Here's how the coronavirus economy will affect your retirement security
July 1, 2020
First, some good news. Do you feel the power, senior power? Well, OK, maybe we are a bit worn down at the moment from the stress of months of lockdown and fear of COVID-19, or maybe (speaking from personal experience) it’s nap time, but this might perk you right up:
“With 10,000 baby boomers turning 65 every day, the American labor force is transforming. Out of the 11.4 million jobs expected to be added to the U.S. economy by 2026, 6.4 million will be filled by workers over 55. Moreover, all of the net increase in employment since 2000—about 17 million jobs—was among workers age 55 and older.”
The authors of the study that produced these findings concluded that, “The aging American workforce and these workers’ lack of retirement readiness will shape employment patterns, the direction of public policy, and the strength of bargaining power for all American workers, old and young.” That is senior power, but it is the question of “lack of retirement readiness” that we want to explore.
Several researchers from the New School Retirement Equity Lab just released a study entitled “Recession Increases Downward Mobility in Retirement: Middle Earners Hit From Both Sides.” We already know that older persons are particularly susceptible to the ravages of COVID-19, but this new research reveals that older persons are also particularly susceptible to the economic dislocations of the pandemic. The authors stress that a few public policy changes could mitigate economic disaster for millions of seniors now and in the future. Let’s take a look.
According to these researchers, the recession resulting from the pandemic will force 3.1 million older workers into lifelong poverty in retirement. Moreover, in the big picture, 67 million older workers and their spouses in the U.S. will experience a reduced income in retirement. The average retiree makes 55% of what they earned when working, but that will drop 7 to 9% -- a far cry from the 70% financial advisors recommend. Low-earning older workers who earn less than $47,600, the median earnings for workers ages 50 to 60, are especially vulnerable.
The study authors note that, “Our broken retirement system hits middle earners (households earning above $48,000 but below the Social Security earnings cap of $137,700) hardest because they are susceptible to both job loss and market loss.” Twenty-two percent of these older workers are expected to lose their jobs in this recession. They may be forced to raid their own retirement savings to survive. More than half of these middle-income earners who lose their jobs will have less than $5,000 in savings when they retire at 65.
You might expect that high-earning households, those with earnings above the Social Security cap of $137,700, would not be significantly affected by the recession. However, even this privileged segment of seniors will be impacted. Before the recession more than a quarter of these households had no retirement savings. For those that do, the post-recession average retirement account balance at 65 is projected to be $173,000, which is $79,000 less than projected without the recession.
In sum, most American workers who are close to retirement or who are now retired are living pretty close to the financial edge, and the pandemic recession is going to make it a lot worse. In response to this, the authors of the paper recommend four policy changes to strengthen the financial security of near and current retirees.
“Congress should immediately expand Social Security benefits by $200 per month and increase the Special Minimum Benefit up to 125% of poverty.” This puts needed funds into the hands of the most vulnerable seniors, and also puts more money into the general economy at a time when it is desperately needed.
“Extend and increase unemployment benefits.” When older workers are laid off, they are unemployed for a longer period of time. The current temporary additional $600 a week should be made permanent, and perhaps increased. This would also help workers avoid claiming Social Security early, which reduces payments the rest of their life.
“Discourage early withdrawals.” The CARES Act eliminated the 10% fee for early withdrawals from tax-advantaged retirement accounts. This was a misguided idea because it encourages cash-strapped younger people to dip into funds they will desperately need when they are older. Reinstate the fee.
“Create guaranteed retirement accounts (GRAs).” Congress should create GRAs to protect all workers from the perils of recession. A GRA is an “individual account funded by employer and employee contributions throughout a worker’s career along with a refundable tax credit.” A GRA is portable between jobs, and is meant to supplement Social Security benefits.
There is no time like the present to learn more about these recommendations and encourage the seniors’ organizations to which you belong to educate and advocate. Our retirement security requires it.