Research Highlights
Raising the Red Flag on Financial Elder Abuse
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The system currently provides the least regulation for precisely the age group with the greatest vulnerability.
You wouldn’t think Mickey Rooney, the late actor, and Brooke Astor, the late philanthropist and socialite, had much in common, but both were victims of financial elder abuse, a scourge that is widening as the US population ages and that costs the nation’s taxpayers as well as the victims. Recent research by NYU Stern Finance Professor Xavier Gabaix explores why the elderly are so vulnerable and proposes regulatory strategies that could help protect them.
In “The Age of Reason: Financial Decisions over the Lifecycle and Implications for Regulation,” Professor Gabaix and his co-authors – Sumit Agarwal of the National University of Singapore, John Driscoll of the Federal Reserve Board and David Laibson of Harvard University and the National Bureau of Economic Research – document, through use of a dataset of credit transactions, that people reach peak financial decision making at age 53, with young adults making mistakes because of inexperience and older adults progressively losing the capability to process new information. Substantially diminished cognitive ability affects more than half of octogenarians, even as their balance sheets grow in size and complexity.
Compounding the problem is the fact that retirees in the US have fewer regulatory protections than most workers, “an unintended consequence of the nation’s systems of defined contribution retirement savings,” the authors write. After all, companies that offer 401(K) plans have a fiduciary duty to the employees that participate, and defined-contribution pension accounts are strictly regulated by ERISA; once those employees retire and roll their savings into IRAs, those protections evaporate. “The system currently provides the least regulation for precisely the age group with the greatest vulnerability,” says Professor Gabaix.
The authors propose nine policy options representing varying degrees of paternalism, from laissez-faire to a mandatory regulatory review of financial products before they’re available to the public.
In “The Age of Reason: Financial Decisions over the Lifecycle and Implications for Regulation,” Professor Gabaix and his co-authors – Sumit Agarwal of the National University of Singapore, John Driscoll of the Federal Reserve Board and David Laibson of Harvard University and the National Bureau of Economic Research – document, through use of a dataset of credit transactions, that people reach peak financial decision making at age 53, with young adults making mistakes because of inexperience and older adults progressively losing the capability to process new information. Substantially diminished cognitive ability affects more than half of octogenarians, even as their balance sheets grow in size and complexity.
Compounding the problem is the fact that retirees in the US have fewer regulatory protections than most workers, “an unintended consequence of the nation’s systems of defined contribution retirement savings,” the authors write. After all, companies that offer 401(K) plans have a fiduciary duty to the employees that participate, and defined-contribution pension accounts are strictly regulated by ERISA; once those employees retire and roll their savings into IRAs, those protections evaporate. “The system currently provides the least regulation for precisely the age group with the greatest vulnerability,” says Professor Gabaix.
The authors propose nine policy options representing varying degrees of paternalism, from laissez-faire to a mandatory regulatory review of financial products before they’re available to the public.