Academic journal article Social Security Bulletin

Retiring in Debt? an Update on the 2007 Near-Retiree Cohort

Academic journal article Social Security Bulletin

Retiring in Debt? an Update on the 2007 Near-Retiree Cohort

Article excerpt

This research note uses 2007 Survey of Consumer Finances (SCF) data to update the authors' work reported in a prior article, which used earlier data to assess debt levels among households approaching retirement in 1995 and 2004. The authors assess whether there have been changes in the debt holdings of near-retirees in 2007, a point in time reflecting the start of the recent financial and economic crisis. Results show that debt levels of near-retirees were modestly higher in 2007 than in 2004, overall and across several subgroups. The results reinforce a general finding of the original article that current near-retirees, primarily baby boomers, are approaching retirement with more debt compared with their counterparts in the mid-1990s. Because the 2007 SCF data captures only the beginning of the current recession, the authors expect future trends to differ from the results presented here.

Introduction

Debt, particularly among older Americans, may have important implications for retirement savings (Securian Retirement 2009; Munnell and Soto 2008; Cavanagh and Sharpe 2002; Yuh, Montalto, and Hanna 1998). It may also influence the timing of the retirement transition, as highly indebted individuals may need to work longer to pay off that debt. Although not a financial risk by itself, debt can affect retirement income security, and in general, indicates less financial cushion for the debt holder.

The main purpose of this research note is to update Anguelov and Tamborini (2009), which used earlier versions of the Federal Reserve Board's Survey of Consumer Finances (SCF) to assess debt levels and prevalence among households approaching retirement in 1995 and 2004. Using the recently released 2007 SCF, this note documents whether there have been changes in the debt holdings of near-retirees in 2007, a point in time reflecting the start of the recent financial and economic crisis, relative to 2004.1

Our analysis compares estimates of debt in families headed by near-retirees (aged 50-61) from the 2007 SCF with similar tabulations for the same age group from the 2004 SCF, reported in Anguelov and Tamborini (2009). Because this analysis captures only the beginning of the current recession and housing downturn, we expect that future trends will differ from the results presented here. However, looking at 2007 estimates is a useful way to examine near-retiree debt at the onset of the financial crisis relative to 2004, a year which essentially reflected the top of a bubble in asset valuations and borrowing.2 It also permits investigation of the extent to which increases in debt levels and prevalence found in the 2004 near-retiree cohort, relative to their 1995 counterparts, continue in the 2007 cohort.

The summary measures used in our analysis offer different ways to assess debt. We first report the mean and median debt holdings, as well as the prevalence (percentage holding debt) across both the 2004 and 2007 near-retiree cohorts.3 To assess the impact of debt on a household's financial status, we report the household's debt service ratio (DSR), the prevalence of high-debt burdens and debt relative to assets. Because household debt is not uniform across the population, the summary measures are analyzed across several key demographic and socioeconomic subsets of near-retirees defined by age, income, and marital status. Further, because observing debt levels at the population level can mask the impact of debt among debt holders, we present separate estimates for debt holders across those characteristics.

Overall, we expect the more recent 2007 cohort of near-retirees to exhibit higher debt levels than their counterparts in 2004. This expectation is based on our previous results (Anguelov and Tamborini 2009), which showed an increase in the debt of near-retirees from 1995 through 2004 and on the onset of the financial crisis in 2007.

Results: 2004 and 2007

The mean, median, and prevalence of debt among near-retirees in 2004 and 2007, overall and among debt holders only, are shown in Table 1. …

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