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.
Financial Goals By The
Decade
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.
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