By: Owen Davis
Most U.S. households got an unexpected financial boost during the pandemic, a result of both reduced consumer spending and robust stimulus programs. Yet as government spending programs have lapsed and high inflation has persisted, those financial cushions have deflated. Economists at JPMorgan Chase now expect aggregate “excess savings” to be depleted by mid-2023—a position that many lower-income households likely already occupy.
As documented in the Older Workers and Retirement Chartbook, a joint project of the Economic Policy Institute (EPI) and the Schwartz Center for Economic Policy Analysis (SCEPA), millions of older households experience financial fragility, including more than half of lower-income older households headed by an adult ages 55 to 64 years old.
We define financial fragility across four dimensions: a lack of ready cash to supplement lost income, risky levels of mortgage debt, excessive non-housing debt (including credit card debt, auto loans, and student loans), and rent burdens (see the chartbook for technical definitions).
Across all the dimensions, fragility reflects households’ potential inability to stay above water in the face of adverse shocks such as job loss or sudden illness. While it is self-evident how low liquid assets in the form of cash and bank account balances contribute to fragility, debts and rent burdens add an additional layer of risk to household balance sheets. Families going through hard times may be able to cut back on discretionary spending to some degree, but they have fewer options for cutting back on rent payments or debt obligations. It follows that lower-income households, which already spend less on discretionary items, face heightened vulnerability.
For financially fragile households nearing retirement, adverse shocks have ramifications not just in the current period but through their future retirement years. Households facing a liquidity crunch may be forced to draw down already-meager retirement savings to make ends meet. Such slippages and leakages are unfortunately pervasive with defined-contribution retirement plans such as 401(k)s.
According to the EPI-SCEPA metrics, financial fragility has grown in recent decades. Using data from the gold-standard Health and Retirement Study, which has tracked older households’ finances and wellbeing since 1992, we find that fragility increased steadily over the time period.
Part of this increase is associated with the mortgage boom preceding the 2008 financial crisis, a trend reflected particularly in growing levels of fragility for the upper-middle class (top 50-90% by income) and the upper class (top 10%). Accordingly, as households reduced their debts in the wake of the great recession, fragility fell for the upper and middle classes.
Yet the trend for the bottom 50% of the older population by income kept up. The share of this group that is financially fragile rose from roughly one-third in 1992 to 54% in 2018, the last year for which we have complete data. For this lower-income group, mortgages explain only part of the trend. Other contributors include growing rent burdens and rising levels of non-housing debt, including student loans (older adults frequently take on the student debt of their children).
These trends are reflected in other research. A Government Accountability Office study in 2021 found increasing levels of debt and exposure to debt for older households over the past three decades. A 2020 study by Barbara Butrica and Stipica Mudrazija found that households age 70 and older have experienced a significant increase in debt and falling credit scores.
For policy makers, the persistence of financial fragility among older households has several important ramifications. Most importantly, retirement savers need a safe and secure vehicle for accumulating savings that is not vulnerable to the risks and leakages associated with the do-it-yourself 401(k) system. The inadequacy of this system was brought into sharp relief when, in the depths of the pandemic, U.S. lawmakers suspended penalties on 401(k) withdrawals. This encouraged older households to sacrifice their standards of living in retirement in order to make short-term financial commitments.
An understanding of the pervasiveness of financial fragility among older workers also underlines the importance of policies that focus on the labor market prospects of older workers, especially age discrimination laws, which are vital to protect workers from being pushed out of the labor market involuntarily. Finally, bolstering and protecting Social Security will ensure that older adults who face shocks to their retirement savings can stay out of extreme poverty in retirement.