Cognitive Ability, Cognitive Aging, and Debt Accumulation

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.