Debt and Financial Vulnerability on the Verge of Retirement

• Published date: 01 August 2020
• Author: ANNAMARIA LUSARDI,OLIVIA S. MITCHELL,NOEMI OGGERO
• Date: 01 August 2020
• DOI: http://doi.org/10.1111/jmcb.12671

DOI: 10.1111/jmcb.12671

ANNAMARIA LUSARDI

OLIVIA S. MITCHELL

NOEMI OGGERO

Debt and Financial Vulnerability on the

Verge of Retirement

We analyze older individuals’ debt and financial vulnerability using data

from the Health and Retirement Study (HRS) and the National Financial

Capability Study (NFCS). In the HRS, we compare three groups of people

age 56–61 in 1992, 2004, and 2010, to assess cross-cohort changes in debt

over time. Two waves of the NFCS (2012 and 2015) provide additional

insights into debt management and older individuals’ capacity to shield

themselves against shocks. Weconclude that recent cohorts hold more debt

and face more financial insecurity than in the past. This will render them

particularly vulnerable to forecasted interest rate increases.

JEL codes: D14, J32

Keywords: personal finance, retirement plans.

THE UNITED STATES HAS WITNESSED a steady rise in access to

financial credit and opportunities to borrow over time, yet many individuals lack

The authors thank Carlo de Bassa Scheresberg, Ana Gazmuri, and Yong Yu for expert programming

and research assistance. Additionally,for suggestions and comments, they thank Barbara Butrica, Carolina

Fugazza, Elizabeth Llanes, Melinda Morrill, Karen Pence, participants at the 2018 TIAA Institute Fellows

Symposium, the 2018 American Economic Association in Philadelphia, the 15th Annual Joint Confer-

ence of the Retirement Research Consortium, the 2016 Working Longer and Retirement Conference at

SIEPR/Stanford University, and the CMV/OECD Seminar on Emerging Trends in Financial Education,

Rio de Janeiro, Brazil. The research was supported by a grant from the US Social Security Administration

(SSA) to the Michigan Retirement Research Center (MRRC) as part of the Retirement Research Consor-

tium (RRC). Support was also provided by the TIAA Institute and the Pension Research Council/Boettner

Center of the Wharton School at the University of Pennsylvania. The findings and conclusions are solely

those of the authors and do not represent the views of SSA, any agency of the Federal Government,

the MRRC, or any other institutions with which the authors are affiliated. C2019 Lusardi, Mitchell, and

Oggero.

ANNAMARIALUSARDI is Endowed Chair of Economics & Accountancy at The George Washington Univer-

sity School of Business (E-mail: alusardi@gwu.edu). OLIVIA S. MITCHELL is the International Foundation

of Employee Benefit Plans Professor at The Wharton School of the University of Pennsylvania (E-mail:

mitchelo@wharton.upenn.edu). NOEMI OGGERO is a graduate student at the University of Turin(E-mail:

noemi.oggero@unito.it).

Received June 12, 2017; and accepted in revised form April 30, 2019.

Journal of Money, Credit and Banking, Vol. 52, No. 5 (August 2020)

C

2019 The Ohio State University

1006 :MONEY,CREDIT AND BANKING

the financial know-how to manage the complex new financial products increas-

ingly available in the financial marketplace.1As a consequence, it is key to learn

more about how people borrow and manage debt in the modern economy. In par-

ticular, older persons today appear more likely to enter retirement in debt than in

past decades. Importantly, the greater indebtedness of people on the verge of re-

tirement has several macroeconomic implications. For example, higher debt levels

make older individuals more sensitive to increases in interest rates. Moreover, re-

tirees may need to devote a rising proportion of their incomes to servicing their

debt. This paper evaluates the factors associated with older Americans’ debt pat-

terns and debt management practices to trace how these patterns have changed over

time and to evaluate whether these practices leave people particularly vulnerable in

old age.

To this end, we examine older individuals’ debt patterns using the Health and

Retirement Study (HRS) and the National Financial Capability Study (NFCS). With

the HRS, we compare three different cohorts of people on the verge of retirement

(age 56–61) as well as people slightly older (age 62–66). We study the determinants

of debt and how debt across the cohorts has evolved. We also discuss the potential

consequences of our findings regarding indebtedness on the verge of retirement.2

With the 2012 and 2015 NFCS, we explore rich new information on debt and debt

management among the same age groups (56–61 and 62–66), highlighting many

signs of financial distress among individuals who should be close to the peak of

their wealth accumulation profiles. The NFCS data also enable us to examine the

determinants of financial fragility and overindebtedness of individuals on the cusp of

retirement.3

Our focus on debt is important for several reasons. First, debt typically grows

at interest rates higher than those which can be earned on investments. For this

reason, debt management is vital for those seeking to manage their retirement assets

conservatively. Second, consumer credit, such as credit card borrowing, has become

more accessible, and this type of unsecured borrowing has risen over time. This trend

can have both micro- and macroeconomic implications. Third, high-cost alternative

financial services, including payday loans, pawn shops, auto title loans, and rent-

to-own shops, have proliferated in many states (Lusardi and de Bassa Scheresberg

2013). Fourth, it is important to identify financially fragile families, which can be

sensitive to shocks during retirement. Finally, the 2008–10 financial and economic

crisis was largely driven by borrowing behavior, so understanding debt may help

avoid a repeat of past errors.

Our paper is organized as follows: We first provide a conceptual framework to

overview the reasons for the increase in debt. We then examine HRS data to document

1. See Lusardi and Mitchell (2007, 2008, 2011a, b, c, 2014); and Lusardi, Mitchell, and Curto (2014).

2. Our prior work examined saving and asset building among those age 50+(Lusardi and Mitchell

2007, 2011a).

3. As academic advisors to these surveys, we have helped design the key questions in both the HRS

and NFCS.