Cognitive Ability, Cognitive Aging, and Debt Accumulation

Authors

Abstract

In the past few decades, financial products target to consumers have become increasingly complex and recent evidence suggests that older adults are entering retirement with more debt than previous generations. We examine how cognitive ability is related to debt burdens among older adults and whether this relationship has changed over time with the increasingly complex financial landscape. Using data from the Health and Retirement Study spanning 1998 to 2014, we find that cognitive ability is an important predictor of debt burdens in older age and that, in more complex financial environments, individuals with higher cognitive ability have taken on higher debt levels than individuals with lower cognitive ability. In a complementary analysis using data from 2015 to 2019 drawn from the Understanding America Study, we find similar results and evidence that the relationship between cognitive ability and debt exposure is driven by financial sophistication. Our findings are broadly inconsistent with financial intermediaries pushing increasingly complicated financial products onto unsophisticated borrowers. However, we find that even higher cognitive ability individuals may have difficulty managing their debt burdens in more complex environments – they hold less total wealth, less liquid wealth, and are more likely to have debt levels that exceed half their assets than their counterparts prior to the expansion in complexity. All told, we find that individuals with higher cognitive ability disproportionately increased their debt burdens during the increase in financial product complexity, and that subsequently they were more financially fragile than similar individuals in previous cohorts.

Key Findings

  • We find that cognitive ability is an important predictor of debt burdens in older age.
  • In more complex financial environments, individuals with higher cognitive ability have taken on more debt relative to individuals with lower cognitive ability.
  • This debt increase is coupled with reduced economic security — after the increase in financial complexity, individuals with higher cognitive ability hold less total wealth, less liquid wealth, and are more likely to have debt levels that exceed half their assets than their higher cognitive ability counterparts prior to the expansion in complexity.
  • Individuals with higher cognitive ability disproportionately increased their debt burdens during the period in which the complexity of financial products increased, and subsequently they were more financially fragile than similar individuals in previous cohorts.

Citation

Angrisani, Marco, Jeremy Burke, and Arie Kapteyn. 2020. “Cognitive Ability, Cognitive Aging, and Debt Accumulation.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2020-411. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp411.pdf

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Project

Paper ID

WP 2020-411

Publication Type

Working Paper

Publication Year

2020
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