March 7, 2017

sick girl in bed with a doctor's hand in the foreground holding a thermometer with dollar signs inside

Overdue bills are a killer. Literally.

New research from the Federal Reserve Bank of Atlanta shows that people saddled with lots of delinquent debt are more likely to die sooner than people who have less overdue debt. In fact, if a person free of overdue debt has even a single account become delinquent, that person's mortality risk during the next quarter rises by 5 percent, according to a working paper by Melinda Pitts, a research economist and director of the Atlanta Fed's Center for Human Capital Studies, and two coauthors.

"Taken as a whole, it seems clear that debt resulting from a financial crisis has lasting effects on health that are substantial enough to increase mortality rates," Pitts writes in "Killer Debt: The Impact of Debt on Mortality," along with University of Colorado Denver economists Laura Argys and Andrew Friedson.

The study is groundbreaking and timely. It's groundbreaking because Pitts and her collaborators analyzed Federal Reserve consumer credit data on a huge group, about 170,000 people, spanning the housing crisis to the postrecessionary period. These data are available only to Fed researchers. In fact, Pitts—who recently discussed her research in the Economy Matters podcast—says she and her colleagues plan to extend their research using this rich trove of information. They might, for example, explore whether certain types of debt—whether it's auto, mortgage, or another type—tend to be especially problematic.

The work on debt and mortality is timely because debt has grown increasingly central to Americans' lives. About 69 percent of all U.S. households held some form of debt in 2011. The median household debt that year was $70,000, up 37 percent from 2000 after adjusting for inflation, according to the paper.

Debt can be a good thing

There's nothing inherently wrong with debt. And health effects are not necessarily related strictly to the amount of debt someone takes on. Research has shown that increased indebtedness can minimize the effect of economic fluctuations by helping households smooth consumption over their lifetimes. In other words, if someone suffers a temporary economic setback, rather than completely shutting down their purchasing, they can use borrowings to adjust. This in turn lessens macroeconomic volatility, the authors note.

However, the Great Recession complicated things. During the bruising downturn of 2007–09, the paper says, "increased debt became a major financial problem for households as the delinquency rate increased by more than 50 percent."

Many studies have established a general link between financial and physical and mental well-being. A review of 20 studies by the Government Accountability Office found that on average, lower-income men approaching retirement live at least 3.6 fewer years than high-income men. And in a 2015 paper, researchers at University College of London found that greater wealth usually equates to longer life, especially among people ages 50 to 64.

Studies of wealth or general financial circumstances are helpful. But examining delinquent debt in particular really gets to the heart of an individual's financial situation, Pitts explains. She and her coauthors write that the amount of delinquent debt captures the nuance of a person's circumstances better than a broader measure such as their employment status because a bad debt load reflects current and future problems. Currently, the person can't meet his or her financial obligations. And that person will be less able to "smooth consumption" in the future because deteriorating creditworthiness will limit borrowing ability.

This research suggests that health care policies can have important long-term financial and public health consequences. Recent studies have found that expanding health insurance coverage improves the financial well-being of those newly covered. For example, a 10 percent exposure to the 2006 health insurance expansion in Massachusetts improved credit scores by 3.4 points, according to a 2016 paper by economists at the Federal Reserve Bank of Chicago, the University of Michigan, and the University of Illinois at Chicago. Their estimates also indicate that the amount of debt sent to collection agencies decreases by $600 to $1,000 for those who gain Medicaid coverage because of the Affordable Care Act.

"Taken as a whole," Pitts and her co-authors write, "our results imply that financial policies are health policies: the effect of individual finances on mortality is non-trivial."

photo of Charles Davidson
Charles Davidson

Staff writer for Economy Matters