Playing with Fire? Household Debt near Retirement in Canada

Abstract

Because retired households cannot quickly adjust to shocks, for example by working more, they represent a vulnerable group when credit conditions deteriorate. We analyze the evolution of debt among households nearing retirement in Canada over the period 1999–2016. First, we find that debt as a ratio of income has risen considerably over that period, and debt as a fraction of assets has also doubled, even though assets remain roughly five times as large as debt. Second, we report that mortgage debt has risen the most but that average mortgage payments have remained relatively constant over the period as a result of the downward trend in borrowing costs. Compared with the United States, Canada has a higher share of highly indebted individuals, and they use home equity lines of credit more extensively than their US counterparts. Finally, we find that a small but significant fraction of households are playing with fire, being vulnerable to a sudden rise in borrowing costs or a meltdown of house prices that could jeopardize their standard of living in retirement.