Is There a Tipping Point: Objective and Subjective Measures of Debt and Retirees’ Wellbeing

• In Event: From Paycheck to Payout: Wealth and Income in Retirement

Abstract

We consider the impact of debt on aging individuals’ well-being. Debt can enable consumption smoothing, help households take on desirable investment risk, and in some cases offer tax advantages. But debt involves tradeoffs—some costs are direct and financial (interest payments), others are subjective and psychological. How individuals experience and evaluate their debt, particularly in later life, is essential to assessing whether and when debt becomes a burden.

Using data from the Health and Retirement Study (HRS), we link objective measures of household debt, income, assets, and debt service burdens with subjective reports of concern about debt, happiness, and wellbeing. While prior research has documented rising debt levels and growing financial vulnerability among older adults, less is known about any thresholds at which debt begins to negatively affect subjective wellbeing. We first consider a simple life-cycle model to guide our expectations for debt accumulation and drawdown over time. We then use HRS panel data to explore variation in debt use across demographic groups and over different stages of the retirement transition.

Importantly, we use subjective reports of debt-related concern to identify the levels and types of debt that individuals perceive as manageable versus overwhelming. We search for tipping points—debt levels or service burdens beyond which concern rises sharply—and document the events that precede and follow these moments. By focusing on the interplay between objective debt conditions and subjective distress, this paper offers new insights into the evolving risks of over-indebtedness as households age.

Authors

• Sarah Holden, Investment Company Institute (ICI)

• Jason Seligman, Investment Company Institute

• Emily Williams, emily.williams@ici.org