The retirement crisis has been under way for a while. A growing share of older households had little or no savings, as costs for housing, health care and other items went up. Some worked longer, while others went deeper into debt to pay their bills. The current recession could quickly make things worse.
Basic retirement security requires having enough income to pay for necessary expenses in old age. My colleague, Jan Mutchler, and her collaborators regularly produce a very useful tool called the Elder Index. It is a county-by-county measure of the minimum amount of income that households 65 years old and older need to pay for the typical costs of living in a given area. It offers a straightforward way to capture retirement income adequacy by focusing on whether older people can afford key items such as housing, health care, food and transportation. This minimum income can vary by geography, by whether people rent or own their home, and by health status. For example, an older couple that rented a house or apartment in the District of Columbia in 2019 needed $33,060 to pay for their basic expenses, while that same couple would have needed only $21,504 in Alabama.
Importantly, the minimum threshold to cover the basic cost of living is higher than the federal poverty line. The federal poverty line does not truly capture older households’ economic difficulties. Many households face material hardships, such as an inability to pay for necessary health care or for their housing, even with incomes above the poverty line. Moreover, many older households, while not officially poor, have incomes just above the official poverty line. The Social Security Administration, for example, estimates that 16.4% of nonmarried people 65 years old and older were poor in 2014, the last year, for which those data are available, while 25.1% of this population had incomes below 125% of the poverty line. The share of older households without the minimum income needed to pay their basic costs of living far exceeds the share officially considered impoverished. For example, 50.3% of older singles had incomes below the Elder Index in 2019, while only 18.2% of older singles had incomes below the federal poverty line that year.
Many older households clearly do not have enough incomes to avoid economic hardships. Social Security is the most important and most common form of income for older households. But it is often not enough to pay for their basic costs of living.
Older workers often need to work longer to offset a lack of savings and limited Social Security benefits. Yet, things are likely going to get worse for older workers’ retirement prospects. Incomes are falling while costs are rising. Here are eight signs that the retirement crisis is getting worse.
First, continued work is no longer an option for many older workers. Unemployment rates for older workers have quickly risen. The average unemployment rate for workers 55 years old or older from March to June 2020 was three times higher at 9.5% than it was in 2019, when it averaged 2.7%. And, among late-career workers, unemployment rates now increase with age. The average unemployment rate was 10.8% for people 65 or older and 9.0% for people 55 to 64 years old, both of which are higher than the unemployment rate of 8.6% for people 45 to 54 years old. Furthermore, older workers typically also spend much longer looking for a new job after becoming unemployed. Working longer is simply not an option for many older workers in this deep recession, leaving them financially less secure.
Second, many older workers could soon face lower Social Security benefits. The initial Social Security benefit that people receive when they retire depends on the average wages in the economy when they turn 60 years old. The Social Security Administration expects that average wages will fall sharply from 2019 to 2020. This drop in wages inescapably means lower benefits for all retirement beneficiaries who turn 60 years old this year. Other benefits, such as spousal benefits, will then also be lower since they depend on the initial benefit of the retiree. Moreover, there is no current adjustment mechanism, so benefits for people who are turning 60 years old in 2020 will never catch up to the levels of benefits for people who are just one year older, even if they had the same earnings during their careers. Millions of retirees and their dependents could thus get lower Social Security benefits, just when older workers will likely need more support from Social Security.
Third, older households may start taking money from their retirement accounts. They may withdraw money from 401(k) accounts and Individual Retirement Accounts (IRAs) earlier than they had planned, due to financial hardship. They may also sell stocks to pay their bills, even as their accounts have not recovered from the stock market crash earlier in the spring. Estimates based on Census data show that 18.4% of people 55 and older used their savings or sold assets to pay for their spending in June 2020.
Fourth, house prices could fall. In June 2020, more than ten percent of homeowners with a mortgage either did not pay or deferred their mortgage. Many of these homeowners received financial support from the federal government via stimulus payments and higher unemployment insurance benefits. The federal government also put a moratorium on procedures against many homeowners for nonpayment of their mortgage. But federal government payments and mortgage moratoriums will run out soon. Many more homeowners could fall behind on their mortgage payments and face foreclosures. Rising foreclosures could then result in lower house prices, making it more difficult for older households to sell their largest asset and obtain money they had counted on for their retirement security. Their retirement income could take a substantial hit if house prices fall.
Fifth, many older households could end up with higher rents. Estimates based on Census data show that already 12.4% of renters 55 years old and older did not pay or deferred their rent in May and June 2020. These nonpayments could increasingly lead to evictions, which make it more difficult and more costly for tenants to find a new place to rent. Costs for one of the biggest spending item for household could go up just as incomes are falling.
Sixth, many older workers may decide to retire early. But taking Social Security retirement benefits before the full retirement age, which will go up to 67 years, leaves retirees with permanently lower benefits. For example, somebody who retires at age 62 when the full retirement age is 67 years will receive 30% less each month than they would have gotten if they had waited until age 67. As the labor market improved, the share of Social Security retirement beneficiaries retiring early fell from 68.4% in 2010 to 49.7% in 2018, boosting retirement incomes. This process could now be reversed as jobs quickly disappear. Many older workers may then retire early, even though it means accepting lower Social Security benefits.
Seventh, the pandemic could raise health care costs for older households in a number of ways. Many patients have delayed elective procedures and preventive screenings out of fear of becoming ill from the novel coronavirus or because hospitals and doctors’ offices were closed. Such delays result in worsening health and ultimately higher health care costs for older patients. Moreover, millions of people, disproportionately older ones, have fallen ill from the virus. When they recover, they will often encounter long lasting health effects that could raise the need for ongoing treatment and more health care spending. And, older people increasingly provide part of the long-term care for their ailing spouses and frail parents amid the virus’ spread in long-term care facilities. This added responsibility increases costs, as families have less time to work and often spend more out of pocket to support their loved ones.
Eighth, older households could increasingly go deeper into debt to bridge the gap between falling incomes and savings and rising costs. Indebtedness among older households has trended up over the past three decades. Among households 55 years old or older, 19.6% used credit cards and loans to pay for their spending in June and July 2020. Rising consumer debt among older households will impose yet another long-term cost and put meaningful retirement security further out of people’s reach.
Older households could find themselves in a quickly worsening economic situation. Incomes are falling while costs are rising. The retirement crisis was already under way before the recession started. The deep and prolonged economic pain now only accelerates it.