Seniors and debt: not a good combo

In a disturbing new trend, more and more seniors are carrying debt into retirement.

We have been warned by everyone from our central bank to the International Monetary Fund that the level of household debt in Canada is too high and that we’d better cut back before it’s too late.

And new data confirms that most Canadians aren’t listening.

According to a recent Statistics Canada report, the percentage of Canadian families with debt increased to 71% in 2012 from 67% in 1999. (Debt includes all types: mortgages, car loans, credit cards and lines of credit, etc.)

Families whose major income earner was 65 years old or older tended to have lower debt levels than the younger crowd, but there is a disturbing trend among this group of retired people: the percentage with debt increased to a startling 43% in 2012 from 27% in 1999. That is an increase of almost 60%.

This trend of debt escalation among seniors is also evident in another recent debt study. The firm of Hoyes, Michalos & Associates Inc., trustees in bankruptcy based in Ontario, gathers a significant amount of information about each client who files a consumer proposal or bankruptcy. Every two years the firm examines data to develop a profile of the average person who files for debt relief.

The firm’s latest study, "Joe Debtor: Marginalized by Debt," is based on the details of almost 6,000 personal insolvencies in 2013 and 2014. Here are the report’s findings.

The typical insolvent debtor is a married 44-year-old male with children. He owes on average $56,545 in unsecured debt, more than three times the average consumer credit of $18,207 per adult in Canada.

Since the firm began these studies in 2008, little has changed in the underlying causes of debt problems. For most debtors the triggers for filing bankruptcy or consumer proposals are still job loss, illness or relationship breakdown.

One of the key findings, however, is that seniors (60-plus) and pre-retirement debtors (50 to 59) are the fastest-growing risk groups, with rising numbers filing for bankruptcy. The share of insolvency filings for debtors aged 50-plus increased to 30% in the 2015 report from 27% in the 2013 study that covered 2011 and 2012, and this figure has been increasing with each new analysis.

At-risk seniors and pre-retirement debtors have also accumulated a significant unsecured debt load, which is the highest among all age groups. This was also the only age group to report an increase in total indebtedness over the two-year period.

On average, debtors 50 and older carried total unsecured debt of $68,677, 1.7% higher than the 2013 study, and 21% higher than the average debtor. Debtors who were older than 60 were the most heavily indebted of all age groups, with total unsecured debt of $69,031. Pre-retirement debtors saw the highest growth in unsecured debt at 2.3%.

Below is a summary of the debt levels of the average insolvent debtor versus those aged 60 and older during 2013 and 2014.

Seniors debt levels chart

So why are seniors carrying more and more debt into retirement? The study cites three main reasons:

• debt accumulated over time to pay for living costs, family needs and medical bills;

• additional borrowing to keep up with post-retirement mortgages and the financial cost of carrying unsecured debt into retirement as income drops; and

• tax obligations from extra earned income and pension withdrawals.        

For the pre-retirement group there are also the financial demands of putting older children through school and dealing with potential health issues for themselves or aging parents.

Senior debtors may be married or living common law (45%), divorced or separated (29%), widowed (14%) or single (12%). More than half (53%) live in a single-person household (second only to 18- to 29-year-olds at 57%).

More than 53% of seniors are retired, although more indebted seniors reported that they continued to work (39%) than in the previous study (36%). This may account for the 6% increase in average monthly income for seniors to $2,215, which is lower than that of the average debtor at $2,427.

According to the study, seniors tend to have a firm desire to repay their debts and will go to great lengths to keep up with their bill payments. In addition to the increasing amount of credit card debt, the study revealed an alarming increase in the number of seniors using payday loans to pay bills when they max out their credit cards.

Almost one in 10 seniors (9%) owed at least one payday loan at the time of their insolvency. While this rate is the lowest of all age groups, seniors with payday loans had the highest level of this type of debt at $3,693 and the most average number of payday loans outstanding at 3.7. More than six in 10 seniors with a payday loan (62%) were in fact retired and, surprisingly, 35% of all senior payday loan borrowers were over the age of 70.

Payday loan companies make it easy for seniors to take out a loan as they will lend against pension income such as the CPP or a company pension.

Seniors also owe higher than average tax debt, even excluding those who were self-employed. This is because many find themselves owing money for the first time as a result of extra part-time income, RRSP and RRIF withdrawals and the fact that their pensions may not have had enough tax withheld at source.

The study concludes: "With a stable income source and a propensity to want to repay their debt, seniors are both a growing, and vulnerable, group of borrowers." To me, as someone who has advocated that the key to retiring well is to retire debt-free, this is not good news.