Debt and Financial Vulnerability on the Verge of Retirement
AbstractDebt and Financial Vulnerability on the Verge of Retirement
Annamaria Lusardi, Olivia S. Mitchell, and Noemi Oggero
Older Americans today are more likely to enter retirement in debt compared to previous
decades, with potentially serious implications for retirement security and the macroeconomy.
While the existing literature offers useful insights regarding the overall rise in debt, much less has
been done regarding older Americans’ debt patterns. Moreover, the little research that does exist
has not looked at the determinants of indebtedness close to retirement. In this paper, we evaluate
the factors associated with older American’s debt and debt management practices, to determine
whether and how these patterns have changed over time, and to evaluate whether these practices
leave people especially vulnerable in old age.
We examine older individuals’ indebtedness using the Health and Retirement Study (HRS)
and the National Financial Capability Study (NFCS). The HRS is a unique dataset with both
longitudinal/panel and cross-cohort features. The NFCS complements the HRS data in two ways:
First it provides quite recent information, and second, it includes a rich set of questions about debt
and debt management unavailable in other surveys.
Using 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). Using the 2012 and 2015 NFCS, we
explore detailed 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. We are also able to examine the determinants of financial
fragility and overindebtedness on the cusp of retirement.
Our main finding is that recent cohorts took on substantially more housing debt and hence
face more financial insecurity than prior cohorts. Factors associated with greater financial
vulnerability include having had more children, being in poor health, and experiencing unexpected
large income declines. Thus shocks do play a role in the accumulation of debt close to retirement,
yet having resources is insufficient to protect older Americans against financial frailty. Our paper
motivates additional analysis on how debt and debt management practices can inform policy.