While there has been a lot of discussion about how COVID-related economic shutdowns have affected retirement security, a new paper suggests that things could have been a lot worse.
The shutdowns could have worsened the picture for 401(k) plans if financial markets had collapsed, the recession had led to widespread withdrawals, or more employers had suspended their match. But these things did not happen, according to the report by the Center for Retirement Research at Boston College (CRR).
In “COVID-19 Is Not a Retirement Story,” authors Alicia Munnell and Anqi Chen explain that the COVID-induced recession appears to have had little impact on retirement, as Social Security checks still go out, 401(k) contributions and balances appear relatively steady and the jump in unemployment has not disproportionately hurt older workers.
After stock prices dropped more than 34% from mid-February to the end of March, the market roared back, with the Dow Jones Industrial Average breaking 30,000, the authors note. Moreover, when the steep drop occurred, most 401(k) participants did not move their assets out of equities, so they benefited from the run-up in stock prices.
Another big fear at the start of the pandemic and following enactment of the CARES Act was mass withdrawals from plans. Among plans offering COVID-related distributions, Munnell and Chen note that only 7% reported that more than 5% of participants used this option. In terms of loans and withdrawals generally, 25% to 35% of plans saw some increase in this activity, they note.
Moreover, there was no widespread suspension of the employer match. While plan balances were not undermined by a stock market collapse or mass withdrawals, retirement security could have been affected if employers had pulled back on their matching contributions, the authors emphasize. According to the report, during the Great Recession, nearly 20% of plan sponsors suspended or reduced their contributions, but in 2020, only 5% took similar action.
Existing Problems
That said, Munnell and Chen remind that even though the pandemic’s effect on retirement could have been worse, the story is not about how it affected retirement, but how the system was already facing problems and pre-COVID weaknesses remain. For example, they note that Social Security continues to face a 75-year deficit and the depletion of the trust fund in the mid-2030s.
In addition, many 401(k) plans continue to face problems of inadequate balances and a major coverage gap. Munnell and Chen point to the Federal Reserve’s 2019 Survey of Consumer Finances on how retirement balances fared between 2016 and 2019. According to the data, for the typical working household approaching retirement with a 401(k) plan, combined 401(k)/IRA balances increased from $135,000 in 2016 to $144,000 in 2019. They note that these balances will provide a couple with only $570 per month in retirement.
Moreover, the authors emphasize that only about half of all households approaching retirement have any retirement savings. Here, they observe that for low earners retiring at age 62, Social Security currently replaces only 42% of a worker’s preretirement earnings—well below the typical target of 75%. A second implication is that many workers move in and out of coverage. According to the report, this lack of continuous contributions reduces the expected 401(k) balance for the typical 60-year-old from $425,000 to $159,000, with fees and leakages further reducing the balance to $120,000.
The authors further observe that 401(k) plans and IRAs provide little guidance on how to turn accumulated assets into income. “As a result, retirees must decide how much to withdraw each year and face the risk of either spending too quickly and outliving their resources or spending too conservatively and consuming too little,” they write.
Participants also shun the option of buying immediate or deferred annuities and do not take advantage of using their 401(k) balances to defer claiming Social Security, which is effectively “purchasing” more annuity income, they note.
Munnell and Chen further explain how the continued decline in real interest rates makes it more difficult to save for retirement and the increased stress on state and local government finances makes it more difficult to fund public sector defined benefit plans. “Most important, the reason for the lack of impact on retirement is that people who have the least have borne the brunt of the pandemic,” they contend.
