The Changing Face of Debt and Financial Fragility at Older Ages
American Economic Association | Papers and Proceedings | Volume 108 | May 2018
Abstract: U.S. consumer credit and mortgage borrowing expanded rapidly prior to the 2008-9 financial crisis, allowing relatively unsophisticated consumers to decide how much they could afford to borrow. As a consequence, Americans today are more likely to enter retirement in debt than ever before, which poses some concerns. For one, higher debt levels make older households quite sensitive to rising interest rates. For another, retirees may need to devote a growing fraction of their incomes to servicing the rising debt.
Various explanations have been offered for the rapid increase in debt among the population at large, including the rise in house prices during the 2000’s and the growth of easier mortgages (e.g., Dynan and Kohn, 2007; Mian and Sufi, 2011). Another is that technological change in the lending market induced risk-based pricing and made it easier for households to borrow (Edelberg, 2006; Dynan, 2009). Moreover, uninformative sales tactics have “shrouded” customers’ understanding of financial contracts and boosted total amounts borrowed (e.g., Gabaix and Laibson, 2006).
Though this literature offers reasons for the overall rise in debt, much less is known about the consequences of higher debt for older Americans. To evaluate whether borrowing practices of people close to retirement make them increasingly financially vulnerable at older ages, we compare debt patterns for three cohorts of older persons age 56–61 in the Health and Retirement Study (HRS) and discuss the implications of our findings.