(NASDAQ) - Americans in their 50s, 60s and 70s are carrying unprecedented amounts
of debt, a shift that reflects both the aging of the baby boomer generation
and their greater likelihood of retaining mortgage, auto and student debt at
much later ages than previous generations.
The average 65-year-old borrower has 47% more mortgage debt and 29% more
auto debt than 65-year-olds had in 2003, according to data from the Federal
Reserve Bank of New York released Friday.
The result: U.S. household debt is vastly different than it was before the
financial crisis, when many younger households had taken on large debts they
could no longer afford when the bottom fell out of the economy.
The shift represents a "reallocation of debt from young [people], with historically
weak repayment, to retirement- aged consumers, with historically strong repayment," according
to New York Fed economist Meta Brown in a presentation of the findings.
Older borrowers have historically been less likely to default on loans and
have typically been successful at shrinking their debt balances. But greater
borrowing among this age group could become alarming if evidence mounted
that large numbers of people were entering retirement with debts they couldn't
manage. So far, that doesn't appear to be the case. Most of the households
with debt also have higher credit scores and more assets than in the past.
"Retirement-aged consumers' repayment has shown little sign of developing
weakness as their balances have grown," according to Ms. Brown.
An important barometer of household financial health is the percentage of
this debt that is in some stage of delinquency, and that percentage has been
steadily dropping. Only 2.2% of mortgage debt was in delinquency, the lowest
since early 2007. Credit card delinquencies also declined, while auto loan
and student loan delinquencies were unchanged.
"The household sector looks much better positioned today than in 2008 to
absorb shocks and continue to contribute to the economic expansion," said
New York Fed President William Dudley in prepared remarks.
Part of the yearslong improvement in credit delinquencies owes to the fact
that older borrowers hold a growing share of the debt. Not only were borrowers
with the best financial situation able to maintain their debt during the
financial crisis, they have had an easier time taking on new debts in recent
years as credit standards have tightened.
By contrast, the overall debt balances of most young borrowers haven't grown
or have declined. The average 30-year-old borrower has nearly three times
as much student debt as in 2003. But these borrowers have so much less home,
credit card and auto debt that their overall debt balances are lower.
This shift for young borrowers could have "consequences in terms of both
foregone economic growth and young consumers' welfare," said Ms. Brown.
When government economists speak, it frequently sounds like they're teasing
their listeners with a parody of "other things being equal" academic nonsense.
But then you realize they're serious...
So here are the obvious, common-sense reasons why the above trends are unambiguously
bad:
Older people are carrying more debt not because they're optimistic about the
future but because they're struggling in the present. Their mortgages aren't
paid off because they've used all their free cash on health care and their
kids' upkeep and education. One of the notable features of recent (supposedly
strong) US employment reports is the large number of new jobs going to workers
55 and older. The implication is that people who in better times might be retiring
are now taking whatever work they can get to make ends meet.
And while it's true that older people default on their debt less frequently
than younger, it's also true that when economists start extolling low default
rates in a given sector it's generally a sign that that sector is about to
blow up. Go back through the history of junk bonds, for instance, and you'll
find the same kinds of statements just before defaults spike. This is from
a 2014 Barron's article:
Junk-rated corporate bonds don't yield much these days, but they don't default
much either. Moody's just reported that the U.S. high-yield default rate held
steady at just 2.1% in May, while the global rate fell to 2.3% in May from
2.5% in April. Things look pretty good for the year ahead too, according to
Moody's:
"Default rates have been remarkably stable as expected. Looking ahead, our
default rate forecasting model predicts that the global default rate will
edge lower to 2.1% by the end of this year before rising to 2.4% a year from
now.
Junk-rated companies have been big beneficiaries of the Federal Reserve's
low-interest-rate policies, which have fueled a clamor for high-yielding
debt among investors while allowing companies to refinance older bonds issued
at higher interest rates with new, lower-coupon debt. At this point in a
normal credit cycle you might see defaults starting to pick up, but this
Fed-subsidized credit cycle looks poised to last longer than most.
Now about the supposedly-improved finances of younger people: If you're 25
years old and already carry $30,000 of student debt, you're not going to borrow
much more. The following chart goes through 2014; in 2015 the average rose
by another $2,000.
Meanwhile, the jobs available to the relatively-young are skewing towards "service," which
is to say waiters, bartenders, medical receptionists, etc., which don't pay
enough to cover $32,000 of student debt, let alone new car loans and maxed
out credit cards.
The upshot: like most evolving financial trends in the developed world, this
one is unambiguously bad and getting worse. Debt, once it passes a certain
point, sucks the life out of a society and no amount of positive spin can hide
this fact from the victims.
