Inadequate Income, Health Expenses Top Reasons for Retiree Bankruptcies

The risks associated with aging, reduced income, and increased health care costs have been offloaded onto older individuals, while at the same time, older Americans are increasingly likely to file for bankruptcy, according to a paper by researchers from different universities.

Using data from the Consumer Bankruptcy Project (CBP), the researchers find more than a two-fold increase in the rate at which older Americans (age 65 and older) file for bankruptcy and an almost five-fold increase in the percentage of older persons in the U.S. bankruptcy system. One in seven bankruptcy filers is of retirement age. Within the oldest cohort, those age 75 and older, there has been a near ten-fold increase since 1991. In 1991, this group constituted only 0.3% of filers, as compared to 3.3% now.

“The magnitude of growth in older Americans in bankruptcy is so large that the broader trend of an aging U.S. population can explain only a small portion of the effect. In our data, older Americans report they are struggling with increased financial risks, namely inadequate income and unmanageable costs of health care, as they try to deal with reductions to their social safety net. As a result of these increased financial burdens, the median senior bankruptcy filer enters bankruptcy with negative wealth of $17,390 as compared to more than $250,000 [of wealth] for their non-bankrupt peers,” the researchers write in “Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society.”

Reasons for retiree bankruptcy

Unstable employment is particularly problematic for older people, the researchers note. When they lose jobs, it takes them significantly longer to find new ones and when they do, they typically earn less than what they earned before. In addition, they say, full Security benefits now begin at 70, rather than 65, and defined benefit (DB) pensions have been replaced with high-risk, employee-owned defined contribution (DC) plans, the values of which fluctuate with the stock market. With DC plans, payout during retirement is not defined or predictable, employees bear all of the market risks, and returns depend on employees’ investment skills.

Citing other studies, the researchers note that in 2013, among working households, ages 55 to 64, with a 401(k), the median amount in those accounts was $111,000. Additionally, out-of-pocket spending among older Americans with Medicare comprises about 20% of their income, and the estimated total of all non-covered medical expenses for a 65-year-old retired couple during their retirement years is $200,000.

The researchers also say that in 2001, 50.2% of households headed by someone 60 or older had some debt; by 2013, that had climbed to 61.3%. Among these older adult households with debt, the median amount they owed more than doubled from $18,385 in 2001 to $40,900 in 2013, according to a 2015 report from the National Council on Aging.

The researchers’ analysis of data from the current CBP suggest that financial struggles, namely a decline in income, was a leading reason for older Americans’ bankruptcies—almost seven out of ten respondents (69.1%) reported that they “very much” or “somewhat” agreed that this was the reason for their bankruptcy.

Additionally, 40% of respondents reported that they “very much” or “somewhat” agree that missing work for medical reasons was a reason for their bankruptcies. When the variable “missing work” is combined with “medical expenses,” 69.6% of respondents “very much” or “somewhat” agreed that this combination of reasons led to their bankruptcies.

The researchers asked those who filed bankruptcy to list the single most important thing that they or their family members were unable to afford in the year before their bankruptcies. More than half of older filers (52%) who responded indicated that the single most important thing they had to go forego was related to medical care—surgeries, doctor visits, prescriptions, dental care, and health/supplemental insurance.

“Absent significant policy changes that reassume the risks of aging and effectively insure the financial stability of older Americans, our data suggest that the trend of an aging bankruptcy population will continue,” the researchers conclude.