As the population gets older and older so too do American debtors.
In comparison, debt held by those under the age of 40 has declined modestly.
“Why has the mass of U.S. debt shifted so heavily to older borrowers?” asked the NY Fed team led by Senior Economist Meta Brown.
“Two potential explanations are an ageing population and an overall change in the amount of debt per borrower that Americans choose to hold at each individual age.”
Brown and her team note that while the ageing of the giant baby boom generation may explain some of the shift in debt loads to older borrowers, it does not make up for all of the increase. Additionally, it does little to explain why millennials are holding less debt than they were in 12 years ago.
To Brown, the explanation lies in the residual impact of the 2008 recession.
Here’s Brown (emphasis added):
One possibility is that the credit boom preceding the Great Recession built higher consumer debt levels. Afterward, underwriting standards tightened across the board in 2008-09, so that any new potential borrowers had little opportunity to take out new loans. An acceleration and then slowdown in lending across the board would lead loans, and their associated borrowers, to be older today on average than in 2003. Alternatively, the shift toward older borrowers could have resulted from new loan originations increasingly favouring older borrowers over younger borrowers, whether this arises from recent changes in borrower or lender behaviour.
Basically, in the run up to the recession, lending standards were looser and, given that Baby Boomers were in their prime family-raising, money-borrowing years, these folks became strapped with higher debt loads that today’s ageing millennial generation.
Those same boomers are also still saddled with the debt, while millennials are unable to receive similar loans due to tighter credit standards.
The implications of this shift, Brown notes, are both positive and negative.
On the one hand, since credit scores are higher for older populations and income is more stable, repayment is more likely. Additionally, despite the higher level of indebtedness, the net worth of older households is about the same as it was from 2004-2007.
On the other hand, the restriction in credit to younger borrowers may negatively impact growth, as millennials are more likely to increase consumption if given wide access to credit in order to fund purchases such as houses and cars.