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Analyzing the Recession’s Effect on Retirement

Last update on: Feb 02 2017
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A major debate among financial advisers is how badly economic and market downturns affect individual finances in the long-term. Some advisers and economists believe these events are cyclical, and that a severe downturn will be offset by an offsetting boom period at some point. In other words, most people will be able to recover what was lost. Others disagree, arguing that it takes a very strong boom to recover losses. Also, people are likely to change behavior and become more cautious after a decline, so they won’t get all the benefit of any subsequent boom.

A different approach was taken by the Urban Institute and the Center for Retirement Research. Using a custom computer model, the research attempted to factor in all the effects of the Great Recession, including lost wages, reductions in income, and investment losses. It also looked at the effects on different age groups. Its findings were that people at all age groups face lower retirement income of about 4.3% annually after age 70 because of the downturn.

The study notes this drop results almost entirely from the anemic wage growth that occurred during the recession, which the model assumes will permanently reduce future wages. Employment declines will have little effect on future aggregate retirement incomes because most workers remained employed during the recession and the losses that occurred are generally inconsequential when averaged over an entire career.

Retirement incomes will fall most for high-socioeconomic-status groups, who have the most to lose, but relative income losses will not vary much across groups. Those workers who were youngest when the recession began will be hit hard. They are most likely to have lost their jobs and the impact of lower wages will accumulate over much of their working lives. But retirement incomes will also fall substantially for those in their late fifties in 2008, because the drop in the economy-wide average wage will lower the index factor in the Social Security benefit formula, permanently reducing their annual benefits. Also, many workers who lost jobs late in life will never become reemployed.

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