Cognitive Ability, Cognitive Aging, and Debt Accumulation

While a large literature has examined savings behavior and accumulation among older
adults, relatively little research has explored older adults’ debt behaviors and outcomes. Recent
work by Lusardi, Mitchell, and Oggero (2020) shows that older adults from recent generations
tend to hold more debt than their predecessors, particularly mortgage debt, and correspondingly
face greater financial insecurity near retirement age. While documenting such trends is an
important first step, developing policy interventions to counteract them requires identifying the
underlying drivers of the observed surge in debt burdens among recent older adults. One
potential candidate is the increasing complexity of financial products targeted to consumers in
the past few decades (Célérier and Vallee, 2017), particularly among mortgage products
(Amromin et al., 2018). Figure 1 documents that originations of complex mortgages with zero or
negative amortization surged in the early 2000s and subsequently reduced sharply after the
financial crisis. Consumers from later cohorts may have difficulty appropriately selecting among
and using these increasingly complicated instruments (Brown et al., 2017; Hastings and Mitchell,
2018). This may be particularly true for individuals with low cognitive ability and older
individuals experiencing cognitive decline. As the financial landscape has become progressively
more complex, the rise in debt burdens may be concentrated on those who are less cognitively
able, raising concerns about the economic security of individuals who may not be adequately
equipped to navigate the system.