This piece in the N.Y.Times was much better than Uchitelle's buffoonishly biased piece I made fun of last week, but has a silliness all its own. The story reduces to 3 lines: Low interest rates mean people borrow more. Low interest rates have been dangerous for the elderly because they have borrowed too much. And now some older people are filing for bankruptcy:
Americans have rushed to borrow at historically low interest rates, an unlikely group has led the charge: the elderly.
As a result, the cushion that could provide financial security for older people — their homes — is no longer so secure. People reaching retirement age are now less likely to own their homes free and clear than their predecessors, according to an analysis of government housing and Census data.
One problem with this article is the not-so-subtle assumption that drives it: consumers are basically idiots. Old people have been systematically stupid with their money. This is a dangerous set of circumstances, the article insinuates, something that merits alarm and concern on the part of Times readers and informed citizens. Perhaps intervention is warranted. Something should be done!
I don’t think I’m reading too much into this. This is what Times stories routinely do. They nudge us into being alarmed about things.
But what do the facts indicate? The interest rate tells us the price of present consumption versus future consumption. If the price of present consumption goes down, it only makes sense that you will consume more in the present. Lo and behold, this is precisely what the elderly have done. They have exhibited the expected behavior, have acted rationally, an economist might say. In the article, this is a problem. Why?
After all, it is a bit of a puzzle in economics that elderly people save as much as they do. What do they get out of leaving large bequests to their children? (The phrase "You can't take it with you" comes to mind.) Many elderly persons could have consumed more during their golden years but chose not to. If the current cohort has begun to value present consumption more, and bequests and security less, who are we to argue with them, to pity them, to imagine them victimized by their own autonomous choices?
In none of these anecdotes are the elderly destitute. Take the main story:
At 71 and 77 years old, respectively, James and Doris Stevenson of Espanola, N.M., have 29 years left on their mortgage, which they recently refinanced for a lower interest rate. They live in their dream home, Mr. Stevenson said - a pueblo-style house overlooking the Rio Grande. The couple, retired teachers, bought it six years ago by using two-thirds of Mr. Stevenson's retirement fund for a $35,000 down payment.
They have a splendid home overlooking the Rio Grande. *A dream home*. They have used their credit cards to finance lots of consumption. Worst case scenario: they have to move to a home that is less of a dream home than this one is--a so-so home as opposed to a dream home. Hardly catastrophic. Why is this newsworthy? Perhaps because even though they are not in such terrible shape, they’re stressed out about things. The stress of the situation, it seems, was responsible for Mr. Stevenson's heart attack.
Hell, I'm in graduate school. The stress could give me a heart attack. But this was MY CHOICE and I wouldn't have had it any other way. Current consumption was Stevenson’s choice. How much should we worry about this?
The article attempts to answer:
Whether such debts are of little concern depends on how much wealth and income older borrowers have on hand. While Fed data show that, as a group, older Americans possessed more assets in 2001 than a decade ago, those assets grew only half as quickly as their debts. Census data show that their incomes over the same period remained flat.
Why is this happening, given that overall the elderly are financially better off today than in any previous generation?
The elderly are better off!!! If this is so, then why lead with misleading statistics that describe assets and debt but not net worth or consumption?
This much is commonly accepted among economists and is fairly uncontroversial: poverty has virtually been eliminated among the elderly. The elderly may be stressed out, sure, may live in so-so homes instead of dream homes, may even leach off their kids and annoy the hell out of them, but poverty among the elderly? Not a big problem. We’ve located poverty in a different demographic now. We have transferred poverty to where we really want it:
What should we worry about with respect to the elderly? They have more debt, the article says. Many have borrowed against their homes.
Although much of the increase is doubtless a result of homeowners tapping rising home values, borrowers must still find the money to make the payments while living on limited incomes.
Not strictly true. If the borrowers want to live off their equity, they can sell their homes and move to smaller ones. They do not have to keep making (high) payments unless they value a nice house more than they value the higher consumption their equity will finance. Again, who are we to make that decision for them?
The main point seems to be that the elderly have been declaring bankruptcy in greater numbers. But creditors lose the most when a person declares bankruptcy. If the elderly have begun to declare bankruptcy more often, then creditors will be less willing to lend to them and the “problem” will begin to fix itself. Also, adult children of the elderly are inconvenienced if they end up having to take care of their parents or if they receive no bequests. Arguably, the unwritten contract between the generations has been getting lopsided lately. Adolescence has been prolonged. Many adult children live with or receive support from their parents long after their teen years. If the elderly have decided to consume more now, and to expose their adult children to inconvenience, this may push the balance toward a more equitable intergenerational arrangement.
Sure, it might a good idea to try to protect the mentally disabled elderly from telemarketers who would take advantage of their frailty. (But the Stevensons were not mentally disabled).
(There is a positive spin here, by the way, but the author misses it: Interest rates may rise soon. This will help prevent the gullible old people from being lured into borrowing too much. So where is the “Good News: Rising Interest rates” story to accompany this silly doomsday piece last week?)
To be sure, it is very nice to own one’s home and to have a measure of security when one is old. But this is not free. The price is reduced consumption. There is a trade-off. It follows that by spending more, the elderly may actually be improving their lives.
The bottom line: Until we see reduced consumption among the elderly, there is no evidence of a real problem.
Our main concern, contrary to the agenda of the AARP and those who make a living by finding victims behind every bush and telephone pole, should be about the poverty problem among lower-income children. This problem exists. It is real. It is a problem we do not have to invent for ourselves by selectively quoting statistics or by pitying consumers for living according to their own priorities.
I am in Beijing now. I ate some octopus here and almost puked. Foulest stuff I’ve ever tasted. My Chinese hosts love octopus and eat it all the time.
I pity them.