Current crisis could damage retirement security in long run

Markets and the economy seem to be conspiring to shrink nest eggs

It may not turn out to be as lethal as the 1918-20 influenza pandemic, which infected 500 million people and killed 50 million worldwide. And its economic damage may not be as devastating as the Great Depression, which saw unemployment peak at 24.9% in 1933 and linger above 14% from 1931 to 1940. But COVID-19’s unusual one-two punch on both health and the economy is likely to produce its own long-lasting negative effects.

One of these is almost sure to be a chilling impact on the retirement security of millions of Americans for years to come.

To be sure, getting through the current economic crisis is foremost on everyone’s mind. An arsenal of unprecedented monetary easing coupled with astounding fiscal stimulus has been pressed into service to avert economic implosion. But like the public health experts who are uncertain about the course of the pandemic and its impact, economists and business leaders — as well as workers of all stripes — are anxious and unsure despite the government’s efforts.

$400 emergency

Most American workers have a lot to be unsure about. Last May, for example, a Federal Reserve survey found that almost 40% of American adults wouldn’t be able to cover a $400 emergency with cash, savings or a credit-card charge that they could quickly pay off. What happens now when many of those same people are out of work and the rent is due?

If the choice becomes food versus rent, saving for retirement is off the table. Of course, if a quick economic turnaround occurs once the pandemic is contained or reversed, a few months or even a year or two of not making 401(k) or IRA contributions for someone in their 20s or early 30s would not be a retirement killer. But if joblessness persists, especially among those in their higher-earning 40s, the missing contributions would be meaningful.

Compounding that problem for those over 50 if temporary layoffs become permanent would be the difficulty in finding comparably paid work. An individual or couple that age on a trajectory to a satisfactory retirement could find themselves looking at a vastly different picture.

Threat to Social Security

Social Security, an essential source of income for the majority of retirees, also may be threatened. As Mary Beth Franklin recently noted, previous economic downturns have prompted people to file for benefits earlier than they might have planned because they need the income. That means lower retirement income for them and a strain on the Social Security trust fund. Another strain comes in the form of high unemployment levels that reduce payroll tax revenue to the fund. To pay tomorrow’s retirees, will payroll taxes have to rise? Will benefits be cut? Both? Will an already strained federal budget have to be tapped?

Those troubling and retirement-threatening longer-term issues are separate from the adverse impact on wealth that this year’s first quarter has wrought. During that period, the S&P 500 lost a fifth of its value and the Dow Industrial Average suffered its worst quarter ever, down 23.2%.

Prior to the pandemic, a bull market in equities had compensated for low yields and the shortcomings of defined-contribution plans in the building of retirement nest eggs.

Today, markets and the economy seem to be conspiring to shrink those nest eggs, posing a challenge for investors and their advisers in achieving a comfortable retirement. For the tens of millions of Americans who can only aspire to require the services of an adviser, the challenge may be unsurmountable.