There was a time when the idea of having debt on one’s personal balance sheet was heavily frowned upon. It was considered prudent to eliminate debt as quickly as possible and take on new debt only as necessary. These lessons were imparted from parents to children, who generally heeded the sage advice of the experienced elder.
Following this advice has become much more difficult, if not impossible in some circumstances. Unmanageable medical expenses and a chronically under-insured populace are a huge factor in the increased level of debt among seniors. We’ve seen this since the turn of the millennium.
Conservative, low-yield investments and a dollar whose buying power has dwindled are also big factors. An abundance of cheap money in the form of home equity loans and sub-prime or low-interest mortgages have fueled this sharp increase with a vigor not seen in the past. Suddenly, taking on debt became the wise thing to do to.
In theory, using this cheaply obtained money to generate a higher return on other investments made sense. Debt became viewed as a tool for growing one’s net worth, rather than the boogie-man to be avoided at all cost.
Home Equity
As a result of this paradigm shift, we’ve seen debt levels among households with heads-of-household age 65 or older increase by more than double between 2001 and 2013. According to the US Census Bureau, the median debt within this age group was $40,900 in 2013.
Interestingly, levels of secured debt, while increasing among seniors age 65 and over, has not followed that trend in all age demographics. For example, it was once borderline unheard-of for a retirement-age individual to owe on a mortgage. That is no longer the case by any means. In fact, secured debt, such as mortgages and auto loans, doubled from around $25,000 in 2000 to $50,000 in 2011. In 1992, only 24% of homeowners above age 62 carried a mortgage. By 2010, this number had skyrocketed to 45%.
Availability of Cheap Money
Conversely, those under age 55 became less likely to have a mortgage on their books. Many factors are at play here, not the least of which is that it became nearly impossible to obtain a new mortgage for all but those with gleaming credit ratings post-2008.
The fact remains that retirement-age seniors were the ones increasing their levels of secured debt during this time frame. While seniors were increasing their collective debt-load, the census finds that overall household debt was decreasing. In fact, the number of households in general carrying debt dropped from 74% in 2000 to 69% in 2011. All the while, those in the 65+ demographic were on the reverse trend.
Rather than pay down existing mortgages, seniors became more inclined to try to take advantage of readily available home-equity loans with negligible interest rates to make other investments with a focus on growth of net-worth. Prior to 2008, many people, seniors included, took advantage of low rates by refinancing their existing mortgages, and thereby extending the amortization schedules further out in time.
Sub-prime era
During the throes of the sub-prime mortgage period, everyone was scrambling to take advantage of loans that were being doled out to anyone who asked, and at rates that were next to nothing. Perhaps unsurprisingly, seniors, who had never before witnessed such a phenomenon, were the hungriest for this new debt.
The newfound access to cash may have been used to complete household repairs that were put off, fund additional vacations, help their children or grandchildren pay for schooling or necessities, or any number of other options.
Unfortunately, a lot of this money went into securities markets, where the growth in value was expected to outpace the rates on the loans. This dream, as we all know, came crashing down in 2008, as the housing bubble burst. The economic ripple-effects were felt around the globe.
Suddenly, the new debt that had been taken on leading up to this became the exact burden that was once feared by older folks in past times who may have witnessed the great depression and had taken so many precautions to mitigate their vulnerability.
As the amount of debt burden carried by seniors increased, and the value of their investments plummeted, this has led to growing insecurity with regard to food, housing, and healthcare costs. This troubling trend has led to many seniors being forced to relocate to sub-par care facilities, simply by necessity, instead of a senior care facility where all their needs are being met.
It’s important that we carry these lessons forward as we plan for late-life care and accommodation for our next generation of aging loved ones. Preparing to cover these costs in a way that is based on sound economic principles, not on gambles, will help to ensure comfortable living for our family members with a minimum financial burden.
Feel free to contact our senior care management team for more information.
