Where Did Retirement Savings Stand On The Verge of the Covid Recession?

The Covid-19 pandemic has affected all aspects of our society and economy, but one area where we fear irreparable damage is in retirement savings. Americans approaching retirement in 2020 suffered a simultaneous hit to both the financial markets and the job markets, reducing the value of their savings and making it hard to make up the difference by working longer or saving more. Worse, older Americans don’t have as much time to recover. We don’t know yet how well Americans’ retirement income security will recover. But we do have new and often-encouraging data on how well prepared Americans were for retirement as the Covid recession hit.

In a recent study published by the American Enterprise Institute, I used the Federal Reserve’s new Distributional Financial Accounts dataset to track Americans’ retirement savings from 1989 through 2016. My study included retirement savings in 401(k)s and Individual Retirement Accounts (IRAs) along with any benefits that had been earned under a traditional “defined benefit” pension plan. I found that average retirement savings increased across all age, income, educational and racial groups over the past three decades. And that increase showed up whether we measured savings in inflation-adjusted dollars or, as many financial planners do, as a percent of the household’s annual earnings.

But 2016 was four years ago and in 2020 we’re enduring a market downturn and an economic recession. How well-prepared were Americans nearing retirement as the Covid pandemic hit? I combined the Fed’s Distributional Financial Accounts with data from the Bureau of Labor Statistics’ Current Population Survey to find out. Unfortunately, the data did not allow me to calculate the value of near-retirees’ IRA account holdings, which are a significant source of savings, but I am able to show trends in household retirement savings in traditional pensions and 401(k) accounts.

In 1989, households aged 55 to 69 held an average of $164,793 in retirement savings through pensions and 401(k)s. By 2000, average retirement savings had risen to $266,887, and by 2006 the average near-retiree household held $316,106 in savings. In 2019, on the verge of the Covid pandemic, the average near-retiree household had retirement savings of $375,642. Those years are important because they immediately precede the last four economic recessions. Compared to past generations of Americans, average near-retirees today have set aside more retirement savings to weather a coming downturn.

In the first quarter of 2020, average retirement savings of households aged 55 to 69 dropped by 4.4%, to $358,967. Further declines are possible. But even then, household savings remain above those that previous groups of near-retirees held.

Americans are also claiming Social Security benefits later, with the average retirement age rising by 1.2 years between 1989 and 2018, according to Social Security Administration data. Americans’ delayed benefit claiming offsets about 80% of the reduction in Social Security benefits that came though the increase in the Social Security normal retirement age from 65 in 2000

Older Americans are also working longer. In 1989, 43.1% of Americans aged 55 to 69 were employed, according to the Bureau of Labor Statistics. By 2019, 54.8% of older Americans were still working. And inflation-adjusted average earnings among Americans 55 to 69 years old have nearly doubled, from $15,587 in 1989 to $34,950 in 2019.

Higher savings, delayed Social Security and increased work in old age have paid off in significantly higher retirement incomes. Congressional Budget Office data show that the average household income of Americans aged 65 and over rose by 55 percent above inflation from 1989 to 2016.

None of this is to say Americans’ retirement security hasn’t been hit by the Covid pandemic, nor that some Americans will reach retirement with insufficient resources. And yes, we should do more to strengthen retirement security, from fixing Social Security’s finances to expanding access to retirement savings accounts.

But recessions and market crashes will inevitably hit us, often without warning. The key to weathering the storm is preparation. Higher retirement savings, delayed Social Security claiming and greater labor force participation are the keys to improved retirement income security, and Americans have done all three.