If you were born in 1960, it turns out you had bad timing. A portion of the Social Security benefit formula is based on national average wages for each cohort of 60-year-old workers. It’s not yet certain how long double-digit unemployment rates will last, but it’s a safe bet that record job losses will bring down average wages this year. That means a middle-income worker who was born in 1960 could see her Social Security benefits reduced in retirement by 14 percent, or $3,900 a year, according to a study from the University of Pennsylvania’s Wharton School.
Older workers, regardless of their birth year, are suddenly having a harder time. In most recessions, they have been largely shielded from job losses. That isn't the case in 2020. “This time, the data show older workers are getting hit harder than those who are 25 to 54,” says Alicia Munnell, director of the Center for Retirement Research at Boston College.
Workers nearing retirement age have been buffeted by numerous factors. Millions who haven’t lost their jobs have still seen hours or wages cut. Their retirement accounts have been dragged down by the market, or been drained to pay for more immediate expenses. Dozens of companies have suspended their 401(k) match programs, affecting more than 400,000 workers. The Social Security trust fund, already projected to run dry by 2035, could be depleted earlier due to the spike in unemployment, which means fewer workers and employers are paying payroll taxes.
As is common during recessions, older individuals struggling now are applying for Social Security early, before reaching the full retirement age. “The bad thing that’s coming out of this is that people are going to claim their Social Security benefits early,” Munnell says. “They’re going to be living on reduced monthly income for the rest of their lives.”
In April, 13.6 percent of Americans 55 and older were unemployed, compared with 2.6 percent in January. To be counted as unemployed, they had to be actively seeking work. That’s not the case for many older Americans, who have decided to retire early or are choosing not to work due to potential health risks. The share of people not looking for work who have declared themselves retired increased from 53 percent in January to 60 percent in April, according to one large survey.
As part of the CARES Act, a stimulus package passed in March, Congress made it easier for individuals to tap into their tax-shielded retirement accounts. Those younger than 59 and a half can withdraw up to $100,000 without paying the usual 10 percent penalty. “We’re looking at retirement savings as a rainy-day fund, and that’s not its purpose,” says Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University.
The result of all this is that workers who were on the verge of retirement are more likely to live in poverty in old age. More than 24 million people over the age of 62 will be living in poverty, compared to a pre-pandemic estimate of 21 million, according to a projection from the New School for Social Research.
Such an increase may not be surprising, given the scope of the economic downturn. Still, it represents a descent into downward mobility, following roughly half a century during which older Americans had been better protected from poverty by Medicare and other programs.
“Every generation of older workers was really destined to do a bit better than the previous generation,” says Teresa Ghilarducci, a labor economist at the New School. “Now, we’re seeing a reversal.”
Squeezed from Both Sides
Even before the recession, the share of the population in homeless shelters who were 62 or older, while still relatively small, had roughly doubled over the past decade. Meanwhile, the share of private-sector workers covered by traditional, defined-benefit pension plans fell from 56 percent in 1994 to 14 percent in 2018.
Tax preferences and automatic enrollments have made it easier for people to save for retirement than expenses. But they don’t always have short-term accounts they can draw from in a pinch. “The retirement savings account, for way too many Americans, is their only form of savings,” says Karen Biddle Andres, director of the Aspen Institute Retirement Savings Initiative.
One of the most commonly cited statistics about savings is the Federal Reserve’s annual survey looking at how many Americans can cover an unexpected $400 expense with cash or savings. In 2018, 39 percent of those surveyed didn’t even have that modest sum handy — a decline from 50 percent in 2013. Hence, individuals drawing down their 401(k)s. “People don’t plan around a steep decline in income,” says Monique Morrissey, an economist at the Economic Policy Institute, a progressive think tank in Washington.
Regardless of their balances at the start of the year, many people have lost money, at least on paper, in the stock market. Despite recent gains, most of the major stock indices remain down for the year.
They will recover, whether sooner or later. But those who have withdrawn funds from 401(k)s will not realize those gains. “If a young person, a couple of decades from retirement, takes out $3,000, that’s actually closer to $50,000 in lost retirement income,” says Antonelli, the Georgetown professor.
Ways to Encourage Savings
In 2017, Oregon created a state-supported retirement plan known as OregonSaves. It’s a Roth IRA program that automatically enrolls workers whose employers do not offer retirement savings vehicles, unless workers decide to opt out. As many as two-thirds of eligible workers participated in 2018, according to the Boston College Center for Retirement Research.
Similar plans have since been introduced in 10 other states. “As the economy recovers, they represent a way to get people back to savings much more quickly,” Antonelli says. “About a third of households today either don’t have a defined-benefit plan or a retirement savings account.”
For policymakers, state-facilitated plans offer a clear benefit: They don’t cost much money. There may be some administrative costs involved, but it’s a lot cheaper than offering any kind of direct assistance. “This is people saving their own money,” noted Andres.
She says that investing has become more automatic thanks to other retirement plans that require workers to opt out, rather than having to opt in. One innovation that may be protecting some workers nearing retirement age is target date funds. Portfolios of funds keyed to a particular retirement date — say, 2024 — become less aggressive over time, buffering investors from some of the downside risk when the stock market is volatile.
But Congress ending the penalty for early withdrawals was a signal from the federal government that retirement accounts could be raided early. “If you look at Fidelity and Vanguard, there have already been a significant number of people who have withdrawn the $100,000 limit,” says Antonelli, the Georgetown professor.
A Harder Time Finding Work
Even before Congress waived the penalty for early withdrawal, plenty of people dipped into their retirement savings early. “There are estimates of 40 percent of retirement plan leakage every year,” says Aspen’s Andres.
If people haven’t saved enough for retirement, it’s not about to get easier for millions of Americans. Following the Great Recession, older workers who lost their jobs had a much harder time finding new ones than younger ones. Only a third of those 62 or older who lost their jobs were working again within a year, and only 41 percent were re-employed within 18 months, according to the Urban Institute.
As businesses reopen, will they rehire older workers? Experienced employees tend to draw higher salaries. There’s also a unique dynamic during this pandemic. COVID-19 can affect anyone, but it’s much likelier to kill individuals who are older. Age discrimination is illegal, but that doesn’t mean it won’t happen. Older workers themselves, if they don’t feel it’s safe to work, may opt to stay out of the labor market.
“What is worse than the Great Recession, so far, is that older workers, especially older women, are overrepresented among people losing jobs,” says EPI’s Morrissey. “Employers may pick and choose which workers they’re bringing back.”
What all this means is that people are going to rely heavily on Social Security in retirement. That’s nothing new, but the system was meant to be part of a “stool,” along with private pensions and personal savings. Now, all three legs are at risk. If and when the Social Security trust fund runs out of money, the system will only be able to pay out 75 percent of promised benefits.
“This just absolutely clarifies that there’s no room for cutting Social Security benefits,” says Munnell, the Boston College economist. “It’s the only source of income for people who would otherwise be extremely vulnerable.”
People born in 1960 may find themselves out of luck. During the 1970s, there was a “notch” in Social Security benefits due to a formula change that gave people born between 1910 and 1916 substantially larger lifetime benefits than those born between 1917 and 1921 (coincidentally, including those born during the Spanish flu pandemic). Despite congressional attention to the issue, those born in 1917 ended up lagging behind those born in 1916 for the rest of their lives.
If the average national wage remains depressed for a couple of years, today's 60-year-olds will be in bad shape. That part of the Social Security benefits formula freezes at age 62.