The Effects of the Financial Crisis on the Well-Being of Older Americans: Evidence from the Cognitive Economics Study

Published: 2010


This paper uses the Cognitive Economics Study (CogEcon) to assess the effect of the financial crisis on the well-being of older Americans. Financial wealth fell by about 15 percent for the median household. These financial losses were concentrated among households with high levels of wealth and high cognitive capacities, who tend to have higher exposure to the stock market. Nonetheless, households with little financial wealth suffered declines in well-being — measured by declines in consumption — as large on average as households with substantial exposure to the stock market. Tight credit market conditions and adverse labor market outcomes account for much of the effect of the financial crisis on the consumption of these low-wealth households.

Key Findings

    This paper uses the Cognitive Economics Study (CogEcon) — a panel survey of older Americans fielded just before and just after the financial crisis of fall 2008 — to assess the effects of the financial crisis.

    Changes in consumption provide a comprehensive measurement of the effect of the crisis.

    • Having financial losses is strongly associated with a decline in consumption.  For a household with financial assets and mean percent losses, these losses reduce consumption by about 0.3 percentage points.
    • Having little or no financial wealth is, however, associated with even larger drops in consumption.

    The credit crisis had severe effects on many older households.

    • A substantial minority of households report financial distress.  Housing-related financial distress is rare in this population.  Being denied credit or making a late payment is more common.  Financial distress is much more common among households with little or no financial wealth.  They are five times more likely to report more than one indicator of financial distress than those with positive financial wealth.

    Many older Americans plan to delay retirement in response to the financial crisis.

    • Reductions in leisure — in the form of returning to work and postponing retirement — are also common responses to the financial crisis and go hand in hand with the decrease in consumption.

    High cognition individuals suffered less in the crisis.

    • Even after controlling for the fact that high cognition individuals have higher wealth and education than average, and that high cognition individuals hold relatively more of their assets in stock than average, high cognition individuals were relatively well insulated from the effect of the financial crisis.