The Recession and Retirement Income
The “Great Recession” of 2007–2009 will reduce average annual incomes at age 70 by 4.3%, or $2,300, according to the Center for Retirement Research at Boston College. The study looked at a combination of employment, wage and demographic trends to estimate the impact of the last economic downturn on retiree income. Though its authors acknowledge that it is too soon to observe the actual effect of the recession on retirement incomes, they predict that “the impact could be significant.”
Two adverse events are projected to have lasting consequences. The first is unemployment. Workers who lost their jobs also lost the opportunity to accumulate Social Security wages. Since Social Security benefits are based on the average of the top 35 years of index earnings, interruptions in employment reduce this average. The second is the lack of wage growth. Stagnant wages prevent employees from increasing their retirement plan contributions (assuming the percentage deducted from each paycheck stays constant). Stagnant wages also impact employer match contributions, pension calculations and average Social Security indexed earnings.
To compound matters, Social Security benefits are indexed to the economy-wide average in the year the beneficiary turns 60. Assuming earnings are permanently reduced after 2008 (from where they would have otherwise been), the index factor used for calculating benefits will also be lower. As a result, the study calculates that average own Social Security benefits are projected to drop 1.4% for those aged 55 to 64 in 2008 and 3.8% for those aged 45 to 54. (Those aged 25 to 34 should see a decline that approximates the decrease in their lifetime earnings.)
Though affluent retirees are less dependent on Social Security benefits, their retirement incomes are still forecast to drop. This is due to lower income from “nonpension assets and earnings at age 70.”
Workers potentially impacted by these trends do not have easy choices ahead of them. They should attempt to save more while also considering the potential impact on their retirement plans.
Source: “The Potential Impact of the Great Recession on Future Retirement Incomes,” Center for Retirement Research at Boston College, May 2011.