Recent Research:"Neither a borrower..." Scratch That. Start Again.

There is increasing speculation that China's surge in the global economy is unsustainable, in part, because of its debt (see the Aug. 22, 2005 issue of Business Week). Closer to home, others point out, with the addition of the recent record U.S. budget deficits, America’s national debt will be too burdensome on generations X and Y and whatever letter comes next.

But at "only" $7.9 trillion (most recent figure), the federal government can write smaller IOUs than its citizens can, according to a March 2005 brief by the Center for Retirement Research.

Will Baby Boomers Drown in Debt? reports total household debt for the U.S. is nearing $10 trillion, rocketing up from less than $6 trillion only five years ago. To put the figure into perspective, the current total is equal to a staggering 83 percent of the country’s annual gross domestic product. As one might expect, personal bankruptcies also have risen, climbing by 50 percent during the last decade.

The focus of the report is on baby boomers, those aged 50-62, whose looming collective retirement launched discussions of modifying Social Security. Will these pre-retirees, in a few years' time, trigger financial collapse when they no longer can meet their debt obligations? Probably not, according to the report, but there are trends that warrant consideration by the tech-based economic development community.

Why be concerned? Personal equity and debt are critically important elements for fueling pre-angel entrepreneurship. Nearly every aspiring inventor or tech entrepreneur taps out his or her own credit or family contributions prior to exploring structured financing. Secured debt can be the source of some angel investor funds as well. If too much of a person’s monthly cash flow is obligated for other personal debt, might there not be less entrepreneurship financed?

The good news is the debt burden of pre-retirees has not risen over the past decade, despite the rapid rise in the total owed – meaning mom or dad and the grandparents still may be able to fork over some cash when asked to personally finance the next Google. The reason for this is that assets have risen in value at a faster rate than debt. As a result, debt for pre-retirees as a percent of assets remained around 10 percent in 2004, the same as calculated for 1992. Debt payments as a percent of income actually rose by half a percent in the same time period to 10.2 percent in 2004.

Lower overall interest rates and the use of home equity loans instead of unsecured debt (home equity loans traditionally carry lower interest rates) allowed debt load to increase at an affordable rate. But what happens as interest rates rise? This is only a problem for boomers presently with adjustable rates (estimated to be one-third of boomers’ debt) and those trying to increase their debt load.

Dramatic, negative changes in housing values, however, could be more problematic, the report notes.  Also, sudden changes in employment status, as the economy continues to restructure to global realities, can be more catastrophic.

Because of its focus, what the center does not discuss in the paper is of some concern. The report states that households aged 50-62 represent about 20 percent of total American households and hold roughly one-quarter of the debt. Who is carrying all of this new debt if it isn’t the baby boomers?

Will Baby Boomers Drown in Debt? is available at: http://www.socsec.org/research.asp?pubid=785

Links to this paper and more than 1,000 additional TBED-related research reports, strategic plans and other papers can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.