Swedroe: Thwarting Financial Abuse

November 12, 2018

The World Health Organization reports that by 2050, 2 billion people (22% of the population) will be age 60 and older, up from 605 million (11% of the population) in 2000. Older adults must make important, and often irreversible, decisions that impact the rest of their lives.

Examples include when to take Social Security and pension benefits, whether to buy long-term care insurance, how to most efficiently draw down savings and whether to annuitize assets.

Unfortunately, while advances in wealth and medical science have led to rising life expectancies, longer lives create the risks of running out of financial assets sufficient to support a minimally acceptable life style and cognitive impairment, which makes us more susceptible to becoming the victim of elder abuse.

What The Research Says

As described in the book “Financial Decision Making and Retirement Security in an Aging World,” the latest volume in the Pension Research Council series, the 2014 study “Financial Exploitation in the Elderly Consumer Context” found that the annual prevalence of elder financial abuse among those age 60+ was about 14% in Florida and Arizona.

Age-related declines in fluid cognitive skills begin to emerge in our 20s—the longer we live, the greater our susceptibility to cognitive impairment. It’s been estimated that today half of those in their 80s have dementia or some milder form of cognitive impairment. Yet as we age, we are still responsible for managing our wealth, health care costs, taxes, insurance and estate plans.

As explained in the book, Wandi Bruine de Bruin, professor of behavioral decision-making at Leeds University, found that older adults make more mistakes when asked to apply decision rules to choose between products, and that as the number of options increases and decisions become more difficult, they are less likely to make the optimal choice.

Also according to the book, in his review of the research on challenges for financial decision-making at older ages, Middle Tennessee State professor Keith Jacks Gamble found: a decrease in cognition is a significant predictor of a decrease in financial literacy among seniors; older investors’ investment selections are less skillful; the prevalence of suboptimal credit decisions increased after age 53; and bankruptcy filings among those age 65 and older constituted the fastest-growing demographic group.

Importantly, he found that while the research shows that a decrease in cognitive skills predicts a decline in self-confidence, this is not necessarily true when it comes to financial decisions—the elderly either don’t recognize this or are reluctant to admit it (which prevents them from seeking help from a trusted advisor). Gamble found that even among those experiencing cognitive declines, about half get no help with their decisions despite the fact that they are likely to benefit from trustworthy, knowledgeable advice.

Susceptibility To Fraud, Elder Abuse

The loss of cognitive skills puts the elderly at greater risk of being susceptible to fraud. Because of that, they are more likely to be targets. According to the 2015 True Link Financial report on Financial Elder Abuse, the amount stolen from elders each year in the U.S. is more than $36 billion.

This includes not only outright theft by unscrupulous people in their lives, and online predators who are after them, but also other kinds of more subtle abuse. Research demonstrates that no one is immune from financial manipulation, regardless of their education, sophistication or experience in financial matters.

True Link found that a significant number of victims are younger seniors, college educated and not living in isolation—and they lost more to abuse than those who were older, less educated and isolated. And the estimate of $36 billion in losses is almost certainly dramatically understated because the elderly are far less likely to report abuse, either due to embarrassment or because the abuse was by a family member, such as a child.

The FINRA Foundation conducted a fraud survey in 2012 and found that those over 65 were targeted more often and were more likely to lose money when targeted compared to those in their 40s. In addition, the 2012 Senior Financial Exploitation Study found that 56% of certified financial planners had an older client who had been financially exploited, with an average loss of about $50,000.

Compounding the problem is that being a victim of fraud causes an increase in risk-taking (to try to make up for the loss), like the casino gambler who keeps playing until he breaks even. In fact, fraud victims report an increased assessment of their lifetime willingness to take on financial risk relative to nonvictims. That in turn can lead to further problems from which it may be impossible to recover.

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