Saving for Retirement Can Mean Adding Some Debt Too

In today’s world, workers need to save if they want to be comfortable in retirement. But there are also limits to what many people can afford.

A new study finds that when U.K. workers were automatically enrolled and started contributing to a retirement savings plan, their household debt – credit cards, bank overdrafts, and other unsecured loans – increased. For every 32 to 38 pounds (or $40-48) in combined monthly contributions by the employer and employee, their debt rose by just over 7 pounds (about $9).

Stepping back to look at the big picture, this research also confirms the benefit of auto-enrollment: it encourages workers who might not otherwise have saved to get started. And the increase in unsecured debt, with its higher interest rates, is much less than the amount that goes into retirement plans. On the other hand, saving is not cost-free.

The researchers admit they’re not sure why the savers borrow more but they had a few ideas. One reason might be that workers spend more because they feel more optimistic about their future finances after they start saving. The employer’s contributions could have that effect, but it still seems a stretch that someone would change their thinking in the 41 months they were being tracked for this study.  

Another reason to add debt makes more sense: people who are on a tight budget and aren’t paying close attention to the change in their finances “may be failing to reduce their spending to sufficiently finance their pension contributions,” the researchers said.

One piece of evidence to back this up is that the increases in debt are larger for workers with lower incomes, who have serious budget limitations, and for younger adults, who may still be finding their financial footing.

The people included in this research had small employers with up to 29 employees and were automatically enrolled in the National Employment Savings Trust, or NEST, which is a U.K. government-sponsored plan that includes various options for investing the account. Like U.S. auto-enrollment plans, workers have the option of withdrawing from NEST.

The researchers also revealed another connection between saving for retirement and debt. Workers who started contributing to the savings plan were more likely to take out a mortgage than the people who opted out of the plan.

In contrast to credit card debt, however, adding mortgage debt can be a good thing. It probably is either tied to investing in an asset – a new house – or is borrowing against an existing property that’s rising in value. Other financial indications of the savers’ finances were also positive, including a slight improvement in their credit scores and a drop in bankruptcies. 

The workers’ household mortgage debt increased by 118 pounds (or about $149) for every 32 to 38 pounds of new savings.

The reasons for workers’ decisions aren’t clear here either. But auto-enrollment “has complex effects across different facets of the household balance sheet,” the researchers concluded.

Squared Away writer Kim Blanton invites you to follow us @SquaredAwayBC on X, formerly known as Twitter. To stay current on ourblog, join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  This blog is supported by the Center for Retirement Research at Boston College