Posts Tagged "Great Recession"

Lost Wealth Today vs the Great Recession

For older workers starting to think about retiring, the economic maelstrom the coronavirus set in motion is a reminder of that sinking feeling they experienced just over a decade ago.

In 2008, the stock market plunged nearly 40 percent, accelerating the steep decline that was underway in U.S. house prices. The unfolding 2020 recession is playing out differently. But both downturns have one thing in common: Social Security as a stabilizing influence on older workers’ retirement finances.

Baby Boomers lost wealthA 2011 study of the change in baby boomers’ finances during the Great Recession found that total wealth dipped by 2.8 percent, on average, between 2006 and 2010 for households between ages 51 and 56.

The 2.8 percent decline in wealth at the time was a significant setback for baby boomers. In more normal times, earlier generations had increased their wealth by 3 percent to 8 percent at comparable ages.

Nevertheless, things could have been so much worse for baby boomers were it not for the substantial wealth they had built up over several decades in their future Social Security benefits – an amount that is unaffected by the collapse of financial and housing markets. The average value of these future Social Security benefits was 30 percent of boomers’ wealth.

Wealth in the study also included home equity and retirement plan accounts.

This time around, it’s too early to determine the severity of the downturn’s effects on older workers. Unlike the previous recession, though, this one has had little impact on house prices so far, and the stock market, after sinking in March, has regained about half of its losses thanks to aggressive action by the Federal Reserve.

The major worry is unemployment. The jobless rate approached 15 percent in March – well above the 2009 peak of 10 percent – and economists expect it to keep rising.

But, in any recession, Social Security is a stabilizing force. Today, it represents a large share of older workers’ wealth just as it did a decade ago. And lower- and middle-income workers’ benefits are a much larger share of wealth, because they are far less likely to have substantial assets in 401(k)s. …Learn More

Photo of mother and daughter

Parents Cut Back Aid to Kids in Downturn

When the economy tips into a recession, as it is doing in reaction to the COVID-19 pandemic, the question of whether parents will give financial help to their adult children could conceivably go either way.

Parents looking for some peace of mind might throw a financial lifeline to their struggling or unemployed offspring. Or parents who’ve been providing some support might pull back.

One study of how parents in the United States and Germany handled this dilemma found that they retrenched in both countries during the Great Recession.

Parents are often an important source of support for their adult children. But between 2005 and the peak of the recession in 2009, the share of U.S. parents providing financial or in-kind support fell from 38 percent to 35 percent.

Germans are less likely to help their children in the first place, and they pulled back even more over the four-year period, from 24 percent to 10 percent of the parents, according to the 2017 study, which was funded by the U.S. Social Security Administration.

By 2011, the two countries had started to diverge: the Germans were stepping up their support again, while Americans continued to pull back. One obvious reason German parents snapped back earlier was that their economy recovered more quickly. …Learn More

Social Security sign

Social Security Tapped More in Downturn

It happened after the 2001 and 2008-2009 recessions, and it will happen again. Some older workers who lose their jobs will turn, in desperation, to a ready source of cash: Social Security.

In the wake of a stock market crash like the one we just experienced, baby boomers’ first inclination will be to remain employed a few more years to make up some of the investment losses in their 401(k)s. But as the economy slows and layoffs mount, that may not be an option for many of the unemployed boomers, who will need to get income wherever they can find it.

Age 62 is the earliest that Social Security allows workers to start their retirement benefits. In 2009, one year after the stock market plummeted, 42.4 percent of 62-year-olds signed up for their benefits, up sharply from 37.6 percent in 2008, according to the Center for Retirement Research (CRR).

Social Security is a critical source of income even in good times. One out of two retirees receives half of their income from the program, and they can also count on it when times get tough.

But the financial cost of starting Social Security prematurely is steep, because it locks in a smaller monthly benefit for the rest of the retiree’s life. For those who can wait, the size of the monthly check increases an average 7 percent to 8 percent per year for each year claiming is delayed up until age 70.

Unfortunately, the people who claimed Social Security early in the wake of the 2001 recession had fewer financial resources to begin with – namely, their earnings were lower, they had less wealth, and they were less likely to have a spouse to fall back on – according to the CRR study.

“These simple characteristics suggest that those hardest hit by recessions are most likely to use Social Security as an income-insurance policy,” the researchers concluded. …Learn More