July 2, 2020
Recession Destabilizes Boomers’ Finances
The COVID-19 recession has changed everything.
This extreme disruption in our lives is always top of mind, which was reflected in our most widely read articles so far this year, based on the blog’s traffic.
Baby boomers, their retirement plans having been deeply affected by the Great Recession, are once again reassessing their finances. One popular article explained that the boomers who were in their early to late 50s during the previous recession lost about 3 percent of their total wealth at the time. This put their retirement planning at a distinct disadvantage compared with earlier generations in their 50s, whose wealth, rather than shrinking, grew 3 percent to 8 percent. The current recession is the second major setback in just over a decade.
Prior to the pandemic, readers liked articles about making careful retirement plans. Post-pandemic, the most popular article was about laid-off boomers desperate for income who may have to start their Social Security prematurely. The retirement benefits can be claimed as early as age 62, but doing so locks in the smallest possible monthly Social Security check – for life.
Even before Millennials were hit by the recession, they were already farther behind older generational groups when they were the same age. One article explained that the typical Millennial had just $12,000 in wealth. They are “the only generation to have fallen further behind” during the pre-pandemic recovery, the Federal Reserve said.
Here are a dozen of this blog’s most popular articles for the first half of 2020. They are grouped into three topics: COVID-19 and Your Finances, Retirement Planning, and Retirement Uncertainties.
COVID-19 and Your Finances:
Social Security Tapped More in Downturn
Lost Wealth Today vs the Great Recession
Boomers Facing Tough Financial Decisions …Learn More
June 9, 2020
Disability Applications Spike in Recession
During the Great Recession, the record numbers of Americans who applied for disability included many people who lost their jobs – and it might happen again as the COVID-19 recession plays out.
A 2018 study estimated that 1 million people applied who would not have done so if there hadn’t been a recession. By October 2009, as the jobless rate was peaking, the additional applicants increased the total applications to the U.S. Social Security Administration by 16.5 percent.
The average age of these applicants was 53, and they tended to have impairments that were musculoskeletal or cognitive in nature. Because these impairments are less severe, they were more likely to be denied benefits, often resulting in an appeal.
In contrast, the people who would’ve sought disability benefits even in a strong economy tended to have serious medical conditions such as Crohn’s or chronic kidney disease that usually qualify them automatically under the disability program’s vetting system.
Ultimately, among the applicants who applied in response to the recession, 42 percent were awarded benefits, according to the study funded by the Social Security Administration and based on an analysis of the agency’s disability records.
When they did receive benefits, they were more often awarded on the basis of having a functional limitation and no transferable skills. As a result, many people who used to work were nevertheless approved for benefits, because their options for transferring their skills from their old job to a new job were limited.
Adding so many people to the disability system carried a steep price in terms of an increase in administrative and benefit costs. But the formerly productive workers also paid a price.
“Once people qualify” for disability benefits, the researchers said, “they rarely re-enter the labor force.” …Learn More
June 2, 2020
Home Care Reform’s Outcome a Surprise
Medicaid pays for care for six out of 10 nursing home residents.
To reduce the program’s costs, the Affordable Care Act (ACA) encouraged states to expand the care that people over 65 can receive in their homes or through community organizations. The hope was that they would delay or – even better for them – avoid moving into a nursing home if they had easier access to medical and support services.
Many states historically did not use Medicaid funding to pay for home care. The ACA’s Balancing Incentive Payments Program required the 15 states that chose to participate in the reform, including Nevada, Texas, Florida, Illinois, and New York, to increase spending on home and community care to half of their total Medicaid budgets for long-term care. By the end of the program, the states had met their goals of more balanced spending on home care versus nursing home care.
But four years after the reform went into effect in 2011, the states’ nursing home population had not changed, compared with the states that did not expand their services, according to a University of Wisconsin study for the Retirement and Disability Research Consortium. The researchers said one possible reason the reform didn’t reduce nursing home residence was that people who were never candidates for this care were the ones taking advantage of the alternative forms of care.
The analysis did find other unintended consequences of the shift in Medicaid funds to home and community care. First, somewhat more older people moved out of a family member’s house and were able to live on their own.
Second, as more people moved into their own place, costs may have increased for a different federal program: Supplemental Security Income (SSI) for low-income people. The increase had to do with how this program calculates financial assistance. SSI’s monthly benefits are based on an individual’s income. When retirees decide to live on their own, the housing, meals and other supports the family once provided are no longer counted as income. The drop in a retiree’s income means a bigger SSI check.
On the other hand, the Medicaid reform may have financial benefits for caregiving families, the researchers said.
The greater availability of home and community care for seniors – whether they live with family or on their own – frees up time for their family members to earn more money at paying jobs. …
May 21, 2020
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.
A 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
March 31, 2020
Boomers Facing Tough Financial Decisions
For baby boomers who thought they were on the path to retirement, the road is shifting beneath their feet.
Danielle Harrison, a financial planner in Columbia, Missouri, sees a raft of problems stemming from the COVID-19-induced economic slowdown.
Many older workers getting close to retirement age are taking big hits to nest eggs that were already too small. Some boomers who lacked pensions and were behind on saving tried in recent years to make up for lost time with a riskier portfolio in the rising stock market – now they’re experiencing the downside of that risk. Others are scrambling to pay expenses or maintain debt payments as their income drops, altering their financial security now and changing their calculations for the future.
“It’s really going to hurt people,” said Harris, who believes that some baby boomers who had planned to retire in the near-term may be rethinking those plans.
And she’s talking about the boomers who still have jobs. The layoffs have already begun and will continue. Economists estimate GDP will contract in the second quarter at an unprecedented 10 percent to 24 percent annual rate.
Evan Beach, a financial planner in Alexandria, Virginia, predicted that “People are going to get fired, and the people who get fired are not the 25-year-olds making $60,000. They’re going to be the 50- and 60-year-olds making $120,000.”
The economic stimulus package Congress passed last week could help, because it was designed to mitigate some job losses by extending loans to businesses that preserve their payrolls. It will do nothing to repair investment portfolios, however.
Beach and other financial advisers worry that panic decisions in this tumultuous time will only make things worse for boomers who, now more than ever, need to preserve their retirement resources.
Just as they did in the years after the 2008 financial market crash, some unemployed boomers will pound the pavement for a job and will scrape by – through odd jobs, short-term contracts, and unemployment benefits – rather than be forced into a premature retirement.
But Beach anticipates that many of them may have no other option than to claim their Social Security – the program’s earliest claiming age is 62. The problem with starting Social Security now is that it would permanently lock in a smaller monthly check. This goes against a central tenet of retirement planning, which is that many people would be better off delaying the date they sign up to increase a retirement benefit they will need for the rest of their lives.
Beach conceded, however, that claiming the smaller benefit now is not irrational for a couple with one laid-off spouse, only $2,000 in income, and $3,000 in expenses. If the laid-off spouse can start getting $1,000 from Social Security, he said, “that’s not irrational. That’s desperate.” …Learn More
March 19, 2020
People on Disability Use Payday Loans
Taking out a high-cost payday loan is an act of desperation, and people on federal disability are some of the biggest users.
Nearly 6 percent of households under 66 and on disability use payday loans, compared with 4 percent of the general population, according to Haydar Kurban at Howard University, who did the analysis for the Retirement and Disability Research Consortium.
The financial vulnerability of disability recipients was starkest in the months after the 2008-2009 recession, when their use of payday loans spiked to 22 percent. The rate of borrowing also rose at the time for the general population but by much less.
Disability benefits under the federal Supplemental Security Income (SSI) program average about $900 a month. To eke out a living, people on disability try to supplement their income with food stamps, Medicaid, some work, or housing assistance from the government or a family member – and some use payday loans to raise quick cash. (A small share of people in this study are not disabled but receive SSI to supplement their Social Security benefits.)
Despite the very low incomes of the disability beneficiaries, they are attractive customers for payday lenders, Kurban said, because the benefit checks provide extra assurance the loans will be repaid. …
February 6, 2020
Can’t Afford to Retire? Not All Your Fault
Three out of four members of Generation X wish they could turn back the clock and get another shot at planning for retirement. One in three baby boomers say don’t think they’ll ever be able to retire.
“Overwhelmingly, Americans are stressed about their current – and future – financial situation,” the National Association of Personal Financial Advisors said about these new survey results.
Regrets about not planning and saving enough are enmeshed in our thinking about retirement. But it is really all your fault that you’re not getting it done?
The honest answer to that question is “no.” There are big gaps in the U.S. retirement system that make it very difficult for many to carry the responsibility it places on workers’ shoulders.
I predict some of our readers will send a comment into this blog saying, “I worked hard and planned and am comfortable about my retirement. Why can’t you?”
Granted, we should all strive to do as much as possible to prepare for old age, and many people have made enormous sacrifices in preparation for retiring. The hard truth is that some people are much better-positioned than others. Obvious examples include a public employee with a pension waiting for him at the end of his career, or a well-paid biotechnology worker with an employer that contributes 10 percent of every paycheck to her retirement savings account. These workers frequently also have employer-sponsored health insurance, which limits their out-of-pocket spending on medical care. This leaves more money for retirement saving than someone who pays their entire premium and has a $5,000 deductible.
Sure, we could all do a better job of planning out our careers when we’re first starting out. But my husband, as a Boston public school teacher, started accruing pension credits before he could’ve imagined ever getting old. He recently retired, and his pension, accumulated during 27 years of teaching, is making our life a lot easier.
But pensions are on the wane in the private sector, and more than half of U.S. workers have neither a pension nor a 401(k) in their current job – this makes it pretty hard to save. IRAs are an option available to anyone, but human inertia makes that an imperfect solution to the problem, because people tend to procrastinate and don’t set them up. Further, working couples in which only one spouse has a 401(k) aren’t saving enough for both of them, one analysis found. …Learn More