Older Americans Going Deeper in Debt
By:
Lucretia Marmon, AARP Bulletin
March 2003
Older Americans
are going deeper in debt.
Unlike
debt-averse elders of previous generations, people over 50 today are
racking up big bills, taking on far more debt than they can handle.
So much so that
more than 450,000 of them filed for bankruptcy in 2002, reports the
Consumer Bankruptcy Project, a joint project of scholars at six American
universities. That's up from about 180,000 people over 50 who filed in
1991, says the project's Elizabeth Warren, of Harvard Law School, making
older Americans the fastest-growing age group in bankruptcy.
"Today's 50-
to 70-year-olds are leveraged to the max," says Leonard Raymond,
executive director of Homeowner Options for Massachusetts (HOME), which
offers older people life planning services. "They are involved with
credit cards and refinancing. They have a different perspective on
debt."
Easy credit and
hard economic times, experts say, are prompting older
people—particularly those 50 to 65—to accumulate mortgage and credit
card debt.
"With
stagnant retirement incomes and rising rent and medical costs, credit
cards increasingly are becoming the financial glue of the crumbling social
safety net of America's senior citizens," says Robert D. Manning,
professor at the Rochester Institute of Technology in New York and author
of "Credit Card Nation" (Basic Books, 2001).
The over-50 age
group collectively is still the country's wealthiest, with higher rates of
home ownership and more assets than younger groups.
Yet during the
1990s, the median total amount of money older people owed doubled, or
nearly doubled, in every income bracket, according to a 2002 study by John
Gist and Carlos Figueiredo of AARP's Public Policy Institute. Mortgage
debt rose from about one-third to over one-half of total elder debt.
"The good
news is most of the increased debt is for housing, an important
asset," Gist says. "The bad news is the burden is highest among
those with the lowest incomes."
Although debt
levels dropped slightly from 1998 to 2001, surveys on consumer finances by
the Federal Reserve Board show that debt overall among older people is up
substantially since the early 1990s. The amount of debt people carry
decreases with age. "Pre-retirees"—the 55-to-64 age
group—carry the most debt and the 75-and-over group the least.
Although
low-income 50- to 64-year-olds borrow less than high earners, they spend
more of their incomes paying it off, or file for bankruptcy if they can't.
Experts blame the financial problems of older Americans on an array of
factors, among them: job loss, medical expenses, death of a spouse,
divorce, financial support for children or grandchildren and less
retirement income.
Many say the ease
of acquiring credit cards, home refinancing and home equity loans also
gets people in over their heads. Added to this is a new attitude of
"debt tolerance" that obliterates budgets and savings.
And credit card
companies—some of which woo older customers regardless of their
creditworthiness—blame the ease of filing for bankruptcy for borrowers'
out-of-control credit card balances.
"Certainly
the 1990s' go-go stock market with its double-digit returns made the idea
of paying off debt seem foolish," says Larry Cohen, director of the
Consumer Financial Decisions (CFD) program, part of SRI Consulting
Business Intelligence in Princeton, N.J.
But it's job loss
and medical expenses that top the list of reasons for indebtedness and
bankruptcy.
Workers who lose
their jobs often use credit cards to tide them over. Belle L., 72, of
Minneapolis closed her catering business in 1994 because of a leg ulcer.
Within eight months she had run up $6,000 on her credit card. It took
working with a credit counselor, she says, to whittle down her credit card
balance.
For Duane Allen
of Yucaipa, Calif., the budget buster was the cost of operations he and
his wife needed starting in 1992, when Allen was 59. "We had no
money, so we put everything on the cards," he says. Their bills hit
$25,000 before they sought professional help.
The decline in
health care coverage for pre-retirees plays a role, too. Some 60 percent
of large companies increased premium costs to employees in 2002, and 45
percent of very small companies offered no coverage, according to the
Kaiser Family Foundation in California.
Medicare coverage
is no guarantee of fiscal health either. Beneficiaries have copayments of
more than 20 percent on medical bills, and each hospitalization can cost
hundreds or thousands of dollars.
In 2001
out-of-pocket spending by enrollees in Medicare+Choice HMOs who were in
poor health averaged $3,588, triple the cost for enrollees in good health,
according to the Commonwealth Fund, a research group in New York City.
The spiraling
cost of prescription drugs also drains budgets. Dallas residents James,
82, and Clarissa B., 78, used their $1,500 Social Security check, their
chief source of income, to pay the rent and for their medications, which
cost $800 a month. They charged their living expenses.
When the couple
could no longer cope with their bills, they turned to the Money Management
Program, which assists older residents with financial problems. Their
credit card tab had hit $9,000.
"Nineteen years ago our clients did not have credit cards,"
HOME's Raymond says. "Now they owe on average $9,000 of credit card
debt."
And while
individuals over 50 are still more likely to pay off monthly credit card
balances than younger people, many are so overwhelmed by debt that they
borrow against their homes to stay afloat.
Once an economic
safe haven, the older American's home has become a cash cow. Low interest
rates and rising home values have spurred a refinancing frenzy as older
homeowners replace their 30-year mortgages with shorter ones.
A growing
percentage of mortgage debt, however, consists of home equity loans or
lines of credit, often spent on cars, vacations and home improvements.
"Real estate
is not as liquid as some people think," says Cohen of CFD in New
Jersey. "If you run into trouble, things can go downhill fast."
Homeowners with a
lot of debt or low credit ratings are prey for lenders who charge
outrageously high fees and interest rates. Borrowers who fall behind on
loan payments could lose their homes.
Financial experts say high debt burdens could be here to stay as baby
boomers, who are more comfortable with credit, get ready to retire.
"Demographics,
attitudes and economic and social trends, along with the mammoth effort by
financial institutions encouraging people to borrow, make a surefire
recipe for trouble in retirement," says CFD's Cohen. "If you
hammer on a nail long enough, it sinks in."
But help is
available. Debtors who are unable to get their finances back on track
themselves are turning increasingly to debt counselors. The 1,300
accredited nonprofit agencies of the National Foundation for Credit
Counseling, based in Silver Spring, Md., helped 1.5 million households in
2002. Consolidated Credit Counseling Services, a large agency in Fort
Lauderdale, Fla., reports a 25 percent increase in recent years of clients
over age 50.
Certified
counselors at agencies like these help clients make budgets, cut spending
and negotiate with creditors to lower payments. Reputable agencies tailor
payment plans to the circumstances of each client, sometimes offering
services for free.
"Choose a
debt counselor the way you would a doctor," advises Tiff Worley,
president of Minneapolis-based Auriton Solutions. "If someone sounds
like they're selling you something, they probably are."
Lucretia
Marmon is a freelance writer in Washington, D.C.
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