Baby boomers are carrying more debt into retirement  — most of it in home mortgages — than retirees of previous generations did, according to Wharton School professor Olivia Mitchell, who will discuss new research on senior indebtedness this week.

Wharton professor Olivia Mitchell will present new research at the AEA annual meeting Jan. 5-7, 2018.
University of Pennsylvania
Wharton professor Olivia Mitchell will present new research at the AEA annual meeting Jan. 5-7, 2018.

Mitchell will present a paper, titled "Debt Drivers Late in the Life Cycle," at the prestigious American Economic Association (AEA) annual conference, attended by thousands of economists and luminaries such as former Federal Reserve Board Chairman Ben Bernanke, Larry Summers, and Nobel Prize-winner Richard H. Thaler.

Her co-authors include Noemi Oggero and Annamaria Lusardi, both of George Washington University. They will present at the 2018 meeting, to be held in Center City from Friday through next Sunday. The Philadelphia Marriott is the headquarters hotel and the Loews Philadelphia the co-headquarters hotel, and a full program is available at https://www.aeaweb.org/conference/2018/preliminary.

Older Americans today are more likely to enter retirement with piles of debt compared with previous generations, with potentially serious implications for retirement security and the macro economy. And boomers' indebtedness close to retirement also leaves them especially vulnerable in old age, the paper found.

Using data starting in 1992, Mitchell and her co-authors examined three cohorts of baby boomers, and found that the latest cohort enters retirement with more house debt than ever.

"Boomers bought into the view that home prices never go down. They also buy more expensive houses with bigger jumbo mortgages, due to a combination of rising home prices and easier terms such as low interest rates. So when the financial crisis hit, that was a great shock to many," she said.

Today's boomers are entering retirement "sitting on way more debt – especially mortgage debt – than counterparts in the 1990s," Mitchell said, adding that the research is part of an ongoing project funded by the Social Security Administration and National Institute on Aging. They'll examine a fourth cohort of boomers soon.

Just how much debt are today's boomers retiring with?

The baseline average for those 56 to 61 years old equals $39,000 in total debt. However, most recently, boomers had $99,000 in debt – the bulk of it in mortgages.

"If you remember the Archie Bunker television show, he had a big party where he burned his mortgage – having paid it off finally. My own husband said to me, 'I'm from Ohio and we pay off my mortgage when we retire.' But that's not the case anymore" for most boomers, Mitchell said.

Other debt surprises for seniors?

More boomers are retiring with student debt, a finding that Mitchell and her co-authors didn't expect.

"A lot of them still hold debt on their own education. Student loans are very different than other debt; you can't discharge them in bankruptcy. We found that 5 percent of people over 65 are having their Social Security benefits garnisheed for student loans. That was something of a surprise."

Also, with the Federal Reserve raising interest rates, seniors will be spending more to maintain that debt.

"The Fed is likely to raise interest rates again in 2018, perhaps another three or four times. Certainly,  credit card holders and auto loan holders will immediately feel the increase. To the extent they have fixed-rate mortgages, it will take longer" to feel the effect, Mitchell said of homeowners.

Today's boomers "are behaving very differently as they head into retirement. People are much more vulnerable to interest rate hikes at older ages. That's something we need to pay attention to. We also find that people head into retirement feeling more financially fragile than before," Mitchell added, as 33 percent of them can't come up with $2,000 for an emergency.

What to do? Sell the big house, says Mitchell.

"Boomers today are entering retirement with a lot more debt. Why aren't they selling the big houses? Some are underwater, or were foreclosed upon, and home prices went down. Psychologically, people don't want to sell for less than they bought their house — even if they lived there for 20 years."

The big lesson: Housing is not an investment, and you don't always make a killing when you sell the house.

"I've owned three houses and I've just about broken even," Mitchell said.

And there are nonfinancial consequences — including worry, stress, and even shortened life expectancy. Laura Argys, an economist at the University of Colorado Denver, found a link between debt delinquency and mortality in a paper she co-authored titled "Killer Debt: The Impact of Debt on Mortality."

What else can boomers do if they're holding debt at an older age? Continue working.

"There's evidence suggesting older women work longer," Mitchell explained,"whether because of debt or maybe they're understanding retirement with debt is a dangerous place to be."