Seniors’ Debt Is Rising Sharply

CU360
February 3, 2010 | COMMENTS

Debt levels of those in or near retirement age are heading up. Both housing debt and consumer debt levels are rising among seniors, especially the low-income. A substantial percentage of seniors now have debt levels well beyond the threshold considered problematic, according to a report from the Employee Benefit Research Institute.

A growing share of older Americans incurred debt through 2007, particularly those age 55 to 64—the age right before or at the start of retirement. The percentage of U.S. households headed by a person age 55 or older who have some level of debt was 63% in 2007—almost three percentage points higher than 2004, seven percentage points higher than in 2001, and up nearly 10 percentage points from 1992.

As the percentage of households headed by a person age 55 or older with any debt increased, the average total debt level also increased—from just over $32,000 (in 2007 dollars) in 1992 to $70,370 in 2007. The median debt level of those with debt increased from $15,923 to $43,000. This was a real increase in the average and median debt levels by 118.6% and 170%, respectively, from 1992.

Although rising debt levels are not necessarily a sign of danger for all seniors (especially if they're also high-income), rising housing debt is of particular concern, since housing typically is the major asset seniors have. Leveraging it at this point in their lives may leave them without a major resource to finance an adequate retirement, given the recent downturn in the housing market.

A threshold level commonly used for determining whether or not a family has a problem with excessive debt is when debt payments exceed 40% of income. By that standard, excessive debt is growing sharply. The proportion of senior households surpassing this threshold increased from 7.3% in 2004 to 9.9% in 2007.

This change from 2004 to 2007 was a result of the surge in senior households with heads age 55to 74 whose debt payment was above the 40% threshold. Among those households, the proportion above that threshold increased from 7.9% in 2004 to 12.5% in 2007. For households with heads age 65 to 74, it rose from 7.9% to 11.2% during this period. These percentages significantly surpass the previous high of 10.6% for households with heads age 55 to 64 in 1995.

In most categories—overall debt levels, percentage with debt, debt payments as a percentage of income, and percentage of households with debt payments greater than 40% of their income—senior debt increased from 1992 to 2007. Furthermore, housing debt increased across all age groups, making up more than 70% of all debt.

What drove this sharply higher debt burden for these seniors? Data indicate the sharp increase in housing debt was due to many homeowners refinancing their mortgages, cashing out equity in their home, or facing rapidly increasing home values from 2001 to 2007.

This increasing level of debt has serious implications for the future retirement security of many seniors. More households have most important asset—their homes—at risk. Seniors who rely on their homes as assets and take on higher housing debt are likely to face major lifestyle changes in retirement—a scenario already playing out with the recent slump in the housing market.

The full report, Debt of the Elderly and Near Elderly, 1992-2007, is available from the Employee Benefit Research Institute, ebri.org.