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A family walks along Venice Boardwalk in their Halloween costumes in Venice, Los Angeles.
Reuters/Lucy Nicholson
The really scary stuff is in their bank statements.
BOO!

On Halloween, the scary truth about American families’ horrifying debt levels

By Allison Schrager

Some scary things last long after Halloween. If anything, the ghouls and ghosts that haunt American streets today are a welcome distraction from what’s truly frightening: the precarious state of the household finances.

When the economy is growing—as it is now—the lurking danger of large debts, low incomes, and shaky assets is less evident. But sometimes economic recoveries are built on weak foundations that suddenly start to crack. Other times, healthy economies are bought down by policy mistakes, political upheaval, or volatile asset prices. American households are not in good shape to withstand an economic downturn, whenever (or however) it arrives.

Take the ratio of debt to income for households headed by two important age groups: 30 to 35 year-olds and 60 to 65 year-olds. These groups are important because one is at the start of their financial lives, while the other is nearing retirement. Many years into the post-crisis economic recovery, both groups still carry historically large amounts of debt relative to their income.

Now, it’s normal for younger families to have more debt relative to their income, with low (but rising) incomes servicing student loans and mortgages. But if this ratio is too high, debt payments eat into income and make it impossible to build a solid financial foundation. Although the average debt-to-income ratio for younger households has come down recently, it remains high compared with prior decades.

Meanwhile, older Americans on the verge of retirement are carrying an unprecedented amount of debt. In 1989 about 65% of near-retirees still had debt; now, it’s around 80%. Worse, the pre-crisis spike in the average sixtysomethings’ debt-t0-income ratio has barely budged as the economy has recovered. It’s hard to see how many Baby Boomers can afford to stop working as a result.

This wouldn’t be so bad if households had lots of wealth to fall back on, in case something happened to their income. But leverage, or the ratio of debt to assets, is also running near historic highs.

Like the banks at the center of the financial crisis, American households took on lots of leverage leading up to the recession. Large debts and thin financials cushion left them vulnerable to extreme hardship when they lost their job or their home, making the recession even more.

Recoveries are supposed to be a time to de-lever and restore financial resiliency. But years later, young Americans have almost the same leverage ratio they had during the run-up to the recession. Older Americans, once again, are in even worse shape. The median debt level for these near-retirees jumped 11-fold between 1989 and 2013; despite the rising stock market over this time, asset holdings did not keep up. The median debt-to-assets ratio of 60 to 65-year-olds has ballooned from around 2% in 1989 to 12% in recent years.

It is hard to predict how the economy will fare in the future. But if there is some unexpected shock, it’s pretty clear that American households are not equipped to deal with it. And that’s really scary.