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Home>UPDATE: Why higher interest rates are going to hurt retirees

UPDATE: Why higher interest rates are going to hurt retirees

UPDATE: Why higher interest rates are going to hurt retirees


By Olivia S Mitchell

Older Americans are deeper in debt

The Federal Reserve's decade of "quantitative easing" will soon end. With this change in policy, we should expect not one but several interest-rate increases over the next few years.

These higher interest rates will come as an unpleasant shock to those who hold far more debt than in the past, especially adjustable-rate debt (http://www.marketwatch.com/story/adjustable-rate-mortgages-make-a-comeback-as-rate-rises-loom-2017-03-10). One group particularly vulnerable to Fed policy changes: older Americans.

Specifically, people age 50-80 have seen their debt rise by 60% between 2003 and 2015, whereas leverage for younger borrowers dropped over the same time frame, according to the Federal Reserve Bank of New York. Baby boomers have racked up mountains of unpaid credit-card bills, student loans for themselves and their children, and payday loans.

Another reason today's older Americans are deeper in debt is that they bought far more expensive homes, and paid for them with smaller down payments, compared to the past.

I vividly remember Archie Bunker's mortgage-burning party on the television show, "All in the Family," which conformed to my parents' expectation of paying off the house before retirement. Nowadays, by contrast, few people retire owning their homes free and clear, meaning they will carry debt for years (https://www.nytimes.com/2016/11/22/health/new-old-age-mortgage-debt.html?mcubz=3), perhaps even for the rest of their lives.

Our recent study (http://www.nber.org/papers/w23664) on three generations of older participants in the Health and Retirement Study (a longitudinal project sponsored by the National Institute on Aging and the Social Security Administration) showed that almost one-quarter of those in their mid-50s now hold debt that exceeds half their assets vs. fewer than one-tenth in the early 1990s. Moreover, almost one-quarter of that age group has less than $25,000 in savings vs. 17% in the previous cohort.

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