Getting Old and Going Under

By SAM URETSKY

The chickens have come home to roost. A research paper titled “Graying of US Bankruptcy: Fallout from Life in a Risk Society” posted online but not yet published in a scientific journal, reports that there has been a dramatic increase in the number of bankruptcies among older people. The paper was written by Deborah Thorne, Associate Professor of Sociology, University of Idaho; Pamela Foohey, Associate Professor of Law, Indiana University Bloomington; Robert M. Lawless, Max L. Rowe Professor of Law, University of Illinois; and Katherine Porter, Professor of Law, University of California, Irvine. It estimates the number of bankruptcies among Americans over the age of 65 and discusses changes that may be necessary in the future to deal with the costs associated with an aging population.

The data presented is significant. In 1991, there were 1.2 bankruptcies among people between the ages of 65 and 74. From February 2013 to November 2016, there were 3.6 bankruptcy filers per 1,000 people in this age range, an increase of 204%. Bankruptcy filing by the elderly has increased as a percentage of all persons filing for relief. In 1991, 2.1% of people filing for bankruptcy were over the age of 65, but while the rate among younger people has declined, the rate of bankruptcy among the elderly is up to 12.2% of all filings.

The authors of the paper describe the problem: “The magnitude of growth in older Americans in bankruptcy is so large that the broader trend of an aging US population can explain only a small portion of the effect.” In our data, older Americans report they are struggling with increased financial risks, namely inadequate income and unmanageable costs of healthcare, as they try to deal with reductions to their social safety net. As a result of these increased financial burdens, the median senior bankruptcy filer enters bankruptcy with negative wealth of $17,390 as compared to more than $250,000 for their non-bankrupt peers.”

Simply, neither the income of the average worker nor the social safety net have kept up with the costs associated with aging. People are living longer, in part as a result of better, but more costly health care. At the same time, the tripod that was designed to support people into their old age has been progressively eroded. Job security has virtually disappeared. Where people used to work in a single job through their career, or at least long enough to get a gold watch, current projections predict that today’s workers may change jobs 12 to 15 times in their working lives. While this will include fast food employment in high school, it also implies elements of insecurity later on.

These same jobs no longer offer a guaranteed pension. Rather, corporations no longer assume the risk of financing retirement income, but transfer it to the employee in the form of a 401(k) or 403(b) plan. These plans not only transfer risk from the company to the employee, but may limit the employee’s investment choices. Worse, many companies fail to offer low cost index funds. These funds, which follow market trends but have lower costs than actively managed funds, have generally been the best investment for small investors. In 2007, Warren Buffett made a $1 million bet against Protégé Partners that hedge funds wouldn’t outperform an S&P index fund. He won. Low expense index funds have generally outperformed actively managed funds with high fees.

Social Security, the second leg of the stool, is indexed to inflation, to keep up with loss of purchasing power, but the indexing is to the Consumer Price Index, and not to the proposed Consumer Price Index for the Elderly. It is known that the aged tend to spend a higher proportion of their income on food to be consumed at home, on home heating and household operation, and on medical care. They are also much more likely to own mortgage-free homes. They tend to spend relatively less than other people on restaurant meals, transportation, clothing, home furnishings and recreation. The increases in costs of medical care are particularly onerous for the elderly.

The third leg of the tripod is personal savings. Because retirement savings are tax advantaged they should contain the bulk of assets, but according to the Report on the Economic Well-Being of US Households in 2017 from the Federal Reserve Board, 40% of Americans can’t cover a $400 emergency expense without borrowing money or selling something. Still, savings may include equity in a house. The median home price in the United States is about $200 thousand, although tapping this money will require selling the house and incurring additional housing costs.

The simple reality is that Americans have to start voting their own self interest. There is some grounds for optimism. Donald Trump and his sycophants in Congress passed a large tax cut, offering the usual argument that giving more money to the wealthy and to corporations would lead to economic growth and raises. So far this tax cut has offered no more benefit than previous claims of trickle down, but this time the voters seem to have noticed. Republicans find that they can’t use the tax cut as a reason for reelection.

The next step is to take money back from the rich, undo the various tax cuts going back to the time of Ronald Reagan, and perhaps even before that. Raise the maximum amount that’s subject to Social Security withholding from $128,400 to $10 million, or maybe eliminate the upper limit entirely. Apply this money to the social safety net so that old people can be comfortable in their golden years. We the people owe more to our parents, and we certainly deserve better for ourselves.

Sam Uretsky is a writer and pharmacist living in New York. Email Email sdu01@outlook.com. See the paper abstract, with link to the full text, at (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=322657)

From The Progressive Populist, September 1, 2018

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