New research finds that older Americans are filing for bankruptcy at a much higher pace than 25 years ago.
The rate of people 65 and older filing for bankruptcy is three times what it was in 1991, a new study from the Consumer Bankruptcy Project found, and the same group accounts for a far greater share of all filers.
“Driving the surge, the study suggests, is a three-decade shift of financial risk from government and employers to individuals, who are bearing an ever-greater responsibility for their own financial well-being as the social safety net shrinks,” The New York Times explains.
Among the problems facing older Americans are, among other things, longer waits for full Social Security benefits, the replacement of employer-provided pensions with 401(k) savings plans and more out-of-pocket spending on healthcare. Declining incomes, whether in retirement or leading up to it, only make matter worse, the Times explained.
“When the costs of aging are off-loaded onto a population that simply does not have access to adequate resources, something has to give,” theConsumer Bankruptcy Project study says, “and older Americans turn to what little is left of the social safety net — bankruptcy court.”
Bankruptcy can offer a fresh start for people who need one, but for older Americans it “is too little too late,” the study says. “By the time they file, their wealth has vanished and they simply do not have enough years to get back on their feet.”
Meanwhile, a recent Harvard study funded by Pew Charitable Trusts uses “stress test” analysis to see how retirement plans in 10 selected states would behave in adverse conditions. (It’s similar to what the Federal Reserve does for large banks.)
The Harvard scholars looked at two economic scenarios, neither of which is as stressful as I expect the next downturn to be. But relative to what pension trustees and legislators assume now, they’re devastating.
Scenario 1 assumes fixed 5% investment returns for the next 30 years. Most plans now assume returns between 7% and 8%, so this is at least two percentage points lower. Over three decades, that makes a drastic difference.
Scenario 2 assumes an “asset shock” involving a 20% loss in year one, followed by a three-year recovery and then a 5% equity return for years five through year 30. So, no more recessions for the following 25 years. Exactly what fantasy world are we in?
But these models are just that—models. Like central bank models, they don’t capture every possible factor and can be completely wrong. Whether they really help or not remains to be seen.
Crunching the numbers, the Pew study found the New Jersey and Kentucky state pension systems have the highest insolvency risk. Both were fully funded in 2000 but are now at only 31% of where they should be.
Other states in shaky condition include Illinois, Connecticut, Colorado, Hawaii, Pennsylvania, Minnesota, Rhode Island, and South Carolina.
If you are a current or retired employee of one of those states, I highly suggest you have a backup retirement plan. If you aren’t a state worker but simply live in one of those states, plan on higher taxes in the next decade.
(Newsmax wire services contributed to this report).
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