Rising Household Debt a Game Changer for Seniors
Life + Money

Rising Household Debt a Game Changer for Seniors


More and more Americans are spending their golden years racking up debt—a trend that if left unchecked could derail entitlement reform and alter the traditional pattern of wealth being transferred from older to younger generations. 

For the past several decades, millions of senior citizens have been able to enjoy relatively safe retirements, in part due to a lifetime of savings, private pensions, Social Security, Medicare, and home ownership.

Several recent studies indicate that the degree of safety might be eroding, as personal debt has become a way of life for a growing number of Americans older than 65:

* The Census Bureau reported last week that the median amount of household debt for Americans older than 65 had more than doubled between 2000 and 2011, climbing from $12,702 to roughly $26,000. Seniors experienced the largest percentage increase of any age group. Their individual debt loads are still below the overall median of $70,000, but the more than doubling stands out in an economy recently defined by consumers deleveraging.

* Analysis released in February by the Employee Benefits Research Institute indicates that median credit card debt for seniors older than 75 surged from $838 in 2007 to $1,800 in 2010, while the share of 75-plus households with mortgage debt ballooned from 10 percent in 1992 to roughly 24 percent in 2010.

* The AARP and the left-leaning think tank Demos released a survey in January indicating that half of Americans older than 50 carry medical expenses on their credit cards, almost a quarter used their credit cards to help other family members, and nearly 20 percent have paid their credit card bills by dipping into retirement savings.

Craig Copeland, senior research associate behind the findings at the Employee Benefits Research Institute, said there has been a cultural change in how seniors think about debt.

“It’s become an accepted part of life,” Copeland told The Fiscal Times. “I would almost argue that the tipping point has kind of passed.”

The impact of that tipping point all depends on whether the debt is manageable; something that economic researchers say cannot be discerned from the existing data. To some degree, it largely hinges on whether older Americans can recover some of the cracks in their nest eggs from the 2008 financial crisis, a catastrophe that damaged their home values and investment portfolios. More than 582,000 seniors have maintained their cash flow by taking out reverse mortgages, of which a stunning 9.4 percent are in default. 

There is a major danger for taxpayers if the debt proves to be too burdensome for seniors. If retired Americans cannot service their debt or exhaust their savings to do so, they will become more dependent on Social Security income and health care coverage through Medicaid, potentially causing more spending in two programs that are projected to push the country deeper and deeper into debt in the coming years.

“What you have to watch out for is financial vulnerability that goes along with higher debt,” Karen Dynan, vice president and co-director of economic studies at the Brookings Institution, told The Fiscal Times. “It means that more older Americans are going to be dependent on Medicaid for their retirement needs.”

The Congressional Budget Office projects that Medicaid spending is already on track to grow from $265 billion this year to $536 billion by 2022. Social Security spending likewise is slated to balloon from $816 billion in expenditures this year to $1.35 trillion in 2022.  Along with Medicare—the health insurance program for older Americans—these are drivers of future deficits but also financial lifelines for indebted seniors.

This is where a potential economic problem becomes a political headache.

House Republicans have targeted all three entitlement programs for overhauls to curb spending in their upcoming budget negotiations with President Obama and Senate Democrats. On the table will be hundreds upon hundreds of billions in spending over the next decade.

Obama previously considered a compromise that would involve a less generous measure of inflation when calculating the annual benefit increases for Social Security, something that is sure to meet strong resistance from liberal senators such as Tom Harkin, D-Iowa, and Bernie Sanders, I-Vt.

Some of Obama’s own network of door-knockers would turn against him if he tried to clean up the federal books by using the so-called chained Consumer Price Index that assumes people responds to higher prices by purchasing cheaper substitutes.

“Any cuts to Social Security and Medicare really threaten to put seniors into poverty,” said David Blank, a spokesman for the AFL-CIO affiliated Alliance for Retired Americans.

Seniors are less likely to be below the poverty line than other age groups, but the open question is whether higher personal debt levels indicate a sea change on this issue.

Unlike the increase in student debt afflicting the millennial generation, it’s unclear despite surveys and anecdotal evidence about what precisely is causing more seniors to borrow. It is possible that the debt stems from a loan to help a younger family member, a mortgage refinancing to capitalize on lower interest rates, or perhaps to make up for lost retirement income or possibly higher medical costs. However, it is certain that the debt load for seniors will continue to rise as baby boomers—who have borrowed more heavily than their parents—retire en masse.

There are currently 26.2 million senior citizen households, 44.4 percent of which carry some debt. That’s a diverse group that encompasses jet-setting billionaires and the bed-ridden. Two-person households tend to be better off than those living alone, such as the roughly two million women over the age of 65 whose assets, not include their homes, average just $7,754, according to the Census Bureau.

Not everyone agrees on the ideal data set for determining net wealth. Researchers at the Urban Institute rely on data from the Federal Reserve that does report a debt increase among the elderly, but it’s much less than what was observed by the Census Bureau and a miniscule share of seniors’ assets.

Then there is the challenge of calculating what it means to be “average,” since extremes exist on both sides of the scale. The Federal Reserve data says the median net worth of someone older than 74 is $215,000, which means with a life expectancy of 78 that seniors should on the whole be financially comfortable.

But more than 46 percent of seniors die with “virtually no financial assets,” according to a 2012 research paper by MIT economist James Poterba, Dartmouth College economist Steven Venti, and Harvard University economist David Wise.

“This group relies almost entirely on Social Security benefits for support in retirement,” the paper concludes. “These persons balance on only one leg of the oft touted three-legged stool that is said to provide retirement support—Social Security, pension benefits, and personal saving.”

The opposing sets of data present a dilemma for policymakers, since there can’t be a solution until the source of the problem is identified. Copeland at the Employee Benefits Research Institute summarized the situation this way: “People don’t know what’s going on.”