The Great Recession Hurts Those Soon to Retire, Even if They Don’t Lose Their Jobs.

A recent report from the Urban Institute suggests that the effects of the recession will be felt for several decades, especially by those who are now ages 60-65.  Even for those fortunate enough to remain employed, individuals nearing retirement will find that their Social Security benefits, pensions and IRAs are lower than anticipated.

The stagnant economy continues to keep wages well below their normal growth rate.  These lower-than-anticipated earnings translate to less money saved directly by workers.  Additionally, many pension plans and 401(k) plans are dependent upon contributions that are generally tied to the workers' pay.  Further, Social Security benefits are based on lifetime earnings. 

The Urban Institute projected average incomes to age 70 for adults aged 25 to 64 in 2008, and then calculated their likely incomes had the recession not occurred, using the Social Security trustees' assumptions from 2010 and 2008, respectively.  The Institute found that, for most workers, the Great Recession will result in average age-70 incomes that are 4 percent lower (about $2,300 annually) than they would have been had there been no recession.  However, the difference rises to five percent (about $2,500) for workers who were between 55 and 59 when the recession began in 2008.  It was also determined that postretirement earnings in this group will decrease by 9 percent.  Workers in this group who find themselves unemployed will face elevated unemployment rates that further inhibit earnings at age 70.

The Institute report noted that, although Social Security is based on lifetime earnings which, seemingly, would not be significantly affected by the recession for workers who had already amassed the majority of their lifetime earnings, the benefits received by older workers will, in fact be impacted.  Social Security is indexed to the average wage in the economy in the year a beneficiary turns 60.  Thus, the lower wage-growth following the depression lowered the index factor for everyone who turned 60 after the recession began.  The lower index is applied across the board, thus effectively reducing benefits even for pre-2008 earnings, and resulting in lower Social Security benefits.

Those already in their 60s at the time the recession began will not feel the effect of this indexing because their benefits had already been indexed.  However, they may still see a three percent drop in age-70 income as the result of likely lower postretirement employment rates. 

Workers aged 25 to 34 in 2008 will see a greater average annual age-70 decrease in income - approximately five percent - because they were more likely to have lost their jobs and, even if working, their lower wage rates can potentially continue for a significant portion of their working lives.  For this group, however, an upturn in the economy, perhaps coupled with changes in their financial behavior (increasing savings, working longer), may help to ameliorate the effects of the recession.

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