The elderly are more in debt today than in past generations, and a new study from the University of Michigan shows a correlation between indebtedness and cognitive ability. This relationship is even more pronounced during the pandemic. Much of the increase in total debt is due to the fact that older people with higher cognitive abilities incur disproportionately greater mortgage debt in response to rising local house prices than their counterparts with more cognitive abilities. weak. Additionally, adults with higher cognitive abilities also incur greater debt of other types, such as credit card debt and medical debt.
“We find that cognitive ability is an important predictor of the debt burden among the elderly and that this relationship has changed over time during the period of expanding financial complexity,” according to researchers at the University of Michigan. “Our results suggest that older people with higher cognitive abilities took on more debt than their counterparts in more complex financial environments.”
Some fear that greater financial complexity will disproportionately increase the indebtedness of relatively unsuspecting consumers due to poor choice of debt instruments.
However, the results suggest that people with higher cognitive abilities, and in particular higher financial literacy, are more likely to take on more debt in more complex financial environments.
This is consistent with research documenting that risky and complex financial instruments are more likely to be adopted by relatively financially savvy individuals.
“All in all, we find that people with higher cognitive abilities disproportionately increased their debt load over the increasing complexity of financial products and subsequently were more financially fragile than similar people in financial products. previous cohorts, ”the researchers said.
The financial security of current and future retirees may be more at risk across the spectrum of financial sophistication, and older people may be less financially resilient to financial shocks than previous cohorts.
“An important area of future research is to examine how the COVID-19 crisis has affected retirement security and debt exposure for seniors,” the study concluded. “Our results suggest that the negative impacts may not be solely, or even primarily, limited to those who are less financially sophisticated.”