May 17, 2011

Recession Means $2,300 Less in Average Annual Retirement Benefits

Workers who were youngest when the recession began will be hit particularly hard

A new report from the Urban Institute and Boston College's Center for Retirement Research finds a sizeable hit to retirement income as a result of the so-called “Great Recession.”

The study uses DYNASIM3, the Urban Institute’s "dynamic micro-simulation model," to examine the long-run effects of the Great Recession on the future retirement incomes of working-age individuals in 2008. It compares a baseline scenario that incorporates the historic and projected effects of high unemployment and lower wages from the recession with a no-recession scenario that assumes the recession had not occurred.

The result? The recession will reduce average annual incomes at age 70 by 4.3%, or $2,300 per person.

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.

Major finding include:

  • Adults age 25 to 34 in 2008 will see their age-70 incomes fall by 4.9% (or $3,000 per person) as a result of the recession. The slowdown in wage growth will accumulate over their entire careers, magnifying its impact. These younger workers were also more likely than older workers to lose their jobs during the recession.
  • The recession did not spare older workers, however. It will reduce age-70 incomes for those 55 to 64 in 2008 by 4.1%, primarily by lowering Social Security benefits. The benefit formula indexes earnings at age 60. Wage growth before age 60, then, significantly affects future Social Security payments.
  • Future retirement incomes will fall most (in absolute terms) for those with the highest incomes, who have most to lose. Among the youngest age group, for example, those in the top income quintile will lose $7,500 per person annually, while those in the bottom quintile will lose only $400 per person annually. The drop in earnings will reduce future income from pensions, retirement accounts, and other assets. Low-income groups will not lose much from these sources, however, because few have access to pensions or accumulate significant retirement savings even in good times.

The authors note the recession-induced decline in household income will increase the number of Americans living on very limited incomes at age 70. Among those age 25 to 64 in 2008; the share with incomes below 125% of the federal poverty level at age 70 will increase 7.4%, leaving an additional 711,000 adults in or near poverty.

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