A hot topic these days is how COVID-19 and the ensuing recession have affected retirement. The surprising answer may be Onot very much.O On the benefit side, Social Security payments continue to go out each month, and 401(k) balances appear relatively unaffected. On the income side, the impact on Social SecurityOs finances has been minimal, and employee and employer 401(k) contributions remain relatively steady. In terms of the labor market, recessions inevitably increase unemployment, but this recession has not hurt older workers more than other groups. The conclusion that COVID is not primarily a retirement story does not mean that all is right with the world. The problems confronting the retirement system before the pandemic remain. Social Security continues to face a 75-year deficit and the depletion of the trust fund in the mid-2030s. Employer plans continue to face inadequate balances, a major coverage gap, no decumulation mechanism, and low interest rates. And older workers continue to face difficulties in finding new jobs, causing many to retire too early. Most important, the reason for COVIDOs lack of impact on retirement is that people who have the least have borne the brunt of the downturn. The discussion proceeds as follows. The first section summarizes Social Security finances before the pandemic and the actuariesO reassessment of the programOs financial status in the wake of COVID. The second section turns to employer-sponsored plans, summarizing the challenges before COVID and examining adverse developments that could have happened but did not. The third section shifts to the labor market to show that while older workers have suffered, they have not been hurt disproportionately and appear as able to work from home as their younger counterparts. On the other hand, those with the least education Ð workers least likely to have a 401(k) Ð have borne the brunt of the recession. The final section concludes that COVID is not a retirement story, but the pre-COVID weaknesses in the retirement system remain. In addition, the continued decline in real interest rates has made it even more difficult to save for retirement, and the increased stress on state and local government finances makes it more difficult to fund public sector defined benefit plans.
Though the economy has been overtaken by COVID-19 and the ensuing recession, the Federal ReserveOs 2019 Survey of Consumer Finances (SCF) still provides a useful update on how retirement balances fared between 2016 and 2019 Ð three years of solid economic growth, strong stock market returns, and continued maturation of the 401(k) system. And given that the market is modestly higher in 2020 and most job losses have been borne by lower-paid workers without retirement plans, 2019 balances may not be dramatically different from today. The big advantage of the SCF is that it provides information not only on 401(k) balances, much of which is available from financial services firms, but also on household holdings in IRAs, which are largely rollovers from 401(k)s. This brief reports on household holdings in these two sources combined. The discussion proceeds as follows. The first section describes the importance of 401(k) plans and IRAs in the retirement income system. The second section documents the trend in individual decisions regarding the accumulation of assets in 401(k)s. The good news is a slight increase in participation rates and greater use of target date funds; the bad news is the lack of universal coverage, flat total contribution rates, high fees, and significant leakages. The third section reports on 401(k)/IRA balances. The SCF shows Ð for households approaching retirement Ð an increase in these balances from $135,000 in 2016 to $144,000 in 2019. These balances will provide a couple with only $570 per month in retirement. Moreover, only about half of households have 401(k)/IRA balances; and, as defined benefit plans phase out in the private sector, the rest will have no source of retirement income other than Social Security. The final section concludes that todayOs 401(k) system provides meaningful benefits only for the top two quintiles of the income distribution and that, for the employer-sponsored system to work effectively, coverage must be universal.
As the COVID-19 pandemic emerged in early 2020, the stock market Ð as measured by the Dow Jones Wilshire 5000 Ð declined by 35 percent between its February peak and March trough. While the market has largely recovered since then, it remains very volatile and exposes household savings to continued market risk. During the February to March period, the value of equities in employer-sponsored retirement plans and household portfolios fell by $14.2 trillion. Of that decline, $4.4 trillion occurred in 401(k)s and Individual Retirement Accounts (IRAs), $1.8 trillion in public and private defined benefit plans, and $8.0 trillion in household non-retirement assets. This brief documents where the declines occurred and the extent to which retirement accounts are exposed to equity market risk. The first section looks at overall trends in the stock market and household exposure. The second section breaks down the decline in equity values by source. And the third section focuses specifically on retirement assets. This information is interesting and important in its own right. But, as the final section concludes, the declines also highlight the fragility of our retirement plans. More than two-thirds of the drop in retirement plan equity holdings was in defined contribution plans. As defined benefit plans become rare, households increasingly bear the full brunt of market turmoil. Much of the discussion about reforming private sector retirement plans has focused on extending coverage. But the current financial downturn also underlines the need to construct arrangements where the full market risk does not fall on retirement plan participants.
A major issue concerning the COVID-19 pandemic is how it will affect future employment options for older workers. Public health officials have made it clear that older people are more at risk of complications from the virus, meaning they may be the last to return to work. Therefore, their ability to survive financially will depend on their ability to work from home. So, the question becomes how many older workers can work from home. This brief builds on recent research that identified occupations that can be done remotely. The new analysis links these jobs to a dataset of individual workers to examine any differences by age, earnings, education, and gender. The somewhat surprising result is that roughly the same percentage of older and younger adults can work from home. The ability to work from home, however, does depend on education, which means that it is highly correlated with earnings. The discussion proceeds as follows. The first section describes the recent study used here as a basis for identifying occupations where working at home is a possibility. The second section presents the results by age and earnings by linking the occupations with the Annual Social and Economic Supplement of the Current Population Survey (CPS). The findings show that about 45 percent of older workers are in occupations with the ability to work remotely and that this ability is strongly correlated with earnings. The third section discusses further results by earnings, education, and gender. The final section concludes that the findings are a good news/bad news story for older workers. The good news is that they are as well situated as younger workers in terms of occupations that allow remote work. The bad news is that only about 45 percent of older workers are in such occupations. Thus, as the economy opens up, the other 55 percent, who cannot work from home and tend to be lower paid, will face either health risks Ð returning to work before the virus is under control Ð or economic risks Ð delaying work until the environment is safe, which may exhaust their resources.
The National Retirement Risk Index (NRRI) measures the share of working-age households that are at risk of being unable to maintain their pre-retirement standard of living. The NRRI, which is constructed by comparing householdsO projected replacement rates Ð retirement income as a percentage of pre-retirement income Ð with target rates, has recently shown about half are at risk. The NRRI was originally constructed using the Federal ReserveOs 2004 Survey of Consumer Finances (SCF). The SCF is a triennial survey of a nationally representative sample of U.S. householdsO assets, liabilities, and demographic characteristics. The NRRI has been updated periodically to reflect data from the 2007, 2010, 2013, and 2016 surveys. We were eagerly awaiting the release of the 2019 SCF this fall to reassess AmericansO retirement preparedness. The problem is that the 2019 SCF will reflect a world that no longer exists. Between those interviews and now, the country has been levelled by the COVID-19 pandemic. Hence, the most pressing question at the moment is how retirement security has been affected by the virus and the shutdown of the economy. This crisis will affect retirement security in a very different way than the Great Recession because the destruction is occurring more through widespread unemployment and less through a collapse in the value of financial assets and housing. The discussion proceeds as follows. The first section reviews the nuts and bolts of constructing the NRRI. The second section discusses how we have adapted existing research to estimate the impact of unemployment on earnings and retirement preparedness. The third section reports the results, showing that the pandemic is likely to have increased the NRRI by 5 percentage points Ð with a 7-percentage-point increase for older households and a 3-percentage-point increase for younger ones. The fourth section places the projected increase in context, explaining why the employment effects of this disaster appear to have less of an effect on retirement security than the Great Recession did. Even so, the final section concludes that the pandemic has worsened an already bleak outlook for retirement security.
