January 16, 2007

Seniors in Debt

Recent stories about the plight of seniors bring to light the growing problem of money not stretching as far as it once did. Today, the elderly are in the unfortunate situation where they benefit very little from cheap imported goods manufactured in Asia - the key to what some call an "era of low inflation".

Their money is increasingly spent on life's essentials - food, utilities, and medical costs - all of which have risen at a brisk pace in recent years. In many cases, the combination of a pension and a paid off home has been replaced by a meager retirement income, high bills, and a reverse mortgage.

A decade ago, homes were routinely passed on free and clear to surviving children, ten years from now heirs may be surprised to find out how little is left after years of borrowing by their parents to make ends meet.

According to this report from the U.K., inflation is now running at almost 10 percent for pensioners. With interest rates rising, those on fixed incomes who must access credit to square the books each month find themselves getting further and further behind.

Stateside, an increasing number of senior citizens are turning to reverse mortgages and credit cards to make ends meet. It didn't used to be this way and it flies in the face of government pronouncements that inflation is under control.

For decades, social security and pensions provided a stable income in retirement. That is still mostly true today, the problem is that living expenses are rising much more quickly than income as demonstrated a year ago when the average monthly social security increase was about $35 while Medicare premiums increased $28.

In this report from Texas, we learn first hand what it is like for some:

When Miss Daisy, 65, totals her monthly bills they amount to usually $200 more than her income. She relies on credit cards to bridge the difference. 'I have no savings, so I have no choice,' she said.

When she adds up her monthly bills for her mortgage, car loan, electricity, gas, water and phone, they exceed her income from Social Security and a part-time job by almost $200.

"I rely on my credit cards to make ends meet," said the 65-year-old Dallas woman, who asked that her last name not be used. "I have no savings, so I have no choice."

She owes more than $7,000 on three cards.

Seniors who grew up in frugal times and have usually been reluctant to go too far into debt are turning increasingly to credit cards to make do in retirement, says a study by the National Consumer Law Center.

"Older people have generally held less credit card debt than younger consumers, but their generation is catching up," said Deanne Loonin, the principal author of the report by the Boston-based consumer advocacy group.

The study quantifies a trend that credit counselors have seen recently. It found that the average credit card debt for consumers 65 to 69 skyrocketed 217 percent over the last decade to $5,844. Researchers calculated the inflation-adjusted increase by examining Federal Reserve data on the assets and liabilities of American families.

The consumer advocacy group's report blames the trend on a combination of seniors' shrinking or stagnating incomes, higher expenses for housing, medical care and utilities, and creditor practices that push seniors to borrow.

"It's not just that elders have more debt than before, but that many are buried in unaffordable debt," Ms. Loonin said.

It's a sort of long, slow squeeze for most seniors and it must be particularly hard for those who have eschewed credit and debt for most of their lives to be forced to rely on it now.

Ask retirees what they think of lower prices for iPods and PCs and the low inflation rate of only two percent - you are likely to get an earful.

Unfortunately, things are probably going to get worse as baby boomers enter their golden years - an entire generation has been conditioned to accept high debt loads in exchange for rising asset prices. In the end, this may not prove to be a very good long term plan.

A 2004 study by Demos, a New York-based research institute, found that consumers within 10 years of retirement are spending an average of one-third of their income on debt payments.

That's partly because some had children later in life and are paying for their youngsters' college education into their late 50s and early 60s. Others have become caretakers for frail parents. Still others have simply spent too much.

"For a variety of reasons, boomers won't have the nest eggs they'd like, and they won't have the pensions and health care benefits that many of today's retirees enjoy," Ms. Cobb said. "Things will only get worse."

It looks like the baby boomers are going to get a retirement wake-up call in coming years.

It didn't have to be this way.