How Pandemic is Putting More Retirements at Risk

CRR pandemic unemployment, retirements at risk

High unemployment as a result of the pandemic is hurting chances of Americans maintaining their pre-retirement standard of living.

Thanks to a bump from the coronavirus pandemic, now more than half of working-age households in America are not expected to be able to afford their current standard upon retirement.

According to a new analysis by the Center for Retirement Research at Boston College, the unemployment caused by COVID-19 has pushed up the share of working-age households not able to afford their current standard of living in retirement from 50% to 55%.

The analysis updates a previous estimate, based on 2016 National Retirement Risk Index (NRRI) data, to include the harmful effects of surging unemployment. Researchers Alicia H. Munnell, Anqi Chen, and Wenliang Hou estimate that perhaps 30% of workers—far more than is reflected in the monthly jobless rate—could be affected by layoffs now and in the future. They did not factor in the recession’s impact on the housing and financial markets, which could make things worse.

The NRRI measures the share of working-age households that are at risk of being unable to maintain their pre-retirement standard of living, which is constructed by comparing households’ projected replacement rates—retirement income as a percentage of pre-retirement income—with target rates.

The CRR brief points out how unemployment hurts retirement in a variety of ways. Laid-off workers’ paychecks vanish immediately, but they may also earn less in the next job. The depressed earnings, over months or years, reduce the money flowing into their 401ks, and the amount they’ll receive in pensions and future Social Security benefits.

It may also force some to spend down savings that, had they not lost their jobs, would’ve been preserved for retirement.

Interestingly, CRR finds the impact on low-income workers is mixed. In one way, they’re protected by Social Security’s progressive benefit formula, which will replace a higher percentage of their earnings as their lifetime earnings decline. But low-income workers have had more layoffs, which widens the gap in their retirement savings—between what they can save and what they should be saving—more than for higher-income people.

The 2020 recession will impact retirement “in a very different way” than the Great Recession, the researchers said. This time, “the destruction is occurring more through widespread unemployment and less through a collapse in the value of financial assets and housing.” However, the lessons of the previous recession can’t be dismissed either.

House prices to this point are still holding up pretty well. But the housing market will be vulnerable to a decline as the recession’s impact spreads. While 401k balances haven’t been battered like they were in the 2008 financial crisis, the stock market is still 7% below February’s record highs and continues to be volatile.

These results underscore the need for policies that provide well-targeted assistance to employers and individuals aimed at preventing more people from becoming unemployed and getting those who are unemployed back to work quickly as the pandemic subsides.

“The shorter the spell of unemployment, the less harm people will experience to their long-term retirement prospects,” the brief concludes.

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