Older Americans nearing retirement age weren’t exactly in great shape financially when 2020 began, and now the economic tsunami caused by the coronavirus has made their situation even more perilous.
When the year began, some 15 million Americans aged 62 and over were living in poverty. That’s now likely to explode some 67% over the next decade to nearly 25 million, according to a study by the Retirement Equity Lab (ReLab) at New York’s The New School.
And this isn’t even using the official federal government’s absurdly low poverty level of $12,760 per person. The New School doubles that figure, to what ReLab economics professor Teresa Ghilarducci calls a base “level of economic deprivation.’” And yet senior poverty will still explode.
“We have to be honest about the likely reality,” Ghilarducci warns. “Millions of older Americans are going to have to accept austerity and a drop of living standards.”
What’s behind the gloomy forecast is hardly a surprise: The double-whammy of job loss and a punishing bear market. Both need some context.
On the job front, the unemployment rate for Americans aged 55 and older quadrupled last month to 13.6%. That’s a full point lower than the overall national rate of 14.7%, but this is deceptive. You know why? Because older workers will be the last to get hired when this crushing downturn ends.
Based on past recoveries, here’s what will happen: Employers will opt for younger, cheaper and more nimble workers over older folks who are perceived (often incorrectly) as not being up on the latest skills and technologies. Thus the jobless rate for older workers will remain higher, and for longer.
And when they do find work, it’ll probably for a lot less. In the “Great Recession” of a dozen years ago, the average older worker took a median pay cut of a whopping 23% (median means half, so half took a pay cut worse than that). By contrast, workers aged 25-34 typically took an 11% cut.
The bottom line here: the dual problem of a long job hunt followed by a pay cut means older workers, when (and if) they find new work, will have less cash to save — and less time to save it.
The market’s steep fall also needs some added context. I heard someone say Monday that the S&P 500 SPX, +0.20% — which crashed 35% during the bear market — has now made up that lost ground, because with Monday’s big gain, it’s now up 35% from the March low. Unfortunately, that’s not how it works. When you fall 35% (say from 100 to 65) it takes a 53.8% gain (35 / 65 = 0.538) just to get you back to where you started. If you hung on, you’re still well underwater. Time is a great friend of the young investor; for older folks nearing retirement, not so much.
Another reason for rising poverty is the lack of pensions among private sector workers. Half a century ago, it was very common to have a defined-benefit pension plan. Today, it’s relatively rare: only about 15% do. This makes a huge difference.
And so there’s not enough time and not enough money. That’s what will push millions more into poverty during what they presumed, over a lifetime of working, would be their golden years.
We keep hearing that it is the millennials (born between 1981-1996) who are the ones in trouble, and will be the first generation in American history to be worse off than their parents. After all, they’re saddled with college debt, forced to delay everything from starting a family to buying a home and more. Yes, millions of millennials are already behind. Yet these younger Americans, aged 25 to 40, have parents who could soon slide into destitution.
The fact is, workers in their 50s today are approaching retirement “with a lot less money than their parents of grandparents, relative to their living standards, and relative to the poverty rate,” Ghilarducci says. “This is a real reversal of the kind of progress we were making in this country, when we lowered the poverty rate among our elders.”
It isn’t the millennials who will be the first generation to be worse off. It looks like their parents will beat them to it.