Debt Leads to Delayed Retirement

Older households approaching retirement are becoming increasingly more indebted and leveraged, which results in an inability to cover their debt with financial assets.

Older households approaching retirement are becoming increasingly more indebted and leveraged, which results in an inability to cover their debt with financial assets. This has implications for retirement decisions. Older adults with more outstanding debt commonly respond to liquidity constraints by working longer, delaying retirement and postponing claiming Social Security benefits.

The findings are based on data from the Survey of Consumer Finances (SCF). Researchers for the IZA Institute of Labor Economics used the data to study how the presence and level of debt impacts the likelihood that older adults continue to work and their decisions about when to retire and collect Social Security benefits.

Typically, the researchers found that more household debt translates to an expectation of about an extra 2.5 months of full-time work and an additional year of overall work. Individuals with a negative net worth or more debt than financial assets work for an additional two years.

On average, a doubling of an individual’s debt reduces the likelihood of receiving Social Security benefits by 1.3%, increases the likelihood of working by 1.1% and reduces the likelihood of being retired by 1.0%. Moreover, regardless of the type of household debt, the impact of a 1% increase in the level of debt has a similar magnitude effect on the tendency to work or retire as a 1% increase in the amount of overall debt.

The study determined that mortgage debt remains the most significant and common source of debt among older households, representing 69% of total debt in 2016. Older adults with a mortgage are 4.8% less likely to be retired and 3.1% less likely to receive Social Security benefits.

Between 1989 and 2016, student loan debt increased by the greatest amount among older households compared to other categories of debt and was the highest among older households in the bottom and middle wealth distributions. In addition, student loan debt reduces the probability of receiving Social Security benefits and being retired among older adults with the lowest wealth.

The findings regarding the impact of household debt on claiming Social Security benefits are more nuanced. Households between the age of 62 and 70 with some degree of debt that can be covered by financial assets are more likely to delay claiming their benefits, while households with a higher level of debt are more likely to claim benefits early.

Source: “Is Rising Household Debt Affecting Retirement Decisions?” by Barbara Butrica and Nadia Karamcheva; IZA, April 2020.