Why Retirees Are Carrying More Debt Than Ever

September 16, 2016 — 1:57 PM EDT

It’s no secret that Americans are in debt. Most sources say that the average U.S. household is about $120,000 in debt (including their mortgage). Further, about $5,700 of that debt is attributed to credit cards ($15,000 if you look at only the households that carry a balance). Debt is not healthy for any age group, but it is particularly dangerous for those approaching or already in retirement, when earning power drops and seniors begin living on Social Security and savings. 

And the bad news is, recent reports show that older Americans are carrying more debt than they have in the past. Why is indebtedness increasing in the years when loans should be paid off, mortgages wiped out and investments at their peak.

What Studies Show

According to research by Robert Harrow reported on Value Penguin, the average credit card debt for Americans 65 and over as of March 2016 is $6,351. This is not the largest amount among age groups (that honor went to those 45 to 54 at $9,096).  But as CNBC pointed out, it is more than double the maximum monthly Social Security payment ($2,639 for those retiring at full retirement age). Younger retirees, aged 65 to 69 have more debt ($6,876), while those 75 and up have the least ($5,638 – the lowest debt level of any American age group).

The Employee Benefit Research Institute (EBRI) also found older Americans carrying significant debt in 2013, when it completed a 20-plus year study of the debt of the elderly and the near elderly. You can read the full report here.

The conclusion was that between 1992 and 2013, older Americans began to carry more debt. The debts they incurred were larger (even after adjusting for inflation) and they had debt later in life. The report is strictly data-driven and doesn’t offer any ideas as to why there is an increase in debt.

The Increase in Debt

Debt levels among all age groups have increased, driven largely by student debt and mortgage debt. However, the interesting trend is that debt is being carried longer than it has in the past. Instead of paying off most debts before retirement, many older Americans are carrying that debt into – and even through – their senior years. Back in 1992 53.8% of older households (heads of household ages 55 and up) carried debt. By 2013 that number had increased to 65.4%.

But the alarming fact is that not only are more households carrying debt, but that debt has increased dramatically. In fact, between 2001 and 2013 the average debt held by seniors increased 83%.

The real question is why? Here are some contributing factors.

Easy Access to Money

Between 2002 and 2007, access to money was incredibly easy. Those who were approaching their retirement years could head into the bank and get a loan for any (reasonable) amount that they desired. This could lead to overextension on auto loans, mortgages and other types of loans.

When the Great Recession hit, those who had taken out these bigger loans saw a significant drop in their retirement accounts. Suddenly they were unable to make larger payments on the debt, instead opting to do just the minimums. The result is more debt that extended farther into their retirement years than they had originally planned.

Decrease in the Value of Retirement Accounts

Many people who were getting close to retirement when the Great Recession came around in December 2007 saw their retirement plan essentially cut in half as stock and other values plummeted. The result was that a number of Americans who had planned to retire around 2008 – 2011 had to postpone that plan. Also, paying off debts may have been put on hold (only minimums paid) while the retirement accounts were bolstered. The trade-off was a larger retirement fund, but debt that lasted later in life. If retirees were able to hold firm instead of selling off, the value of many of these accounts eventually rebounded. But meantime the debts had grown.

If you are approaching retirement now, it's important to put a good plan in place. That plan should account for market fluctuations and down markets, as well as periods of significant growth. 

Increase in the Cost of Living and Student Loan Debt

Back in the early 1990s, the cost of living was significantly lower. There were no cellphone bills to pay – and no Internet – and it was a time of cheaper gasoline. Today, the necessities cost more and there are more of them. And the EBRI report points to a growing level of housing debt as one reason older families reach retirement with significant debts. This both adds to costs and removes a significant asset that can help support homeowners in their later years (see The Reverse Mortgage: A Retirement Tool). 

Then there's the issue of student debt. Younger Americans already know that the student debt burden has increased significantly. Those in their mid-20s tend to carry the most student debt of any age group – but in the early 2000s that debt was just under $5,000 on average, a pretty easy amount to pay off. By 2015, that debt amount had grown to little under $12,000 – more than double. Not surprisingly in the early 2000s most people had paid off the majority of their debt by age 35. In 2015, that point wasn’t reached until their late 40s. 

But some older Americans – who likely acquired their student debt way back in the 1970s or '80s – are still struggling to shake it. In 2014, Forbes reported that more than 16% of the $1.2 trillion in student loan debt belonged to people over 50, according to the New York Federal Reserve Bank. The reporter talked to a 60-year-old still paying off $75,000 worth of loans from her student days in the '70s. 

And even if they did pay off their own student debt, many older Americans went into debt again to help family members go to college. For example, many parents took out federal PLUS loans, which generally have higher interest rates than federal loans granted to students. For example, the 2016-17 rates for federal direct subsidized and unsubsidized student loans are 3.76%, while PLUS loans cost  6.31%. Parents and other relatives helping with student loans, such as grandparents, should note that up to 15% of Social Security benefits – and 100% of  tax refunds – can be withheld to pay off student loan debt (see Seniors: Before You Co-sign That Student Loan).

The Bottom Line

Debt is a significant problem for many older Americans. The EBRI report notes that "the percentages of families whose debt payments are excessive relative to their incomes are at or near their highest levels since 1992. Consequently, even more near elderly and elderly families are likely to find themselves at risk for severe changes in lifestyle after retirement than past generations."   

If you are approaching retirement, take time to analyze your debts and strategize ways to eliminate or reduce them. Be especially careful of taking on more, especially agreeing to requests to co-sign student or other loans. You have less time and can expect fewer resources to repay loans if the principal borrower falls short. There's nothing to prevent you from making gifts of money, if you can afford it, without adding to your potential debt load. If you are already in retirement, work with a financial advisor or debt counselor to retire your debts as much as possible.

Especially if you're married, focus hard on reducing debt before either of you dies. Depending on the state and the type of debt, a widow(er) may or may not be liable for a deceased spouse's debts. Children generally are not (see Debt After Death: Should Kids Pay for Their Parents?). But it's best for everyone if those issues never arise.