball, resulting in monetary misery.  Figuring out these distinctions in family debt conditions is essential to understanding the implications of the rise in debt holding amongst seniors.  

This temporary, primarily based on a brand new paper, addresses three key questions: 1) As extra older households carry debt in retirement, what share are at “high-risk” and “low-risk” of economic hardship? 2) Is the expansion in debt holding pushed by the high- or low-risk households? and three) What are the several types of high-risk households?  The solutions will assist policymakers decide which kinds of debtors are most susceptible and develop tailor-made options for helping them.   

The dialogue proceeds as follows.  The primary part supplies background on traits in debt holding amongst older People.  The second part kinds households into high-risk and low-risk primarily based on their debt and asset profiles, and it reveals that high-risk debtors are driving the expansion in debt.  The third part identifies 4 teams of high-risk debtors with very totally different traits.  Given the various conditions of high-risk debtors, the fourth part suggests some potential methods to deal with every group’s particular wants.  The ultimate part concludes that the debt burdens of high-risk debtors are trigger for concern, however a one-size-fits-all answer doesn’t exist, so focused interventions can be only.  

Background

Because the Nineties, the share of People ages 65+ with debt has been growing, elevating considerations amongst policymakers and researchers (see Determine 1).  A lot of this development, although, is pushed by rising mortgage debt.  Given the low rate of interest atmosphere in current many years, carrying mortgage debt into retirement may very well be financially savvy.  Certainly, prior research have instructed that older households are refinancing their mortgage with out extracting any extra fairness.  However carrying housing debt into retirement might not be a very good transfer for everybody as mortgage funds can change into a considerable portion of retirement bills.

Whereas a lot of the expansion in borrowing amongst older households is because of rising mortgage debt, different non-secured types of debt – reminiscent of bank card, scholar mortgage, and medical – have additionally elevated (see Determine 2).  Such a debt can put older households vulnerable to monetary misery.  Bank card debt – the dominant type of non-secured debt held by households (see Determine 3) – has high-interest charges, which might result in the speedy accumulation of enormous balances and will lead to severe monetary penalties, reminiscent of chapter.  The smaller types of non-secured debt may also increase considerations, notably for in any other case financially susceptible teams.

Line graph showing the percentage of all households ages 65+ with debt by type, 1989-2019
Bar graph showing the percentage of households ages 65+ with non-secured debt by type, 2019

Briefly, it isn’t clear how a lot of the expansion in older households with debt is a priority.  The purpose of this examine is to tell apart between debtors who’re at excessive threat of jeopardizing their retirement and the financially savvy debtors that made probably the most of low rates of interest. 

Defining Low- and Excessive-Threat Debtors

The evaluation attracts from two nationally consultant surveys – the Survey of Client Funds (SCF) and the Well being and Retirement Research (HRS).  The SCF, administered triennially since 1983, captures wealthy info on family stability sheets, together with the assorted kinds of debt.  To complement the SCF, the evaluation makes use of the HRS, a biennial survey of households ages 51+ with detailed knowledge on family belongings and money owed, to supply extra info by race.

Step one is to group older households with debt into these at “low-risk” and “high-risk” of economic misery in retirement on account of the debt (see Desk 1).  The components used to group households (sort of debt, debt payment-to-income ratio, and debt-to-assets ratio) are generally utilized by lenders or different research.  It is very important embrace households with any revolving bank card debt within the “high-risk” group, since many of those debtors might expertise unhealthy outcomes, although they’d not be captured by the opposite debt measures (in Desk 1). 

Table showing the definitions of low- and high-risk borrowers

Breaking down households by threat degree reveals that, whereas each teams have grown over time, general development is pushed by the high-risk households (see Determine 4).  Whereas these high-risk debtors are clearly the primary concern, it’s first price confirming whether or not or not the expansion in low-risk debtors is troubling as nicely.  Thankfully, our evaluation finds that a big share of the expansion for this group – about one-half – is because of financially savvy debtors who took benefit of low rates of interest to acquire or refinance a mortgage mortgage.  In distinction, nearly not one of the development for high-risk households is defined by such benign components.  So, the following step is to take a more in-depth have a look at the traits of those debtors. 

Line graph showing low-risk and high-risk borrowers as a percentage of all households ages 65+, 1989-2019

Who Are the Excessive-Threat Debtors?

Step one is to easily have a look at high-risk debtors’ race/ethnicity and wealth: two traits that are usually related to the probability of being financially susceptible.  The patterns listed below are as anticipated – non-White households usually tend to fall into the high-risk borrower group, although the hole with White households has been narrowing over time (see Determine 5a).  Equally, households with much less wealth are additionally extra more likely to be high-risk debtors; right here, although, the hole with high-wealth households has been widening (see Determine 5b).

Line graph showing the percentage of borrowers ages 65+ who are high risk, by race and wealth tercile, 1994-2018

The following step is to conduct a extra detailed evaluation to establish whether or not particular subgroups of high-risk debtors exist who could have totally different causes and desires for accumulating debt.  This method makes use of a Latent Class mannequin, which teams households primarily based on wealth, medical and monetary shocks, homeownership, debt traits, and problem in dealing with important bills.

4 clear subgroups emerge from the evaluation (see Desk 2).  The most important group is “financially constrained” households, which have low ranges of wealth, are sometimes overleveraged, and usually tend to wrestle with the necessities.  The overwhelming majority of this group has bank card debt and one out of ten has medical debt.  They’re additionally disproportionately non-White and least more likely to have a school diploma.  This group could also be borrowing simply to get by.  

Table showing the four types of high-risk borrowers from the SCF analysis, 2016-2019

The second subgroup is the “bank card debtors,” which incorporates middle-wealth households with no apparent have to borrow.  In comparison with the financially constrained group, these households are in a lot better form, as few wrestle to fulfill fundamental wants and none of them carry extreme debt in comparison with their belongings.

The third subgroup can’t afford their home.  They’re low/middle-wealth households whose home has change into a big legal responsibility and constraint on their revenue in retirement.  Particularly, their housing debt equals 60 % of their dwelling worth (many have skilled giant drops of their housing worth since buy) and they should dedicate over 40 % of their revenue to debt funds.  This group can be disproportionately non-White.    

Lastly, about one-fifth of the high-risk debtors are “rich spenders.”  Regardless of being within the high third of the wealth distribution, a couple of quarter of their revenue goes to debt funds, about 80 % have bank card debt, and over a 3rd have second properties.  

How Can We Assist Excessive-Threat Debtors?

What might be achieved to scale back the monetary vulnerability of high-risk debtors?  Clearly, given their numerous traits, no one-size-fits-all answer exists.  Thus, the very best method can be for monetary counselors, shopper advocates, and/or policymakers to develop tailor-made options for the particular wants of the 4 teams and to focus on help to these most susceptible to monetary hardship.  Whereas an in depth technique is past the scope of this examine, a number of ideas could assist.  

The primary and largest group of high-risk debtors is characterised by their “monetary constraints.”  For these households, debt counseling and consolidation could assist, however many wrestle to fulfill fundamental wants, in order that they want extra assets.  One method is strengthening means-tested applications, like Supplemental Safety Revenue (SSI).  Since SSI presently has extraordinarily low earnings and asset thresholds, many low-income seniors should not eligible, and the SSI profit quantity is lower than the poverty degree.  Enhancing a program like SSI might present a lifeline to scale back their burden.  One other method is to reinforce Social Safety’s Particular Minimal Profit, which is supposed to supply an satisfactory degree of advantages for lifetime low-earners.  Nevertheless, the worth of this profit has eroded, and the quantity receiving the minimal profit declined from round 200,000 within the Nineties to about 25,000 in 2022.

The second group – “bank card debtors” – look very totally different from the “financially constrained” households and don’t have any apparent have to accumulate debt, notably expensive bank card debt.  Households on this group could not perceive the implications of revolving bank card debt, how the excessive rates of interest have an effect on unpaid balances, and what the minimal cost means.  Some on this group, who should not have an emergency fund, could also be utilizing their bank card to assist easy expense shocks.  These households may benefit from conventional monetary counseling applications to curtail the usage of high-interest-rate debt and to encourage precautionary saving for sudden bills.  Laws requiring bank card issuers to supply higher info to customers might additionally assist.  For instance, when customers navigate to a bank card cost display screen, the primary possibility listed might be the quantity to repay the complete stability.  An alternative choice is for a warning to seem if customers choose to pay an quantity that’s lower than the stability they owe.  

The third group has “an excessive amount of home” and would greatest be served by applications that assist these overstretched householders cut back their housing burden.  Choices might embrace refinancing their mortgage to scale back their month-to-month funds or downsizing; albeit this step might be difficult if their housing fairness has declined, for some beneath their buy worth.  Policymakers and monetary counselors might additionally encourage near-retirees to prioritize paying off their mortgage earlier than retirement to keep away from having mortgage funds overwhelm bills in retirement.

Lastly, the fourth group of “rich spenders” must get a deal with on their discretionary spending to assist rein of their borrowing.  Many on this group have a second dwelling, so promoting it’s one solution to handle their debt burden.  Whereas these households could also be a decrease precedence for policymakers as they’re the least susceptible, common monetary counseling might additionally assist them change their habits in order that they don’t devour past their means.  

Conclusion

A quickly rising share of U.S. households carry debt in retirement, elevating considerations about their monetary safety; and the overwhelming majority of this development is pushed by debtors who’re at “excessive threat” of economic bother.  However the traits of those high-risk debtors range loads.  Some teams appear to have the assets to handle their debt, so monetary counseling on the dangers of extreme bank card or mortgage debt or improved disclosure necessities for lenders could assist them get a deal with on their borrowing.  Different teams have only a few assets to work with and wrestle with important bills.  For these debtors, monetary schooling can present solely restricted assist, and so they want extra assets, maybe via broader entry to means-tested applications like SSI.  The important thing takeaway is the popularity that no one-size-fits-all answer exists, so understanding the various traits of high-risk debtors is important to growing efficient insurance policies to assist older households scuffling with debt. 

References

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Appendix

Table showing the four types of high-risk borrowers from the HRS analysis, 2016-2018

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