The level of bankruptcies affecting Americans aged 55 to 74 is increasing and it’s just another example of how poor retirement alternatives, rising health care expenses, combined with low savings levels are all making the retirement crisis even more dire.
A new report by the Consumer Bankruptcy Project found that “the rate of people 65 and older filing for bankruptcy is three times what it was in 1991, the study found, and the same group accounts for a far greater share of all filers,” according to an article in the New York Times. The study found that February 2013 to November 2016, there were 3.6 bankruptcy filers per 1,000 people 65 to 74; in 1991, there were 1.2, affecting some 100,000 people in the study, although that number is underrepresented, according to people familiar with the subject.
Looking ahead, the news story said “the next generation nearing retirement age is also filing for bankruptcy in greater numbers, and the average age of filers is rising, the study found.” The Causes of Increased Bankruptcies Among Older Americans The academic report offered a few possible explanations about why this increase in bankruptcies is happening. One source cited in the report found that a “risk society” exists when “social institutions provide less ‘insurance’ against the vicissitudes of life, such as job loss or loss of one’s health and individuals are expected to assume responsibility to navigate these risks.”
The authors of this new report indicated that the financial decline and eventual bankruptcies of more elderly Americans “can be linked to the dismantling of the United States’ social safety net and the corresponding financial risks placed on individuals.” The authors go on to say that “during the twentieth century, countries that embraced the modern welfare state assured their citizens ‘a wide range of individual protections, the most basic of which are retirement security and access to preventive and curative health care.’ These policies of shared risk decrease the financial risks of aging citizens and obviate the need to take out unmanageable debt.” “The United States not only has not followed suit, but has also weakened many programs designed to help seniors through their retirement and final years.” This happened since the U.S. began following neoliberal economic policies that began during the Regan presidency (1981-1989.)
The Retirement Crisis in Now Permanent
More studies with similar finding should be in the pipeline since the facts that are driving this phenomenon—the demise of pensions, low wage growth, shifting more financial risk to less sophisticated investors–are now permanent. Rising health care expenses and the continued destruction of health care financial supports (Medicare and Medicaid) from federal and state programs will increase out-of-pocket medical expenses for many people. Other major financial factors are the roles home ownership and home equity play in building and preserving retirement wealth. As noted in my book, How 401(k) Fees Destroy Wealth and What Investors Can Do to Protect Themselves, home ownership is a good engine for building retirement wealth, but it can erode quickly in a recession where real estate values often drop significantly. For example, the U.S. economic recovery that happened since the economic recovery began in June 2009 until mid-2018, has lasted nine years. This makes the current recovery the second longest in U.S. history, according to an article in Seeking Alpha.
While Trump’s short-term tax cut for individuals has given this recovery more time, another recession is a historical constant. This means it is a valid point to consider whether home ownership should continue to be encouraged at the possible expense of other types of retirement savings. Specifically, people should balance how much money they put in their homes vs. their retirement funds. It would also be helpful for financial planners to develop tools to help people evaluate this trade-off between the pros and cons of building home equity wealth. After all, there is a danger of concentrating too much savings into housing. As the 2008 recession proved, it’s possible to lose a great deal of home equity as a home turns into a less liquid investment followed by a very long recovery trajectory.