Double-digit unemployment, soaring budget deficits, and a fragile economic recovery all provide ammunition to the "sky is falling" truth tellers. Forget about retirement, we're told. Expect to work forever. Against this tide of doom, it is refreshing to come upon a fact-based assessment of our economic situation that says, in effect, "aint no big deal."
[See 6 Steps to a Better Retirement] Economists Alan Gustman and Nahid Tabatabai (both at Dartmouth College), and Thomas Steinmeier (Texas Tech University) have analyzed the economic condition of people in their 50s who are nearing retirement. These are the folks whose futures are widely viewed as most harmed by the plummeting values of retirement accounts and homes. The accepted truth is that their nest eggs have been badly depleted and they simply don't have enough time to replenish them before reaching traditional retirement age. So, they face the choice of putting off retirement, accepting a permanent reduction in their standard of living, or, quite likely, both. It is depressing, to say the least.
But the economists found that this picture is not accurate. Drawing upon detailed financial information available from an ongoing survey, they found that most people in this "near retirement" age group were not heavily exposed to stock market losses and have not been seriously hurt by falling home values. They certainly have been exposed to unemployment stresses and related financial reversals, but even here, the researchers note, many households have two earners, and thus have been cushioned from the full brunt of the recession.
They sifted through the real assets held by this group as of 2006—well before the economy's facade began to crumble—and then looked at the losses in these various asset classes. They then factored in how other serious downturns had affected people's plans. Their conclusion? The long-term impact of our present distress will be a delay in retirement of people in their mid-50s by a total of one and a half months. My goodness! Let's head for the storm cellars!
The stock market decline might delay retirements, but only a bit. Less than 10 percent of the people studied will delay retirements by a year or more because of the market decline. The recession, on the other hand, may substantially increase the pace of retirement for older employees who lose their jobs and can't find new ones. "Thus, the net effect of a deep recession and a falling stock market may be an overall increase in retirements." To date, the Social Security Administration has reported, the pace of people taking benefits when they turn 6—the earliest qualifying age—supports the prediction that recessionary stresses are forcing people to take retirement benefits as soon as they can.
Looking at the total wealth that people will be depending on to fund retirements, the study found that the average household had nearly $767,000 in total wealth in 2006. This average was skewed by very wealthy people at the top. Wealth for the median household was about $537,000 (median means that half the households had more wealth and half had less). Here are the components of a median household's wealth:
Social Security, 40.1 percent; pensions, 19.7 percent; homes, 22.3 percent; other real estate, 3.3 percent; business assets, 1.6 percent; vehicles, 3.3 percent; financial assets (including stocks held outside retirement plans), 5 percent, and IRA assets, 4.7 percent.
Looked at in this way, the impact of the downturn can be more easily understood. Social Security benefits have actually increased during the recession because of last year's 5.8 percent cost-of-living adjustment to benefits. Pensions have been hit by market losses. But the economists noted that for people in their 50s, traditional defined-benefit pensions are still a common benefit. Retirement payouts from these pensions are less threatened by the stock market decline than for the newer defined-contribution retirement plans.
While home prices have fallen, there is a lot of research to support the notion that homeowners don't use their housing wealth to fund retirement. Instead, they regard it as an emergency "piggy bank" that is accessed only as a last resort. Further, homeowners in their 50s tended to have enough equity in their homes to avoid serious foreclosure problems. Their mortgage loans are still "above water," meaning their homes are still worth more than their outstanding mortgage balances.
Totaling up all stock market wealth, the economists said, only about 9 percent of the median household's wealth was held in stocks, and 35 percent of people in their mid-50s owned no stock at all in 2006. Market losses, while serious, were "not a life-changing loss for the average household," the economists concluded.
Further, they noted, the average impact of the recession on people in their 50s masks tremendous variations. This diversity casts doubt on the ability or wisdom of broad-based government support efforts. Most people in their 50s don't need much help. Lower-income people will derive much of their retirement support from Social Security and Medicaid, and this reality wasn't changed by the recession. The largest financial losses have been experienced by the most affluent members of this age group. Should government really be helping them? Older employees who've lost jobs are seriously affected, but unemployment benefits already exist and have been extended because of the severity of the recession.
The economists are certainly not saying that the past two years have been a walk in the park. Millions of people have suffered serious and life-changing reversals. But they are saying that the nature of retirement has not changed, and that the fundamental financial condition of most people in their 50s has not been significantly harmed.
"This is not to argue that the effects of the downturn are small," their study says. "Stock market losses aside, many will have lost jobs and homes. In this circumstance, our instinct is often to redesign or adopt new policies. However, in dealing with the older population, it is no easy task to think of policy changes that will be cost effective in remedying obvious market and policy failures. Indeed, there are many reasons not to leap to policy reform on the basis of our recent experience."