Ask the Experts: Does Over-50 Credit Card Debt Spell Doom for Retirement?
In this edition of our “Ask the Experts” series, we examine the causes and implications of rising credit card debt among Americans approaching retirement age with some of the foremost experts in the fields of economics, sociology, retirement planning, management, and law.
Credit card debt is on the rise among Americans age 50 and older, according to a joint study from the AARP’s Public Policy Institute and the research organization Demos, sparking concern about the financial well-being of a significant population segment as it approaches retirement age.
The study, titled “In the Red: Older Americans and Credit Card Debt,” found that the average person age 50+ carried a credit card balance of roughly $8,278 in 2012, compared to $6,258 among younger folks. Not only is such a large disparity an aberration from the 2008 version of the study, which revealed relatively consistent debt levels across age groups, but it also speaks to broader societal and economic issues that have evolved in earnest since the Great Recession. This is especially apparent when you consider the types of expenditures that are fostering these prodigious debt figures.
- Half of Americans 50+ are paying for medical expenses on credit, averaging a balance of $893 in this expense category alone.
- 49% and 38% are leveraging credit card debt to make house and car repairs, respectively.
- 34% are leveraging credit to pay living expenses, such as food and rent.
- Around 25% report that job loss has contributed to their credit card debt, while 23% say they’ve used money to help family members who are having financial problems.
Many people might be inclined to simply chalk these statistics up to the economic hardships of the past few years and assume that things will level out as the economic recovery progresses. After all, once people over the age of 50 pay off their plastic, they’ll still have retirement savings accounts, 401(k)s, and home equity to fall back on, right?
Not necessarily. The study also revealed that 16% of people age 50+ used equity from their homes to pay down credit card debt last year, while 18% dipped into their retirement accounts. In other words, the final credit card debt numbers might actually be worse, rather than better, than they initially seem.
In order to get a better sense of what’s caused this curious landscape as well as its broader economic impact, we turned to a few experts in fields ranging from retirement planning to economic policy. You can check out each expert’s insights by clicking their respective name below, or simply jump to the Takeaways section in which we boil things down into a few concise conclusions and offer tips for retirees-to-be eager to get out from under the burden of credit card debt.
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Hell yes, we should be worried about it. These are people who are approaching retirement, which is a very financially risky time of their lives, particularly if they’re on a 401(k) rather than a pension which seems to be the way our society has moved in the last generation. They’re very vulnerable. … It’s very, very difficult for an older person to get a job. I think what we’re seeing in the increase in the average amount of credit card debt is nothing more than a reflection of these people are financially struggling and have not been able to find jobs. They have probably been on the job market for 18 months to 2 years and can’t find anything because at 50 they’re considered used up. I’m 51, and I’m like, ‘I don’t feel used up; I’m just hitting my stride.’ Employers don’t want to hire them. …
Our economy is in the tank. We can say, ‘well, there’s been a 0.2% decline in unemployment, that’s great!’ Where have the jobs come from, what kinds of jobs are out there? They tend to be service jobs that pay very poorly, and they are not going to people 50 and over. That’s the age group that’s having a really hard time rebounding in this economy, and they’re trying to make up the difference with their credit cards. … Can you imagine going into retirement with that? At some point you have to retire, but there are a lot of people who are my age and 10 years older who are saying, ‘I will never retire; I will work until I die.’ Like what the hell? What has happened? What has happened in our economy? … My hunch is that they’re spending a greater period of time in unemployment, the jobs they’re finding are inadequate – the income is inadequate, and they just can’t make it. And they’re turning to credit cards. Americans have always relied on credit. I mean, this is nothing new. It’s just that we’ve never relied on it to this degree before. If you go back a generation, maybe two, people were owning their homes and out of debt by the time they were 55 or 60 years old. That ideology has changed, unfortunately, and it leaves them very, very vulnerable.
So, they’re just at the mercy of the economy?
Yes. A lot of us had emergency funds. It was called our 401(k) and we’ve been putting our retirement into it for the last 30 years. Two years ago that thing hit the tank, and we had people who lost half of their retirement. They had a safety fund. That had it, and Wall Street walked away with it. But they had it. They played by the rules. They put in their monthly investments. It’s gone. They had that safety net that was supposed to get them until the day they died and they got ripped off. So, yeah, ideally they should pay that credit card off but, hell, they know that. I mean, they know that better than you and I do. They’re the ones who are drowning in it, who are freaked out because they can’t make that minimum monthly payment. They’re calling the credit card company and saying, ‘please work with me,’ whatever that’s supposed to mean – ‘please don’t raise my interest rate.’ But they know the answers better than you and I do because they’re living it, and if they could fix it they would.
It’s not surprising since they would have much more access to credit. They probably have much higher incomes than people who are younger, and they would have had longer job histories and no doubt other assets as well. So, the credit card companies would feel more confident extending credit to them and multiple cards would be available. As to whether this poses a real threat to older people’s retirement, that relates a little more to what they’re spending the money on. If it’s a matter of cash flow or they’re using it to rack up airline miles in order to take a trip, that’s one thing. If they’re rolling over the debt month to month, however, that is a more serious concern and may reflect the fact that some have lost their jobs or have had income cutbacks and are using credit cards to pay for groceries and basically finance day-to-day expenses. There’s no doubt that if they’re saving for retirement, the very best investment they could make – one that would return as much as perhaps 18% a year – would be to get rid of any credit card debt. … That should be sort of mission No. 1: Pay down the credit card debt so that you’re not paying these ridiculously high interest rates.
Secondly, their home mortgage is another issue. That is, are they still paying their home mortgage, has that been paid off, are they using their credit cards simply because it’s more convenient than a home equity line of credit which would be cheaper but is more of a hassle to get started? If their home is already mortgaged to the hilt, that presents a whole different issue and the data about average balances just doesn’t tell us what any specific older person is going to be indebted with.
A further conflating variable is when you compare the credit card debt of households of different ages, one reason why the younger persons’ household’s [debt] may be much smaller is they’re of course dealing with their student loan debt. Hopefully, people in their 50s either don’t have any student loan debt anymore or graduated in a time when they didn’t need to take on so much student loan debt, but the point is, what really matters is total indebtedness: student loans home mortgages, car loans and credit cards as a percentage of income and assets. If they are high on their credit card debt but have paid much of their mortgage down and don’t have any student loan debt, I would be less worried about that than if they were basically trying to tap any recourse, including one with as high a maintenance cost as credit cards. It’s almost impossible to come up with a scenario where that’s a smart strategic move.
What are the implications of people not getting a handle on their credit card debt as they enter, say, their 60s?
At a minimum, of course, they have much less savings to live on, and they may not be able to retire on schedule or they may be having to rethink retirement entirely. Another version is they’re going to take Social Security as soon as they can [and] it will not be enough. It was never intended to be [a] self-sufficient retirement plan; it was only supposed to be one of three components – the others being employer-provided pensions and savings. What this is suggesting is that that savings component is either wiped out or substantially diminished because of the credit card debt. And so it may mean that they’re going to be taking Social Security while continuing to work. A point that a lot of people don’t realize is that you can go ahead and take Social Security at age 62 and for the current generation that means that you’ll be getting about 25% less than you otherwise would have. But there’s something else that sounds more technical, something called a ‘retirement earnings test,’ which means that if people are taking Social Security and still working – perhaps to pay down their credit card loans or at least to make the minimum payments – they may think that they are double-dipping but there is a retirement earnings test that applies until they reach full retirement age that is a pretty severe tax in effect, that says that if you make more than a little over $14,000, those additional earnings are going to reduce your Social Security benefits by about 50 cents for each dollar. So they’re getting a double whammy: they’re getting smaller benefits because they’re taking them early, and if this credit card debt indicates that they’re going to continue working at anything other than just a sort of minimal amount, they’re going to have even those reduced benefits reduced further because of their ‘excess earnings.’ And, as I said, it doesn’t take a whole lot to have excess earnings.
To what extent do people know about the penalties for taking Social Security early before they decide to do so?
There is, I think, some level of understanding that if you take benefits early you’re not going to be getting the full amount. So that if you would have otherwise been eligible to receive, say, $1,000 a month when you reach full retirement age, a lot of people understand that if you take benefits at age 62, you’re not going to get $1,000, you’re going to get about $750 on these numbers . But two things they typically don’t understand is that that reduced amount is not just until they reach age 66. They may think, ‘I’ll take $750 now and survive on that for four years until I reach full retirement age.’ No, it doesn’t work that way. You take the early retirement benefit, you get hit with the 25% reduction and that is a permanent reduction. So, even in four years when you become 66, 67 and so forth, it doesn’t ‘go back up.’ I don’t think that a lot of people realize that by taking benefits early they are basically short-changing themselves forever. A further point that a lot of men in particular don’t understand is … that when they pass away, their surviving spouse in many cases is going to be succeeding to the Social Security benefit they got. And so by going early, they not only reduce the benefit they receive, but they’re also going to reduce the Social Security benefit that their surviving spouse receives for the rest of her life. Then, in terms of this retirement earnings test, I think that is something they really don’t know about and won’t even see right away.
It could well be that you’re observing that a set of people have a certain lifestyle and certain bills to pay and if their income goes down or they lose a job, they try to retain that for as long as they can. Perhaps the easiest way to get credit would be through running up credit card debt. So, one could certainly have a rationale for that that would make some sense if you thought about what else would those people do to try to have short-term income, especially if they thought things were going to get better? You wouldn’t necessarily want to sell your house. You wouldn’t want to do things that would result in significant financial loss to you, so it might well be that given the available options that credit card debt doesn’t seem so bad.
Do you have any tips for retirees trying to make do on a fixed income?
The term fixed income is thrown around a lot, but few retirees really live on a fixed income. First, Social Security isn’t fixed any more than my wage is fixed. In fact, it wouldn’t surprise me if we went back and looked, that people on Social Security have gotten bigger increases than my university has given me over the last few years. So, what’s fixed? Fixed in real terms, more or less, so it rises from year to year. Obviously, this is a controversial issue of whether it should rise more or less, but that’s not really fixed. And if one has other forms of asset wealth, those monies are likely to go up or down and one has to be careful about that, but that’s really no different than the rest of us. What would be more likely to be fixed would be if a person has an employer pension, a [defined benefit] plan. They’re unlikely to be increased if a person is on other forms of government assistance. So, I wouldn’t necessarily use the word ‘fixed’ income. However, the budgeting issue is an important one, and that’s important for all of us in terms of trying to think about how to spend and save. Is it more important for the elderly who are no longer working? Probably yes, but it’s not unimportant for all the rest of us. Another big issue these days is just people accumulating debt and not being able to manage the debt.
Basically, by the time someone is 50 [years old] they shouldn’t, other than for very special purposes, have any credit card debt. Certainly they shouldn’t have any credit card debt if there’s an interest rate higher than the interest rate they’re getting on a fairly safe investment, which at the moment is pretty close to zero. So, other than things like free credit cards, it indicates something significant, way out of whack, that there would be any debt. On a sort of normal schedule, someone let’s say at age 50 should be pretty well paid down on their mortgage. So, I think it’s a general symptom of people having insufficient savings for retirement made worse by the fact that in a lower interest rate return on investment environment what would have been reasonable amounts of money for retirement five years ago are no longer reasonable amounts. Just from my point of view, it’s a little problem within the much bigger problem of inadequate savings for retirement, which is not limited to individuals. Pension funds are in the same boat and are at least starting to recognize that they need to have more in dollar amount of investment set aside to cover retirement. They’re just not adjusting fast enough.
What advice do you have for people over the age of 50 who are struggling with credit card debt?
Clearly, it’s paying down the debt as quickly as possible. It involves what I think people are already trying to do, which is saving at a higher rate. It is difficult to save at a higher rate when you have tax rates for most people going up, you have issues with energy which have sort of spread themselves through the economy, and probably the biggest problem is healthcare costs. I think people’s expectations as to the level of healthcare [they should receive] are out of line with reality. If we’re an economy that’s basically in the same spot where it was for most people in the late 1960s, we should have levels of healthcare that, taking into account certain advances in technology, aren’t going to be a whole lot different. And people clearly don’t have that expectation; the government doesn’t have that expectation. You can’t look at the whole retirement picture without looking at basically a world that’s unchanged in terms of the average person’s lifetime income from where it was 40-some years ago, but expectations of spending on healthcare that have maybe gone up three or four times since then. That’s the elephant in the room of all of this. So, it’s not like there’s any easy, magic thing people can do other than just try to rearrange things so that the debt that they have is something that they can pay off and is something other than credit card debt, which tends to come with very high interest rates attached to it. And a lot of people are clever already. They do things like borrow against 401(k) plans, which is always of course a bad thing to do, but if you can borrow against that at a low interest rate and you are for whatever personal circumstances stuck for a while, it’s clearly preferable to credit card debt. The world is set up so any sort of financial set-back is very difficult to recover from, and going through a typical person’s life, they’re going to have one or more of those at some point.
What broader societal dynamics are contributing to rising credit card debt levels among older consumers?
The whole society is going through a painful process of having to adjust expectations. The positive thing has been technological change, even in the healthcare area. One thing we have to do is probably backtrack a lot on regulations in healthcare. The valid comparison is we have the income of someone in the late 1960s, [yet] doctors in the 1960s did not spend half or more of their time dealing with paperwork. They spent a tiny amount of their time [on it]. There has to be a major rollback on the whole administrative cost of the healthcare system, whereas it seems that the current moves are just to make that so giant that you seriously discourage existing physicians from continuing to work and you start cutting into the people who want to go into the profession. That’s going to be very difficult for society to determine that they want to actually have a medical care sector that delivers medical care, rather than delivering bureaucracy. It’s the sort of thing where it takes some sort of reaching bottom or crisis point to get change there. But technology is the positive. With the same dollar resources that the U.S. was spending 40 or 50 years ago, there are lots of medicines and treatments that are available at now low costs because they’ve gone off patent that were just unimaginable back then.
How has the nature of retirement planning changed over the past few decades?
People live longer. Retirement is just a much bigger thing now. …. Originally, Social Security with the retirement age of 65 was not intended to cover a whole lot of people. If you look at the actuarial tables from back then, not many people got past 65. We’re looking at a future where we’re going to have enormous numbers people age 90 and above. We could well have enormous numbers above age 100. At some point, steps have to be taken at some level to start adjusting for that, and certainly the current political landscape doesn’t look like one where the adjustment will occur.
Takeaways + Tips
- Increased debt levels for older Americans could mean any number of things: A disparity between the credit card debt levels of people who are older than 50 and their younger counterparts doesn’t automatically spell doom for the former. One reason for that is older consumers tend to have a greater opportunity to incur debt since their lengthy credit histories and often higher income levels equate to higher credit limits. Or, they could conceivably be leveraging a 0% credit card offer to invest their would-be payments elsewhere for a short period of time.
- However, the reliance on credit card debt to cover day-to-day expenses speaks volumes: Since older consumers generally turn to credit only after they’ve exhausted savings, home equity, and loans against their 401(k), increased credit card debt indicates that little money is leftover for retirement. It also implies that they’ve been struggling for some time now and something needs to change soon if their situations are to improve.
- Indebted consumers age 50 and up are behind schedule for retirement: The traditional life schedule that most people strive to emulate entails buying a home in your 20s, paying off a 30-year mortgage by the time you’re in your 50s, and then building up a nest-egg for retirement which comes in your 60s. People currently in their 50s obviously aren’t debt free and are therefore looking at a much later retirement, if any at all.
- Social Security won’t cut it alone: Not only was the Social Security system based on a much shorter life expectancy than what we’re seeing now, but it wasn’t intended to be self-sufficient either. Rather, it was meant to supplement personal savings and a company pension.
- You should think carefully before taking Social Security benefits early: Opting for Social Security benefits at 62, as opposed to 66, will cost you 25% of your expected lifetime payout and may impact what your spouse receives as well. Earning more than about $14,000 per year between the ages of 62 and 66 will further reduce whatever Social Security benefits you earn during that time.
It’s easier said than done, but the first step toward retirement for consumers age 50 and up is obviously to get rid of any credit card debt as soon as possible. While the recent economic landscape has helped to fuel indebtedness, it ironically also offers a way out too. In the aftermath of the Great Recession, credit card companies have taken to offering 0% interest introductory terms for a year-plus in order to attract new customers who have high credit scores. In fact, the best card on the market – the Slate Card from Chase – offers 0% on transferred credit card debt for 15 months and charges neither an annual fee nor a balance transfer fee.
That means if you’ve been able to maintain excellent credit in the face of rising debt, you could trade in your current high interest rate for no interest at all without paying a dime in the process. Not only could that lessen your financial load in the short-term, but it could also save you around $1,000 in fees and finance charges while allowing you to pay down what you owe much faster. Just make sure to first use a credit card calculator to develop a conservative debt payoff plan because you never know whether 0% rates will still be available a year and a half from now.
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