Debt payments as a percentage of income steadily rising
by Craig Copeland, Ph.D., Employee Benefit Research Institutereprinted with permission from EBRI
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When projecting the future income security of retirees, researchers typically focus on measures concerned with retirees’ accumulated financial assets, particularly within tax-qualified retirement plans (e.g., 401(k) plans and individual retirement accounts (IRAs)), and coverage by supplemental health insurance to Medicare provided through a former employer.
However, any debt that a near-elderly or elderly family has accrued entering or living in
retirement is likely to offset its asset accumulations, resulting in a lower level of retirement income security. The nearelderly are defined as those ages 55–64, while the elderly are defined as those 65 and older. This article focuses on the trends in debt levels among those ages 55 and older, as financial liabilities are a vital but often ignored component of retirement income security.1
The Federal Reserve Board’s Survey of Consumer Finances (SCF) is used in this article to determine the level of debt.2 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 (often related to housing or children) is likely to fall in the future. On the other hand, high 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 when their active earning years are winding down. However, if these high-debt-to-income older families 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-to-income and high-debt-to-asset ratios.
As described in more detail below, debt levels of the current elderly and near-elderly are at much higher levels than they have been for past generations. Among families with heads age 75 or older, both housing and consumer debt levels increased in 2010. Moreover, for this cohort, a larger percentage had debt levels above the threshold considered problematic. While a high debt level is not necessarily a sign of financial danger for all elderly or nearelderly families (especially if they are also high-income), housing debt (typically the most financially significant 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 with debt in 2010 was virtually unchanged from 2007, although there was a significant increase in the share of those families with the oldest heads (ages 75 or older). The percentage of American families headed by individuals age 55 or older with some level of debt was 63.4 percent in 2010, almost unchanged from the 2007 level of 63.0 percent (Figure 1). However, the 2010 level was up nearly 10 percentage points from the 1992 level of 53.8 percent.
The incidence of debt decreases significantly as the family heads age; i.e., in 2010, 77.6 percent of families with heads ages 55–64 held debt, compared with 38.5 percent of those with heads ages 75 or older. While the percentages with debt decreased for families headed by individuals ages 55–64 and stayed the same for families headed by individuals ages 65–74, the percentage with debt among those with heads age 75 or older increased to 38.5 percent in 2010 from 31.2 percent in 2001. Each age group in 2010 has a significantly higher percentage with debt than it had at the low point for each age during 1992–2010 study period.
The presence of debt increases with family income. In 2010, 44.6 percent of families in the lowest-income quartile had debt, compared with 77.7 percent of those in the top-income quartile (Figure 2). While families in the secondincome quartile (26 percent to 50 percent) had the largest percentage point increase in the incidences of debt from 2007–2010, prior to 2004 the increases in the percentages with debt across the income quartiles were similar.
In 2004, there were larger increases in the percentages of debt among families in the two lower-income quartiles than those in the two higher-income groups. The percentages with debt in 2007 showed increases for the two higherincome groups, while the percentages in the two lower groups experienced declines. However, in 2010, the lowerincome groups had increases in the percentages with debt, while the higher-income groups had decreases.
As the percentage of families with heads age 55 or older with any debt increased from 1992–2010, the average total debt level also increased: from $33,726 (2010 dollars) in 1992 to $75,082 in 2010. At the same time, the median debt level (half above, half below) of those with debt increased from $16,683 to $55,400 (Figure 3). This was a real increase from 1992 in the average and median debt levels of 122.6 percent and 232.1 percent, respectively.3
However, debt levels differed significantly across various family characteristics. Families with younger or more educated heads, higher incomes, or higher net worth had significantly higher average and median debt levels. Furthermore, families with working or white family heads and married families also had significantly higher average levels of debt. For example, in 2010, among those with debt, families with heads ages 55–64 had a median debt of $76,600, compared with $30,000 for those headed by people age 75 or older.
While the substantial increases in debt levels from 1992–2010 can be construed as a negative result, debt levels may not tell the full story. 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.4
The next two sections examine these 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 assets.
The first measure of the indebtedness of the near elderly (ages 55–64) and elderly (age 65 and over) is the percentage of family income that debt payments represent. From 1992 to 2004, debt payments were approximately 9 percent of family income, at which point they began trending upward: 10.3 percent in 2004 to 11.4 percent in 2010 (Figure 4). As the age of the family heads increased, the debt payment percentages decreased, from 12.4 percent for families with heads ages 55–64 in 2010 to 7.1 percent for those headed by individuals age 75 or older.
While the percentage of income that debt payments represented for families with heads ages 55–74 increased only slightly, debt payments as a percentage of income increased substantially for families with heads age 75 or older; from 4.5 percent in 2007 to 7.1 percent in 2010.
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