Academic journal article Social Security Bulletin

Retiring in Debt? Differences between the 1995 and 2004 Near-Retiree Cohorts

Academic journal article Social Security Bulletin

Retiring in Debt? Differences between the 1995 and 2004 Near-Retiree Cohorts

Article excerpt

This article uses the Federal Reserve Board's Survey of Consumer Finances to examine the debt holdings of near-retirees (aged 50-61) in 1995 and 2004. Employing a variety of measures of household borrowing, we find that near-retirees in 2004-the leading edge of the baby-boom cohort-had more consumer and housing debt than their counterparts in 1995. We observe a modest increase in the median debt service and debt-to-assets ratios between the two cohorts, but no statistical difference in the average ratios. Analysis of several demographic and socioeconomic subgroups reveals certain population segments, such as households headed by single women, with significantly higher debt service ratios in 2004. We discuss the implications of these trends for the retirement income security of older baby boomers and suggest further avenues of research.

Introduction

This article examines patterns of debt among households approaching retirement in 1995 and 2004.1 Household debt in the United States has received increased academic and public policy focus in recent years.2 Underlying this attention has been growth in aggregate household debt, as well as in personal bankruptcy claims since the end of the 1980s (Bucks, Kennickell, and Moore 2006; Kish 2006; Manning 2000; Masnick, Di, and Belsky 2006; Mishel, Bernstein, and Allegretto 2005, Tables? 4.13-4.17; Sullivan, Warren, and Westbrook 2000). At the end of the first quarter of 2007, the debt outstanding in the U.S. household sector, including mortgage debt, totaled over $13 trillion, up from $3.6 trillion in 1990, adjusting for inflation (Board of Governors 2007).3

Debt is an increasingly substantive concern for retirement analysts and policymakers for several reasons. Although carrying substantial debt later in life is not an indication of financial risk by itself, it can have repercussions for retirement income security. The financial planning literature has shown that the more economic resources a family uses to service its debt, the less it will save for retirement (Cavanagh and Sharpe 2002; Yuh, Montalto, and Hanna 1998). Debt may affect retirement timing, as individuals with high debt may need to work longer to service that debt. If carried into retirement, debt can decrease the longevity of accumulated financial assets and savings, and more generally, mean less financial cushion for the debt holder. For example, the ability of an aged person to respond to health shocks and other costly life events may be negatively impacted if he or she holds a high debt burden.

A number of recent studies have examined various aspects of debt with a focus on retirement income security (for example, Lee, Lown, and Sharpe 2007; Munnell and Soto 2008; and Soto 2005). However, debt remains an understudied component of older Americans' financial circumstances. To advance our understanding of debt patterns among older workers, this article documents trends in debt among two recent cohorts approaching retirement. Specifically, data from the Federal Reserve Board's Survey of Consumer Finances (SCF) are used to compare debt among households headed by individuals aged? 50-61 in 1995 (comprising persons born between 1934 and 1945, largely the war-baby cohort) with debt among those headed by individuals aged? 50-61 in 2004 (comprising persons born between 1943 and 1954, largely the leading edge of the baby-boom cohort).4 To gain a deeper understanding of trends across different population segments, debt measures are broken out by various demographic and socioeconomic subgroups of near-retirees.

The results document changes in household debt patterns among near-retirees in the leading edge of the baby-boom cohort, showing prominent increases in mortgage and home equity debt in particular. The level of debt, however, does not necessarily portend financial problems; more reliable indicators are debt's relation to household income and assets. Median debt service and debt-to-assets ratios of near-retirees in 2004 were modestly higher than those in 1995. …

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