Undermining retirement security
by Craig Copeland, Ph.D.,
Mr. Copeland is affiliated with the Employee Benefit Research Institute (EBRI). Reprinted with permission.
Debt is often overlooked when discussing the future income security of retirees. However, any debt that a near elderly or elderly family has accrued entering or living in retirement is likely to offset any asset accumulations, resulting in a lower level of retirement income security.1
This article focuses on the trends in debt levels among those ages 55 or older (near-elderly are defined as those ages 55–64 and the elderly are defined as those ages 65 and older), as financial liabilities are a vital but often ignored component of retirement income security.2 The Federal Reserve Board’s Survey of Consumer Finances (SCF) is used in this article to determine the level of debt.3 Debt is examined in two ways:
- Debt payments relative to income
- Debt relative to assets
Each measure provides insight regarding the financial abilities of these families to cover their debt before or during retirement. For example, higher debt-to-income ratios may be acceptable for younger families with long working careers ahead of them, because their incomes are likely to rise, and their debt (related to housing or children) is likely to fall in the future.
On the other hand, higher debt-to-income ratios may represent more serious concerns for older families, which could be forced to reduce their accumulated assets to service the debt at points where their active earning years are ending. However, if these older families with high debt-to-income ratios have low debt-to-asset ratios, the effect of paying off the debt may not be as financially difficult as it might be for those with high debt-toincome and high debt-to-asset ratios. As described in more detail below, debt levels of the current elderly and near-elderly increased in 2013.
However, the average debt held and debt payments as a percentage of income decreased. While holding debt is not necessarily a sign of financial danger for all elderly or near-elderly families (especially if they are also high-income), housing debt (typically the major asset elderly families have) is of particular concern, because leveraging it at this point in their lives may leave them without a major resource to finance an adequate retirement.
Percentage With Debt
The share of older American families that had debt in 2013 increased from 2010. The percentage of American families headed by individuals ages 55 or older with some level of debt was 65.4 percent in 2013, up from the 2010 level of 63.4 percent (Figure 1). The 2013 level was up over 10 percentage points from the 1992 level of 53.8 percent. The percentage with debt decreased significantly as the family heads aged; i.e., in 2013, 78.5 percent of families with heads ages 55–64 held debt, compared with 41.3 percent of those with heads ages 75 or older.
Furthermore, the percentage with debt increased from 2010 to 2013 for families headed by individuals in each age group studied. For those families with heads ages 55–64, the percentage with debt increased from 77.6 percent in 2010 to 78.5 percent in 2013. Among those families with heads ages 65–74, the percentage with debt increased from 65.0 percent to 66.4 percent and for those families with heads ages 75 or older, the increase was from 38.5 percent to 41.3 percent. In addition, each age group in 2013 had a higher percentage with debt than at any survey year during 1992–2013 study period except for families with heads ages 55–64, which peaked in 2007 at 81.7 percent.
The percentage with debt also was also higher for those with higher family incomes across each survey year, except in 2013 when the percentage decreased at the highest-income quartile. In 2013, 44.8 percent of families in the lowest-income quartile had debt, compared with 77.2 percent of those in the third income quartile (Figure 2). Of those in the highest-income quartile, 76.4 percent had debt in 2013, an amount lower than the third income quartile, and also lower than in 2010, when 77.7 percent of those in the highest-income quartile had debt.
The 2013 percentage of elderly and near elderly families with debt was the highest during the study period for those families in the third income quartile, while the percentage with debt for families in the highest-income quartile has trended down since 2007 and for families in the lowest-income quartile has leveled off at just above 44 percent since 2007.
As the percentage of families with heads ages 55 or older with any debt increased from 1992–2013, the average total debt level also increased: from $36,144 (2013 dollars) in 1992 to $73,211 in 2013. At the same time, the median debt level (half above, half below) of those with debt increased from $17,879 to $47,900 (Figure 3).
This was a real increase in the average and median debt levels of 102.6 percent and 167.9 percent, respectively, from 1992.4 However, while the percentage with debt increased from 2010 to 2013, the average debt level and the median debt level of those families having debt decreased during this time from $80,465 to $73,211 for the average and from $59,372 to $47,900 for the median.
These debt levels differed significantly across various family characteristics. Families with younger or more educated heads, higher incomes, and higher net worth had significantly higher average and median debt levels. Significantly higher average levels of debt were also seen in families headed by individuals who were working for someone else, white or married.
For example, in 2013, among those with debt, families with heads ages 55–64 had a median debt of $63,300, compared with $20,000 for those headed by people ages 75 or older. Similarly to the overall decline in the median debt, the median debt level across each category break decreased from 2010 to 2013, except for families with a head without a high school diploma and families with a nonworking head that wasn’t retired. While the increases in debt levels from 1992–2013 can be construed as a negative result for these families, debt levels may not tell the full story of their financial well-being.
If income and assets grow at a pace faster than these debt levels, these families might actually be in an improving financial position despite the increased debt levels.5 The next two sections of this article examine debt levels relative to income and assets:
- For income, the amount of debt service is examined by using required debt payments relative to family income.
- In contrast, for assets, outstanding debt is measured relative to total asset
The first measure of the indebtedness of the near elderly (ages 55–64) and elderly (ages 65 and over) is the percentage of family income that debt payments represent. From 1992 to 2001, debt payments were approximately 9 percent of family income, at which point they began trending upward; from 10.3 percent in 2004 to 11.4 percent in 2010 before decreasing to 10.0 percent in 2013 (Figure 4).
As the age of the family heads increased, the debt payment percentages decreased, declining from 11.3 percent for families with heads ages 55–64 in 2013 to 6.5 percent for those headed by individuals ages 75 or older. In 2013, the debt payments as a percentage of income declined for each age category from those seen in 2010. Across the three lowest-income quartiles of these families, the percentages of income that debt payments represented in 2013 were just over 15 percent (Figure 5). There was a significant drop-off for those in the highestincome quartile to 7.7 percent.
Debt payments as a percentage of income for the middle two income quartiles were unchanged from 2010 to 2013. In contrast, debt payments as a percentage of income for the lowest- and the highest-income quartiles decreased from 2010 to 2013.
Housing: The Driver of Debt
The level of housing debt drove the change in the level of debt payments in 2013, while the nonhousing (consumer) debt-payment share held stable from 2010. The share of income that went to housing debt payments increased from 6.7 percent in 2004 to 8.3 percent in 2010 before declining to 7.0 percent in 2013. Among the age groups, the share of income that housing debt payments represented among families with heads ages 65–74 decreased from 8.6 percent in 2010 to 6.7 percent in 2013, and for families with heads ages 75 or older, it decreased from 4.7 percent in 2010 to 3.8 percent in 2013 (Figure 6).
Excessive Debt Levels
Looking at the average debt payment as a percentage of income does not generally reveal how many people are in difficult situations with debt, because the average can mask a wide distribution of individual circumstances. A threshold commonly used for determining a problem with excessive debt is when family debt payments exceed 40 percent of income. By that standard, the percentage of families with excessive debt increased in 2013, but it remained below its 2007 level.
The proportion of near elderly and elderly families surpassing this threshold increased from 8.5 percent in 2010 to 9.2 percent in 2013, while the 2007 level was 9.9 percent (Figure 7). The increase from 2004–2007 was a result of the surge in families with heads ages 55–74 whose debt payments were above the 40-percent threshold, while families with heads ages 75 or older experienced a decline in the percentage with debt payments above this threshold.
In contrast, the change from 2007–2010 was the result of declines in the proportion above the 40-percent threshold among those with heads ages 55–74, while the percentage with these high debt payments increased for the families with heads ages 75 or older, rising to 4.9 percent in 2010 from 4.3 percent in 2007. However, in 2013, the percentage with debt payments above the 40-percent threshold increased across each age group.
The share of families with debt payments above 40 percent of income was lowest for those families in the highestincome quartile in 2013, as it was in all prior years in the study (Figure 8). The proportion of families above the 40- percent threshold was highest for families in the second income quartile (13.7 percent). Families in the second quartile not only had an increased likelihood of having debt payments above this threshold in 2013, but their percentage overtook the lowest-income quartile to rank in the highest position.
While the percentage above the 40-percent threshold declined for the two highest-income quartiles in 2013, the increases in the lowest two quartiles pushed the overall level in 2013 above that of the 2010 level. Overall debt levels, percentage with debt, debt payments as a percentage of income, and percentage of families with debt payments greater than 40 percent of their income all increased from 1992 to 2013. Furthermore, housing debt increased across all age groups, representing more than 70 percent of all debt. However, many of these measures of debt improved in 2013 except in some measures where they worsened for those families with the least-educated family heads and with the lowest incomes.
Read more, with graphs & charts, here.