The coronavirus pandemic is taking a toll on people’s jobs and savings. Economists are largely in the dark about what all of this will exactly mean for the economy in the coming months. It is clear, though, that the retirement crisis will get worse. It’s just not clear how fast and how much.
Before this crisis started, workers were staying in the workforce to older ages and on average had more wealth. That seems like good news, except that it wasn’t. Many of the people who retired relatively late saw few wealth gains in recent years. Working longer was not an insurance against few savings.
Consider Federal Reserve wealth data, for instance. When looking only at recent retirees – people from 55 to 69 years old who retired in the past 10 years – the share with total wealth of less than $250,000 – including home equity and the imputed wealth from a defined benefit pension – grew from 7.1% for the years from 2001 to 2007 to 10.3% for the years from 2010 to 2016 (see figure below). All of that growth came from a sharp drop of the share of recent retirees with wealth from $25,000 to $300,000. Their share dropped from 32.5% to 27.4%.
Working longer is especially pronounced among those with little wealth. The average retirement age for the two groups of recent retirees with wealth below $300,000 was the highest with 61.1 years. In contrast, recent retires with total wealth between $1.5 and $4.5 million had the lowest average retirement age with 60.2 years (see figure below). Recent retirees with wealth below $25,000 also worked an extra 0.9 years on average – the largest increase in the retirement age for any group — from 2010 to 2016 compared to the previous period from 2001 to 2007. For many financially insecure older households, working longer was an important part of their retirement strategy before the crisis hit.
But working longer is not a surefire way to more wealth. Median wealth among those recent retirees with less than $25,000 in total wealth in fact fell from $6,232 in the years from 2001 to 2007 to $1,547 in the years from 2010 to 2016 – a drop of more than 75%, even though people in this group not only worked longer than others, they also worked longer than in the past. The median total retirement wealth in retirement accounts and imputed defined benefit pensions (not shown here) was zero in both periods for this group. That is, their non-retirement savings fell. In comparison, median wealth for those with total wealth between $25,000 and $300,000, who also worked on average until they were 61.1 years old from 2010 to 2016 went up by 9.4% at the same time. But, their median retirement wealth (not shown here) declined from $28,227 in the earlier period to $27,380 in the later years. This is the only group, for which retirement wealth fell. Many older workers with few or no retirement wealth stay in the labor market longer to offset low or little savings for a secure retirement, mainly to gain extra income. But that does not translate into more wealth and thus more income security later in retirement.
But working longer is an unsafe insurance against lack of savings. Jobs for older workers can quickly disappear and take a long time to come back. The data on unemployment for older workers from the last crisis suggests as much. In the last recession from 2007 to 2009, the unemployment rate for workers 55 years old and older rose faster than the unemployment rate for prime-age workers aged from 25 to 54 years (see figure below). Among, workers 55 years old and older, the unemployment rate grew by 133% from 3.2% in December 2007 to 7.0% in June 2009, when the recession officially ended. The unemployment rate for prime age workers increased by 118% from 4.0% to 8.5% during that same period.
And, once older workers are out of a job, they look longer on average for a new one than is the case for younger workers. During the Great Recession, the average length of unemployment for unemployed older workers from age 55 to 64 years peaked at 56.7 weeks – more than a year –(see figure below). And, it reached a whopping 61.4 weeks for workers 65 years old and older two years after the recession officially ended in October 2012. Among younger workers, the peak was 43.7 weeks for workers 35 to 44 years old and 50.0 weeks for workers 45 to 54 years old (see figure below). Unemployment poses a major challenge for all age groups, but older workers regularly have a harder time finding a new job than younger workers.
The data suggest that, absent sufficient savings, many older workers increasingly delayed retirement to compensate for those limited savings. Yet that strategy is clearly not sustainable when the labor market is in a free fall. As a result, many older workers will quickly be in a precarious situation of too few savings and no good way to find a new job to keep working to help them pay their bills. They will end up retiring early, accepting permanently lower Social Security benefits and ultimately financially struggling.
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