Summary
Much of the attention to retirement preparedness focuses on asset accumulation in individual account retirement plans as well as the presence of defined benefit plans, but the other side of the balance sheet — debt — can potentially have a significant impact on the financial success of an individual’s retirement. Any debt that a family may have accrued entering or during retirement can offset any asset accumulations, resulting in less retirement income security.
This Issue Brief focuses on the trends in debt levels among American families, with a special emphasis on families with family heads ages 55 or older and those of different racial/ethnicity groups, as financial liabilities are a vital but often-ignored component of retirement income security. The Federal Reserve’s Survey of Consumer Finances (SCF) is used in this paper to determine the debt levels. The most recent data are for 2022, so they provide the first look at debt post-pandemic and provide a comparison with the 2019 prepandemic baseline.
In addition to the incidence and levels of debt, debt is examined in two ways:
- Debt payments relative to income.
- Debt relative to assets.
Each measure provides insight regarding the financial abilities of American families to cover their debt before or during retirement. For example, higher debt-to-income ratios may be acceptable for younger families with long working careers ahead of them, because their incomes are likely to rise, and their debt (related to housing or children) is likely to fall in the future. On the other hand, higher debt-to-income ratios may represent more serious concerns for older families, who could be forced to reduce their accumulated assets to service the debt at points where their peak earning years are ending. However, if these older families with high debt-to-income ratios have low debt-to-asset ratios, the effect of paying off the debt may not be as financially difficult as it may be for those with high debt-to-income and high debt-to-asset ratios.
This study by the Employee Benefit Research Institute (EBRI) found various results about the debt holdings of families.
- The share of American families with heads ages 55 or older who had debt increased continuously from 1998 through 2019 before decreasing in 2022. Despite this decrease, the 2022 level of 66.8 percent was 13 percentage points higher than the 1992 level of 53.8 percent and 3.8 percentage points higher than in 2007. The percentage with debt was lower for families with older heads. In 2022, 77.2 percent of families with heads ages 55–64 held debt, compared with 64.8 percent of those with heads ages 65–74 and 53.4 percent of those with heads ages 75 or older. However, the increase in the incidence of debt overall for this group has been driven in recent years by the families with heads ages 75 or older, where the share having debt increased from 41.3 percent in 2013 to 53.4 percent in 2022. In contrast, the incidence among families with heads ages 55–64 experienced small increases or declines during that period. The percentage of families with heads ages 65–74 with debt decreased by over 5 percentage points from 2019 to 2022 after minimal change in the years 2013 to 2019.
- In contrast, the average debt level increased from 2019 to 2022 but was not significantly different from its 2010 level. However, the ratio of debt to assets decreased from 2019 to 2022, showing that asset growth was higher than debt growth during this period. Additionally, the percentage of these families having debt payments in excess of 40 percent of income (a common threshold for determining if a family has an issue with debt) also decreased in 2022.
- Housing debt continued to drive the level of debt payments in 2022, while the nonhousing (consumer) debt payment share of income held relatively stable. However, the incidence of credit card debt increased for families with heads ages 75 or older in 2022, but this age group of families experienced a significant decrease in the median credit card debt held in 2022. In contrast, the incidence of credit card debt decreased for families with heads ages 55–64 while their median credit card debt increased in 2022.
- Younger families — those with heads younger than age 55 — have had a higher probability of having debt and higher debt payments as a percentage of income than older families. Yet, the trends from 2010 to 2022 were consistent across both age groups (below age 55 and ages 55 or older) on all debt measures, except for the increase in average debt and decrease in total debt payments as a percentage of income for the families with heads ages under 55, while these measures saw a decrease and an increase, respectively, for the older group.
- Families with Black/African American or Hispanic heads had higher debt-to-asset ratios but a similar likelihood of having debt but with higher likelihoods of having credit card debt and significantly lower probabilities of having housing debt than families with White family heads. Thus, the debt of the families with these heads is more likely the result of consumer debt, not housing debt, which would allow families to build wealth through homeownership. The higher incidence of credit card debt is especially acute among higher-income families.
While improving in many respects in the most recent years, the overall trends in debt are troubling in terms of retirement preparedness, in that American families just reaching retirement or those newly retired are more likely to have debt — and higher levels of debt — than past generations, specifically those who were reaching or in retirement in the 1990s. Furthermore, the percentage of families with heads ages 75 or older having debt, and specifically credit card debt, are at their highest levels since 1992. Thus, more and more families are carrying debt into and throughout retirement, as debt issues persist during the working years of the family heads. Consequently, families with heads in their working years appear to need help managing debt, which could be accomplished through financial wellbeing programs provided by employers that help improve money management. This could reduce families’ risk of running short of money in retirement due to a potentially lowered likelihood of holding debt while in retirement. Therefore, with reduced financial liabilities, workers in these families could better focus on work and feel more secure in retiring. This is even more pertinent for families with non-White family heads, as they have more debt, particularly credit card debt, relative to their assets than families with White, non-Hispanic heads.