CHICAGO (Reuters) - This month marks 10 years since one of the most dramatic events of the financial crisis—the collapse of the Lehman Brothers investment bank. In the financial crash and Great Recession that followed, millions of Americans lost their homes and jobs and saw their prospects for a secure retirement damaged.
A decade later, the economy has recovered by most standard measures—the stock market is making record highs, unemployment is at a 50-year low point, gross domestic product is rising sharply and consumer confidence is at an 18-year high.
But how are we doing on retirement security? The picture is very mixed, as you can see from a comparison of key numbers before the crash and today for retirees - and workers close to retirement.
The bubble in housing markets preceding the financial crisis was the main cause of the economic downturn. Housing remains a critical component of retirement security, since home equity is a more important component of net worth than financial assets for older households. The Joint Center for Housing Studies of Harvard University (JCHS) reports that 59 percent of households aged 55-64 owned retirement accounts in 2016, but 74 percent owned their primary homes. Among households aged 65-74, some 50 percent owned retirement accounts, and 79 percent owned their primary homes.
In August, real housing prices (adjusted for non-housing inflation) were 9 percent below where they were in 2006, according to Jonathan Spader, senior research associate at the JCHS. “Real prices are the most relevant for retirement security,” he noted, “since it reflects how much housing a dollar actually buys, and what you have available to tap as home equity.”
You might well expect housing values to remain lower than when the bubble burst - and some parts of the country have seen prices recover much more strongly than others. But home ownership data for pre-retirees points to a more worrisome trend.
The foreclosure crisis following the bubble’s collapse had a relatively small impact on retired households (aged 65 or older) home ownership fell at the smallest rate for any age group—down from 81 percent in 2004 to 79 percent in 2017, JCHS data shows. But among households aged 55 to 64, the homeownership rate fell from 82 percent in 2004 to 75 percent in 2017. “That’s a troubling figure, because it suggests a much larger group of people will hit retirement age without home equity,” Spader said.
Seniors who do not own homes also will be subject to the volatility of rental costs, which have spiked in recent years and show no signs of slowing down. Nearly one-third of all households were cost-burdened in 2016, JCHS reports, meaning they paid more than 30 percent of their incomes for housing; among renters, 47 percent were cost-burdened.
The share of households over age 65 carrying mortgage debt into retirement also has been rising—41 percent in 2016, compared with 35 percent in 2007, and up from 22 percent in 1995.
The stock market has rocketed ahead more than fourfold since March 9, 2009, when the S&P 500 .SPX bottomed out at 676.53. The dramatic gains are reflected in aggregate retirement account holdings - traditional IRA accounts held $6.9 trillion at the end of 2016, according to the Investment Company Institute (ICI), up from $4.2 trillion at the end of 2007.
But the gains are concentrated in the top third of earners in the country, who held roughly 87 percent of all equities in 2016, according to the Center for Retirement Research at Boston College.
Among the top 10 percent of U.S. households, the median value of their retirement holdings jumped 70 percent from 2007, to $403,000 in 2016, according to the most recent Federal Reserve Survey of Consumer Finance (SCF). For middle-income groups, account values were stagnant or slightly down—a staggering finding considering the strong market gains.
A key culprit is unemployment during the downturn, when workers not only were unable to save for retirement but may have tapped savings to meet living expenses, noted Teresa Ghilarducci, an economist and director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research. “People in the bottom half of income had a lot more shocks and they were much more prone to tap their retirement savings.”
Very little progress has been made in making retirement accounts more available to workers since the recession. Fifty-two percent of families had access to retirement accounts in 2016—down from 53 percent in 2007, according to the SCF.
And the coverage story is worse among single people, minorities and less educated workers. For example, 35 percent of single workers without children had access to retirement accounts in 2016, unchanged from 2007. And 92 percent of families in the top 10 percent of income had access in 2016, compared with just 11 percent of the lowest-income families, SCF data shows.
“When you disaggregate the data, you see that households who had more invested to start with have rebounded, but others are just trying to claw their way back,” said Monique Morrissey, an economist with the Economic Policy Institute.
And surprisingly few retired households are relying on retirement savings for a significant portion of their income.
The Employee Benefit Research Institute (EBRI) reported earlier this year that within the first 18 years of retirement, individuals who accumulated less than $200,000 in non-housing assets before retirement had spent down (at the median) about one-quarter of their assets. The drawdown pattern was similar for retirees with assets between $200,000 and $500,000, and only 12 percent for those with $500,000 or more.
The study pointed to annuity income from pensions and Social Security as key reasons for this—people simply adjust their spending where they can to match what is coming in, and hang on to savings to meet emergency needs.
Social Security is especially critical for lower- and middle-income households, since the program’s design replaces a higher percentage of pre-retirement income. “Social Security provides a great foundation,” said Sarah Holden, senior director, retirement and investor research, at the Investment Company Institute.
But that approach faces threats. Defined-benefit pensions are disappearing rapidly in the private sector and Social Security is becoming less valuable over time due to the gradual increase in the age when full retirement benefits are available, which was set in motion by reforms enacted in 1983.
The big picture: 10 years after the collapse of Lehman Brothers, retirement security in the United States is a tale of two realities. The affluent have recovered just fine, while lower- and middle-class households face a very uncertain retirement.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Reporting and writing by Mark Miller in Chicago
Editing by Matthew Lewis