Borrowing Boom Imperils Retirement for Millions

Editor’s note: This is part 1 of a 12-part collaborative series between Next Avenue and Marketplace Morning Report.

Major economic and social transformations often gather momentum slowly and unevenly. That is, until accumulated data and experience adds up into clear signs of meaningful change. That is the story arc of the more than three-decade-long increase in older Americans' debt nearing and during retirement. The debt burden threatens the retirement security of growing numbers of older people, especially those of modest means.

The numbers are striking. The Federal Reserve calculates that debt more than quadrupled in households headed by people aged 65 to 74 over the decade ending in 2022, from an average of $10,150 for households to some $45,000. For those 75 years and older, debt increased sevenfold, from nearly $5,000 to $36,000. To put those numbers in context, debt roughly doubled during the same period for those younger than 65.

Of course, owing money isn't necessarily bad, at least not by definition. Even upper income households, say, those earning $260,000 or more, borrow to buy homes, cars, appliances and other goods and services. Young adults typically take on debt to pay for their education and to start a family. Older households with substantial resources may decide to keep paying the monthly mortgage tab rather than eliminate it because they can profitably invest the money elsewhere.

That said, standard personal finance advice has long been to eliminate debt around the time when saying goodbye to colleagues for the last time. The mantra "retire debt free" is based on the insight that everyday life at older ages becomes financially riskier with debt, especially anyone living on a fixed income. Yet in the past few decades fewer and fewer older adults have been able to become debt free.

"In 1989 about 58% of older adults over the age of 50 carry debt in retirement and in 2020 that percentage has jumped to 78%," says Mingli Zhong, senior research associate at the Urban Institute, a Washington D.C.-based think tank. "That is a big increase in terms of the number of retirees carrying debt into retirement."

Among older adults of modest means, the combination of high debts and low savings can feed off each other in a pernicious cycle, pushing more older households into the ranks of the financially precarious. The fastest-growing demographic group declaring personal bankruptcy is 65 years and older.

Several factors have come together to change the debt profile of older Americans. For one thing, debt is the other side of the lack-of-retirement-savings coin. Nearly half of private sector workers and some two-thirds of lower-wage workers don't have access to a retirement savings plan at work. The evidence is overwhelming that people don't save for retirement without the opportunity of participating in an employer-sponsored retirement savings plan.

For another, wages for most workers stagnated or grew slowly in recent decades, particularly for Blacks, Latinos and women. Low-wage workers comprise a substantial share of the workforce. In the Brookings Institution report "Meet the Low-Wage Workforce" the authors calculate that more than 53 million people — 44% of all workers aged 18 to 64 — earn low hourly wages. Women and Black workers are overrepresented among low-wage workers.

Another Brookings report, "Low-Income Workers Experience — by Far — the Most Earnings and Work Hours Instability," found that more than half of households earning less than $25,000 a year in 2023 reported experiencing sharp variation in monthly income. (In sharp contrast, only about a quarter of households earning over $100,000 a year report that their month-to-month income is volatile.)

"I'm seeing the debt increase for everyone, but it's a matter of whether you have the resources to deal with the debt," says Odette Williamson, senior attorney with the National Consumer Law Center. "And for those, especially people of color, older adults, who have faced a lifetime of discrimination in the job market, market and other types of discrimination, they simply have aged with little or no resource to meet these mounting expenses."

Financial innovations making it easier to borrow, including against home equity, also played an important role. "We found that the debt-creating institutions overwhelmed our wealth-creating institutions," says Teresa Ghilarducci, professor of economics at the New School of Social Research.

For example, nearly 80% of people aged 65 and older are homeowners. On the surface, that's a reassuring statistic. Yet Ghilarducci calculates that home equity for the bottom 90% measured by wealth has barely increased over the past 40 years.

One reason is that lenders have made it simple and quick to borrow against home equity, lowered down payment requirements, and similar changes. "People were able to also get car loans and other kinds of durable consumer purchases on loans rather than cash," adds Ghilarducci.

A recent report by AARP reveals that almost half of older adults surveyed are using credit cards to cover basic living expenses. Home equity is being tapped to pay bills. Toss in medical debts, student loans and auto loans, and the evidence is overwhelming that the accumulation of debt signals that too many older adults are living on a financial precipice in their retirement years.

For those older borrowers struggling to make their debt payments, the situation seems reminiscent of the haunting lyrics from Woody Guthrie's 1946 song "The Debt I Owe."

Every day, several times a day, a thought comes over me
I owe more debts than I ever can pay back more money than I'll ever see.

Editor’s note: This article is part of our “Debt Free” series, a Next Avenue initiative made possible by a grant from the RRF Foundation for Aging.

Chris Farrell is senior economics contributor for American Public Media's Marketplace. An award-winning journalist, he is author of the books "Purpose and a Paycheck:  Finding Meaning, Money and Happiness in the Second Half of Life" and "Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community and the Good Life." Read More