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Retirement Planning > Social Security

Rising debt keeps older Americans working longer

By Maria Wood

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Older Americans now shoulder a heavier debt burden, and it’s forcing them to stay in the labor force longer and delay claiming of Social Security. So found a research paper released by the Center for Retirement Research at Boston College.

The impetus of the study, written by Barbara A. Butrica and Nadia S. Karamcheva, was to ascertain whether indebted older adults would continue to work to settle their obligations, or claim Social Security sooner if they are unemployed or not earning enough to pay off their loans. Overwhelmingly, the researchers found, debt-burdened older workers are choosing to stay in the workforce longer rather than claim Social Security benefits as soon as they are eligible.

Before they came to that conclusion, Butrica and Karamcheva outlined some fairly startling statistics on household debt in the U.S. and how it’s increased in recent years. Citing data from the Federal Reserve System’s Board of Governors, the typical debt-encumbered family owed $70,600 in 2007, a significant jump from the $23,300 number charted back in 1989. By 2010, the median value of household debt was $70,700, with debt payments accounting for roughly 18 percent of their disposable income.

Those nearing retirement, in particular, are now more likely to not only carry debt, but have a heavier burden as well. Between 1998 and 2010, the percentage of adults between 62 and 69 with any type of debt rose from 48 percent to 62 percent. What’s more, the median value of per-person indebtedness climbed from $19,000 to $32,100 in 2010. Accordingly, the average debt-to-asset leverage ratio increased from 10 percent to 18 percent.

The impact

As these debt-burdened pre retirees prepare for retirement, what are they more likely to do: work longer, or claim Social Security sooner? Their solution, according to Butrica and Karamcheva, is to stay employed and thus postpone claiming Social Security.

Here are the numbers:

  • Nearly half of adults between 62 and 69 with debt are working, compared to one-third of those without debt.
  • Seventy-one percent of older adults with debt receive Social Security payments versus 78 percent of those without debt.
  • Those with debt are 8 percentage points more likely to work and 2 percentage points less likely to obtain Social Security than those without debt.

Other factors that weigh heavily in the decision to remain employed into their 60s and beyond is the amount of debt (an increase of $10,000 ups the likelihood of working by 0.7 percentage points and reduces the chance of claiming Social Security by 0.3 percentage points) and whether that debt comes in the form of a home mortgage. Nearly 65 percent of homeowners with mortgages are still working at age 64 compared to 54 percent of those without mortgages. Moreover, 50 percent of homeowners with mortgages have yet to claim Social Security by age 65, while only 35 percent of those without mortgages have not collected Social Security benefits.

Overall, having debt reduces the probability of fully retiring by 22 percent and the chance of claiming Social Security benefits by 14 percent.

The study’s authors conclude that working longer can bolster retirement readiness, especially for those with debt. However, they also point out that age and ill health could prevent many older Americans from working for a lengthier stretch. For those with debt, that may mean selling their homes, taking out a reverse mortgage or declaring bankruptcy. Optimally, pre-retirees should enter their retirement years debt-free.

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