Older Participants Increasingly Carry Debt Into Retirement

Older Americans have more debt when they reach retirement age than they used to, raising concerns about their financial security, according to a new report published by the Center for Retirement Research at Boston College.

While certain kinds of debt are not necessarily detrimental in retirement, the CRR found that some borrowers are more “high-risk” than others and that financial education could help people better manage their debts.

The share of Americans aged 65 and older with debt grew to 63% in 2019 from about 38% in 1989, according to researchers Anqi Chen, Siyan Liu and Alicia Munnell. Due to data limitations this report’s analysis ends in 2019, before the COVID-19 pandemic. Liu said when data becomes available, future research may shed light on the impact of the subsequent high-inflation period and interest rate hikes on debt among older households.

Much of the debt stems from rising mortgage costs, but taking out a low-interest mortgage to buy a home, which typically appreciates, is likely a financially savvy choice.

Unsecured forms of debt, such as credit card debt, student loan debt and medical debt, have grown as well. The CRR researchers argued that this type of debt puts older households at a higher risk for financial distress and noted that there is no single solution to the problem of debt in retirement.

Credit cards, for example, the most common form of unsecured debt, have high interest rates, which can lead to rapid accumulation of large balances and serious financial consequences, such as bankruptcy. About 85% of Americans age 65 and older had some form of credit card debt, according to 2019 data.

High-Risk vs. Low-Risk Borrowers

In this study, the researchers separated older borrowers into those at “low risk” and at “high risk” for financial stress in retirement due to debt. The report highlighted that understanding the diverse characteristics of high-risk borrowers is essential to developing effective policies and education to help older participants.

Within the category of high-risk borrowers, the CRR identified four subgroups. The largest group (33%) consisted of “financially constrained” households, which have low levels of wealth, are often overleveraged and struggle with affording the essentials. This group is just borrowing to get by.

The second group (26%) consisted of “credit card borrowers,” which included middle-wealth households with no apparent need to borrow.

The third group (19%) was low- and middle-wealth households whose housing debt payments consumed more than 40% of their income, and this group is disproportionately non-white. Households from racial or ethnic minority groups were also more likely to hold debt in retirement, the CRR found.

“As the population of retirees becomes more diverse, a greater share of older households will be debt holders,” the report stated.

Lastly, one-fifth of the high-risk borrowers were categorized as “wealthy spenders.” Although these households are in the top third of the wealth distribution, about one-quarter of their income goes toward debt payments, about 80% have credit card debt and more than one-third have second homes.

No ‘One-Size-Fits-All’ Solution

Recognizing that it is important to reduce the financial vulnerability of high-risk borrowers, the researchers said no “one-size-fits-all” solution exists.

“Older borrowers who are more at risk of financial trouble may be accumulating credit card debt, overburdened with a big mortgage or struggling with daily expenditures due to having limited resources,” Liu wrote in an emailed response. “Plan sponsors may consider understanding the specific needs of their plan members (who may be different from the general population) before thinking about targeted interventions—including but not limited to financial education—for members in various financial situations.”

The report also suggested that credit card borrowers, in particular, could benefit from traditional financial counseling, as many likely do not understand the implications of revolving credit card debt, how high interest rates affect unpaid balances and what the minimum payment means. In addition, some in this group, who do not have emergency savings, may be using their credit card to help smooth expense shocks.

Legislation that requires credit card issuers to provide better information to consumers could also help, the report stated. For example, when consumers navigate to a credit card payment screen, the first option listed could be the amount to pay off the full balance, as opposed to paying amounts that are smaller than the balance they owe.

For those with overwhelming housing debt, the researchers advised providing programs that could include refinancing mortgages to reduce monthly payments or could recommend downsizing.