This week, the U.K.’s Financial Times covered an important and overlooked aspect of how the U.S. treats its elders: bankruptcy. Stories of seniors filing for bankruptcy are heartbreaking and uncomfortable, so I am not surprised that it took a correspondent paid by a foreign newspaper (Patti Waldmeir) to tell this American story from the lobbies of our bankruptcy courts.
Like every good story, there are complicated victims and more than one perpetrator. Everyone has a role in the “crime.”
Victims In Elder Bankruptcies
Bankruptcy in the United States has undergone a rapid “graying” over the past few decades. In 1991, elders made up 2% of the bankruptcy relief claims; now the share is 12%. Those stark numbers come from a recent Indiana Legal Studies research paper, “Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society,” cowritten by professors Deborah Thorne of the University of Idaho, Pamela Foohey of Indiana University Bloomington, Robert M. Lawless of the University of Illinois, and Katherine M. Porter of the University of California, Irvine.
The leap in elder filers means about 98,000 families or about 133,000 elders out of 51 million people over 65 file for bankruptcy to get relief from all debt, excluding nondischargeable student debt (which is often incurred by co-signing the student loans of children or grandchildren). In most cases, those filing for bankruptcy come from the lower end of the income ladder. Of elder households that filed for bankruptcy in 2016, 78% made less than median total income.
Explaining Elder Bankruptcy
Several overlapping factors have contributed to the rise in elder financial distress.
Big impersonal forces are one set of reasons more elders are filing for bankruptcy. In the last 40 years, trade unions have weakened, real wages have stagnated, and good pensions have eroded—trends that catch up with people as they age. Companies have offloaded longevity and pension risk onto employees by eliminating pension plans or switching from defined-benefit plans to less-certain 401(k)-type options.
Another big impersonal force is the rise in medical costs, which has coincided with political decisions to have Medicare pay for a smaller share of elder health care. The longer people live, the higher the medical costs.
It’s always tempting to cite bad decisions on the part of the poor as a reason for a victim’s woes. The Financial Times mentions that some researchers blame aging boomers for diverging from their Depression-era parents who, unlike their aging sons and daughters, were averse to debt. Yet it is difficult in this case to separate the consumer side from the industry that markets to borrowers—it is unlikely that humans have changed as much as banks’ business model for credit cards.
Perpetrators and predators are another source causing bankruptcy risk among the elderly. Banks hype low-interest credit cards, even to elders who have just filed for bankruptcy. According to the Federal Reserve’s Survey of Consumer Finances, 60% of senior households had debt in 2016 and 29% of senior households owed money on mortgages or other housing debt. These rates represent a roughly 50% increase in the share of senior households holding debt over the last 25 years.
The Financial Times reporter also notes that positive psychological effects of bankruptcy may explain why people go to the unnecessary trouble of discharging debt in court. An advisor quoted in the story suggests elderly people file for bankruptcy not because they need to but because creditors—who can’t garnish their Social Security checks or squeeze “blood from a turnip”—will simply stop harassing them.
A Broken System
Whatever the role that personal psychology plays in the rise of elder bankruptcy, it is clear that America’s evolving labor markets and crumbling retirement system play a central role. Many older workers in their 50s are faced with superannuation. Discarded from the labor market, they can’t find decent work and can’t afford to contribute to their 401(k)s. The do-it-yourself 401(k)-based retirement system requires a great deal of luck: 40 years of steady employment and steady contributions.
Waldmeir, the Financial Times correspondent, did a great job in not blaming the victim. America has embarked on a 40-year economic experiment of do-it-yourself pensions, the breaking of unions, real wage stagnation, the common practice of discarding workers in their 50s, and cutting Social Security benefits by raising the retirement age. The effects of that experiment are now coming home to roost in bankruptcy courts across the nation and, more broadly, in the form of personal misery among aging boomers.
Maybe now it is time for an American news outlet to investigate the financial health of British elders. The elder poverty rates in the U.S. and U.K. both exceed the OECD average of mostly rich and developed countries, and both have faced sharply rising bankruptcies among their older population. Nearly 21% of elderly Americans face poverty compared to nearly 14% in the U.K. Whatever is the cause of the crisis in elder finances, it isn’t limited to the U.S.