Retirees Cite Decline in Income as Reason for Bankruptcies

A study found the cost of health care was another top reason retirees filed for bankruptcy.

The risks associated with aging, reduced income, and increased health care costs have been offloaded onto older individuals, while at the same time, older Americans are increasingly likely to file for bankruptcy, according to a paper by researchers from different universities.

Using data from the Consumer Bankruptcy Project (CBP), the researchers find more than a two-fold increase in the rate at which older Americans (age 65 and older) file for bankruptcy and an almost five-fold increase in the percentage of older persons in the U.S. bankruptcy system. One in seven bankruptcy filers is of retirement age. Within the oldest cohort, those age 75 and older, there has been a near ten-fold increase since 1991. In 1991, this group constituted only 0.3% of filers, as compared to 3.3% now.

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“The magnitude of growth in older Americans in bankruptcy is so large that the broader trend of an aging U.S. population can explain only a small portion of the effect. In our data, older Americans report they are struggling with increased financial risks, namely inadequate income and unmanageable costs of health care, as they try to deal with reductions to their social safety net. As a result of these increased financial burdens, the median senior bankruptcy filer enters bankruptcy with negative wealth of $17,390 as compared to more than $250,000 [of wealth] for their non-bankrupt peers,” the researchers write in “Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society.”

Reasons for retiree bankruptcy

Unstable employment is particularly problematic for older people, the researchers note. When they lose jobs, it takes them significantly longer to find new ones and when they do, they typically earn less than what they earned before. In addition, they say, full Security benefits now begin at 70, rather than 65, and defined benefit (DB) pensions have been replaced with high-risk, employee-owned defined contribution (DC) plans, the values of which fluctuate with the stock market. With DC plans, payout during retirement is not defined or predictable, employees bear all of the market risks, and returns depend on employees’ investment skills.

Citing other studies, the researchers note that in 2013, among working households, ages 55 to 64, with a 401(k), the median amount in those accounts was $111,000. Additionally, out-of-pocket spending among older Americans with Medicare comprises about 20% of their income, and the estimated total of all non-covered medical expenses for a 65-year-old retired couple during their retirement years is $200,000.

The researchers also say that in 2001, 50.2% of households headed by someone 60 or older had some debt; by 2013, that had climbed to 61.3%. Among these older adult households with debt, the median amount they owed more than doubled from $18,385 in 2001 to $40,900 in 2013, according to a 2015 report from the National Council on Aging.

The researchers’ analysis of data from the current CBP suggest that financial struggles, namely a decline in income, was a leading reason for older Americans’ bankruptcies—almost seven out of ten respondents (69.1%) reported that they “very much” or “somewhat” agreed that this was the reason for their bankruptcy.

Additionally, 40% of respondents reported that they “very much” or “somewhat” agree that missing work for medical reasons was a reason for their bankruptcies. When the variable “missing work” is combined with “medical expenses,” 69.6% of respondents “very much” or “somewhat” agreed that this combination of reasons led to their bankruptcies.

The researchers asked those who filed bankruptcy to list the single most important thing that they or their family members were unable to afford in the year before their bankruptcies. More than half of older filers (52%) who responded indicated that the single most important thing they had to go forego was related to medical care—surgeries, doctor visits, prescriptions, dental care, and health/supplemental insurance.

“Absent significant policy changes that reassume the risks of aging and effectively insure the financial stability of older Americans, our data suggest that the trend of an aging bankruptcy population will continue,” the researchers conclude.

ACLI, IAA Comment on SEC Standards of Conduct Proposals

They say that additional interpretation of standards of conduct for investment advisers is unnecessary and that imposing broker/dealer standards on life insurers and investment advisers is inappropriate.

The American Council of Life Insurers (ACLI) and the Investment Adviser Association (IAA) both commented on the Securities and Exchange Commission’s (SEC)’s standard of conduct proposals, for the most part saying that additional interpretation of standards of conduct for investment advisers is unnecessary and that imposing broker/dealer standards on life insurers and investment advisers is inappropriate.

As for Form CRS, which would create a requirement for a uniform relationship disclosure document to be used by broker/dealers and investment advisers, ACLI says that it is not conducive to life insurance products.

“Life Insurers provide significant written disclosures at the point of sale to satisfy multiple regulators’ requirements and to help customers understand the nature of their various products and relationships,” ACLI says in its letter to the SEC. “These disclosures include many product related materials (insurance sales illustrations, policy contracts, required “buyers’ guides,” prospectuses), marketing materials describing the firm’s offerings, documents that provide the terms for a brokerage or advisory relationship (brokerage account agreements, advisory account agreements, Form ADV, investment policy statements), and other required disclosures.” In addition, “life insurers fulfill a considerable amount of post-sale disclosure depending on the nature of products and services provided, such as in-force insurance ledgers, transaction confirmations, periodic performance reporting for investment accounts, and updated Form ADV brochures.”

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ACLI goes on to say that “the proposed Form CRS is based on a full-service broker/dealer model and does not provide for workable disclosure of information relevant to customers of insurance-affiliated broker/dealers. Firms should have the flexibility in the Form CRS to accurately describe their business model and what their clients can expect from the relationship. This would make the document more user friendly and hopefully make it more likely that a customer would read the document. We believe that the intent of the Commission in creating the proposed form would best be met by allowing for greater flexibility in the required disclosures.”

As for Regulation Best Interest (Reg. BI), regarding appropriate conduct standards for broker/dealers, ACLI is in favor of it, saying in a letter to the SEC, “Reg. BI is vastly superior to the prescriptive, and now vacated, DOL Fiduciary Rule and its BIC exemption. Life insurers strongly support protections serving the best interests of customers, which can be meaningfully safeguarded with disclosure about services and material conflicts of interest. This approach provides an effective means to shield consumers and facilitate informed purchase decisions.”

However, ACLI says, “it is critical that proposed Reg. BI equitably includes life insurers’ products, functions, services and regulatory framework within the scope of the SEC’s focus in developing a final regulation. The disclosure standards and objectives should be consistent and parallel in Form CRS and Reg. BI to avoid confusion and to promote clear understanding. A more flexible approach to required disclosure is preferable and would serve consumers better.”

As far as the SEC’s proposed interpretation regarding standards of conduct for investment advisers, ACLI asks the SEC not to “propose additional, unnecessary requirements in the investment adviser space. Investment advisers are adequately regulated, and ACLI recommends that the SEC not use its current interpretation as a foundation to promulgate additional regulation in an area where it is not needed. ACLI has concerns that any proposed enhanced regulation for investment advisers would create duplicative and unnecessary regulation.  Life insurers with associated investment advisers and broker/dealers are subject to multiple layers of regulation from state insurance commissioners, state securities regulators, the SEC, and FINRA. In lieu of any proposed regulation, the SEC should continue to provide interpretative guidance and rely upon the voluminous existing guidance and case law regarding the duties of investment advisers, rather than attempting to codify this body of existing law.”

For its part, IAA also says that regulations should be more flexible and that the SEC should not impose “unnecessary and ill-fitting” broker/dealer regulation on investment advisers.

“We are concerned that ‘harmonization’ of investment adviser and broker-dealer regulation would result in an overly prescriptive, check-the-box regulatory regime that does not fit advisers’ businesses and is not consistent with the flexible principles-based fiduciary duty for advisers,” IAA tells the SEC in a letter. “Accordingly, we recommend the Commission refrain from any rulemaking in these areas.”

IAA goes on to say that “Investment advisers’ business models and activities differ significantly from those of broker/dealers. Given those differences, financial responsibility rules are inappropriate and unnecessary for advisers. A requirement for advisers to provide account statements would be duplicative. Investment adviser clients currently receive account statements from custodians.  Further, the custodial account statement or an invoice from the adviser specifies the actual advisory fees clients pay. “

IAA adds: “Federal licensing and continuing education requirements for investment adviser personnel are unnecessary.  Advisory personnel who engage with retail clients are already subject to state licensing and qualification requirements. The Commission has not explained why a second layer of licensing and qualification is warranted.  Further, advisory personnel are subject to a range of compliance requirements and already receive training on the laws, regulations, and fiduciary obligations applicable to advisers.  Finally, advisers already are required to provide clients with a description of the qualification, education, business background, disciplinary history, and additional compensation (including sales awards) for personnel providing advice for each client. This information is required to be affirmatively provided to each client for whom the advisers’ personnel are giving or formulating advice, and is far more relevant to a client assessing the qualification of such personnel than passing an exam. There is no such counterpart for broker/dealers.”

 

 

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