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June 11, 2011 at 05:26 PM
The 23rd annual Morningstar Investment Conference closed Friday with a lunchtime address from David Laibson, a professor of economics at Harvard University. Entitled “The Age of Reason: Financial Decision-Making Over the Life Cycle,” the hour long presentation provided attendees with a stark look at how society treats the elderly, especially in the financial realm.
He began by noting the “two faces of aging,” one that is of healthy, active seniors happily living out their retirement; the second is more bleak, with dementia involved more often than not.
“The movie The Note Book featured a woman suffering from dementia and memory loss,” he said. “The manner in which she is portrayed is one of an elegant, well-dressed senior that gave no hint that she was ravaged by the disease.”
He noted that 20% of those age 65 and older report being taken advantage with an unsuitable financial product. But he added the figure is significantly lower than reality, as many seniors never realize they were taken advantage of, and therefore unable to have it reported.
He then noted when individuals are age 20, they are charged higher fees and interest rates, on average, for loans. The fees and interest rates then decline until they’re in their 50s, before they begin to rise once again.
“You might say it’s a function of their finances, but the 20 and 65-year-olds had better FICO scores,” he said. “So why does this happen? I’d like to say all loans are commoditized, but the reality is they are a function of supply and demand, and depend on negotiating skills. The simple fact is those in middle age are better negotiators.”
He then turned to credit cards, and described the tactic many companies take by offering to waive interest charges for a year on balance transfers. Included in fine print is the fact that if any purchases are made using the card, the zero interest portion of the balance must be paid off first, and the high balance charges are paid off last.
“It’s a real life financial IQ test,” Laibson said. “Using the card immediately wiped out what was in essence an interest free loan. The old and the young didn’t figure it out.”
