Coronavirus Shock Is Destroying Americans’ Retirement Dreams

As her few investments were plunging in , she’d thought about driving down to the Census Bureau, where a job was waiting if she just got her picture taken and picked up an employee ID. The Census Bureau would pay $25 an hour, almost $11 more than the rate she earned working 19 hours a week at a private school that abruptly closed the week before. But the virus news was insisting she stay in.

“I’m always looking for a job. Always,” she says. “This time, I think I’m going to pass.” Once a middle manager at a food company, Dominguez used to consider herself upper middle class. Then her employer was bought. She lost her job and, at 59, discovered no one would hire her for comparable work. She never thought that in her late 60s she’d be contemplating risking her health for the chance at a part-time job. “I’m right there at the edge,” Dominguez says. “The next couple months are going to be tough.”

For older people, the coronavirus crisis has been an appalling shock. Many can’t travel or see grandchildren. Even buying groceries is a risk. Their life savings are melting as the global economy shuts down and financial markets plummet. The pain may be particularly acute in the U.S., where Americans rely on a retirement system that was broken well before a pandemic dashed it to pieces.

Almost half of U.S. households 55 and older have nothing saved for retirement. Many of the rest were already doing worse than earlier waves of retirees. After a 40-year-long shift from traditional pensions to individual 401(k) retirement accounts, Americans’ financial security is now defenseless against whatever crisis comes along.

Just before the markets tumbled, Alicia Munnell, a professor and director of Boston College’s Center for Retirement Research, and her colleagues examined the retirement savings of late baby boomers, now 55 to 60 years old, the first cohort to spend their careers with 401(k) accounts rather than pensions. What she found was “really horrifying,” she says. With just a decade or more to retirement, late boomers had far less saved in 401(k)-style defined contribution plans than older cohorts did at the same ages. Middle-income late boomers had less than $30,000 saved in their early 50s, vs. $55,787 for early boomers and $50,787 for mid-boomers.

This result was puzzling and perverse. The more time Americans spent in the 401(k) system, the less they were managing to save. The prime culprit, researchers concluded, was the Great Recession, which hit the 401(k)-reliant late boomers harder than older cohorts. The younger boomers were actually doing a good job of saving until their mid-40s. Then the 2008 financial crisis destroyed their wealth just as the resulting recession derailed millions of careers. In the aftermath, they earned less and saved less than older boomers had at the same ages. The study warns that Generation X and millennials seem to be on a similar trajectory.

Now, another economic shock is putting livelihoods and retirement savings in jeopardy. The ultimate damage is impossible to predict, with U.S. stocks more volatile than anytime since the start of the Great Depression. The sell-off highlights “the vulnerability of workers relying on defined contribution plans, where they absorb all the risk,” Munnell says. It also highlights the importance of Social Security, the economic lifeline created during the similarly grave crisis of 90 years ago. “Those checks are going to go out every month and continue no matter what happens to the stock market,” she says. “That really is the backbone of the retirement system.”

Social Security can be credited with creating the very notion of retirement. For centuries before the program was launched in 1935, only the wealthy could afford to stop working. As the U.S. recovered from the Great Depression and then boomed, a new retirement system for the middle class took root. Employers attracted workers with pensions that, like Social Security, guaranteed income for life. Starting in the 1980s, however, the 401(k)—almost an accident of the tax code—began replacing pensions, pushing more risk and responsibility onto the shoulders of American workers.

The system was a boon for many thrifty upper-middle-class professionals, but showed flaws early on. Many amateur investors made big bets on high-promise, zero-profit tech stocks in the 1990s and got slammed when the bubble burst. Wide swaths of the workforce never got access to a 401(k) at all, and those who had one often paid high fees and received paltry contributions from their employers, which were often slashed during hard times. There were reforms on the edges: Automatic sign-ups helped encourage higher savings, and new rules helped nudge savers into more diversified funds.

Still, even affluent Americans faced a persistent problem with the 401(k) system—one that’s hitting hard right now. It’s known as sequence of return risk. For anyone about to retire, what matters to their financial well-being is not just the long-term return their portfolio can deliver, but also what happens in the markets in those first years after they stop working. A big blow at the start—even if it’s followed by a rally—can set you off course for good.

To see why, consider a common financial planning shortcut called the 4% rule. It says you should be able to withdraw about 4% of the starting of your nest egg each year. So if you have $1 million saved by retirement, you can live on an income of about $40,000. Now, of course, many Americans who were millionaires at the beginning of the year are back to six figures. Spectrem Group, a research firm, estimates the number of U.S. millionaires as of March 20 dropped by at least 500,000, from a record 11 million at the beginning of 2020.

The losses for retirement savers depend on how exposed they were to stocks. The Vanguard Target Retirement 2020 Fund, split roughly 50-50 between equities and bonds, was down 13.9% year-to-date through March 24. Right there—and this assumes no further decline—a $40,000-a-year income for someone retiring now has fallen to $34,440. That’s a considerable change in lifestyle. If you can’t make that adjustment, you can draw down more, but every dollar you pull out now won’t be there to take advantage of a future rise in . And your odds of running out of money before you die will go up.

What about the picture for younger people, whose retirement is years or decades away? That’s darkened too. On the upside, if you are very young, it’s possible that today’s lower equity valuations will improve your future returns. But that assumes you are in position to save and invest now. That’s difficult when millions lose their jobs and businesses see revenue drop to zero. Instead, many cash-strapped Americans may be forced to tap into retirement at the worst possible time.

Even in the best of times, though, many workers with 401(k)s would have struggled to save enough. Last year, Munnell’s Center for Retirement Research calculated what would happen if workers eligible for 401(k)s boosted their contributions by 5 percentage points. Although that would require a heroic effort by many working- and middle-class Americans—a boost in their savings rates of 50%—it barely moves the needle. The share of working-age households at risk of falling short in retirement barely dropped at all, from 50.2% to 47.1%.

Most people can’t save enough individually to protect themselves from bad luck, whether that’s a job loss or a global financial collapse. “The 401(k)-based system is woefully inadequate for protecting workers from these sorts of shocks,” says Nari Rhee, director of the Retirement Security Program at the University of California at Berkeley’s Center for Labor Research & Education. “No individual can do it alone.”

Even before the crisis, experts and policymakers were starting to rethink the 401(k)-based system by going back to old ways of sharing the risks of retirement. One idea—bedeviled by legal barriers, red tape, and cost concerns—is to make the 401(k) look and feel more like a traditional pension, using annuity-like insurance products that guarantee income for life. Another is to shore up Americans’ retirement security by bolstering Social Security.

“Savings are important for short-term needs,” says Nancy Altman, a former pension lawyer who co-founded the advocacy group Social Security Works in 2010. “But what you need for retirement is insurance, and that’s what Social Security provides.” About half of retirees rely on Social Security for most of their income.

Even wealthy Americans love their Social Security, especially at times like this. Its became clear to Milo Benningfield, a San Francisco financial adviser, as markets crashed in 2008. “It offered all kinds of benefits, both financial and psychological,” he says. “It’s the only real asset in the plan that’s guaranteed income for life—if all else fails.” For now, Benningfield says his retired clients are relatively calm, with cash in their portfolios that should allow them to ride out volatility.

Despite its practicality and popularity, Social Security has long been a political football. According to calculations by the system’s trustees last year, the program’s income and reserves won’t be enough to pay for scheduled benefits by 2035, forcing the U.S. to reduce benefits by about 20%, unless changes are made. The coronavirus pandemic makes those calculations worse, though no one can fathom by how much right now. There will be fewer workers to support the pay-as-you-go system through their payroll taxes. Money will be flying out the door faster than it’s coming in.

Yet now, with every sector of the economy crying out for help, some are making the case for more generous benefits. On March 21, Democratic Senators Elizabeth Warren, Chuck Schumer, and Ron Wyden proposed increasing Social Security checks by $200 a month over the next two years, as part of the stimulus to combat the fallout from the pandemic. Deficit hawks say such payments wouldn’t be targeted enough to the people who most need help now. But even if that idea goes nowhere today, the conversation has shifted away from fixing Social Security by making it more austere. The federal budget anxieties of the 2030s, or even 2021, are looking a long way away.

As things get tighter, many Americans may simply cancel a big chunk of their retirement. It’s a strategy that more and more older people had been trying. In the recovery from the Great Recession, more Americans worked past 65 than at any point since the creation of Medicare back in the 1960s. A couple years of extra work, when you’re still saving and not drawing upon savings, can drastically lower the risk of running out of money later. Social Security also rewards those who wait with higher benefits.

But this crisis was perfectly designed to throw a wrench into such plans. Unemployment is rising, and jobs dealing with the public are unsafe for seniors, who are likelier to die if they catch the virus. Now, baby boomers like Dominguez, who struggle to find work, have little to fall back on beyond Social Security.

Ninety years ago, the Depression was the crucible for a new approach to old age, a way that generations of workers could share economic risks to create the possibility of retirement. Today, as businesses from giant corporations to mom and pop restaurants go begging for bailouts, retirees—and the millions who hope to get there—may demand their own rescue package. —With Paula Dwyer

©2020 Bloomberg L.P.