COVID’s Long-Term Hit to Social Security

July 13, 2020

Pandemics and protests. Reopenings and re-closings. COVID-19 fear and COVID-19 fatigue. We’re in turbulent times that we all wish were over, but they are not and won’t be soon. Many of the issues and changes are going to be around for a long time. Our financial services team is more than two dozen studies and a hundred presentations in to the crisis. The most common questions we hear are – what trends will continue after this is over, and what issues are bubbling under the surface?

Many trends will stick around long after the crisis is over. Telehealth use, digital/contactless payments, working from home and a new emphasis on ESG investing aren’t going anywhere. But one area we are particularly concerned about as a more long-term threat is Social Security. Fortunately, the liquidity generated by monetary stimulus from the Federal Reserve and the fiscal stimulus by the Federal government have buoyed the market so retirement assets have held up well so far. Unfortunately, that is all poised to change.

Social Security is often talked about as under threat, with actuaries forecasting the system to go bankrupt in the future. Yet as of now, Social Security has never missed a payment or cut benefits. Many people don’t realize that payouts are determined in part by the Average Wage Index which is immediately being impacted by current and rampant pay cuts, layoffs and furloughs. If Congress does not act to address this issue, citizens born in 1960 (and likely 1961) will see a nearly 15% cut to their lifetime benefits from Social Security when it’s time for them to collect. And if the pandemic suppresses the economy into 2022, those same cuts will effect even greater numbers of pre-retirees. What’s more, the impact to their social security benefits will be permanent.

Our recent study of DC plan participants finds that 84% of those born from 1956 to 1964 name Social Security among their top five sources for income in retirement, with one in five (21%) indicating it as their primary source. These percentages mean that a significant 15% decrease in Social Security benefits is a massive issue pre-retirees don’t see coming. Right now, pre-retirees who are not high net worth are facing very difficult situations and tough choices, as layoffs and furloughs have hit this group particularly hard. Unemployment for those 55 and older reached 13.9% in April, with certain demographics hit even harder. Women have been harder hit than men (15.5% versus 12.1% unemployment) and pre-retirees of color lost their jobs at a higher rate. In the 55-to-64 age group, second-quarter unemployment was 10.9% for whites, 12.9% for blacks, 16.7% for Asians and 13.9% for Hispanics.1 Wage data are not yet available, but the substantial reductions in earnings are expected to fall along similar demographic lines. These figures, coupled with the potential for cuts in Social Security benefits, show that the retirement crisis will hit these groups particularly hard.

This is a critical issue for those who have not saved what they need for retirement, and much like unemployment, will disproportionately hit people of color and women. Our qualitative research shows that almost none of the people impacted are aware that this issue looms. Pre-retirees, whether they know it or not, need help and all the advice they can get. This is an opportunity for asset managers, plan sponsors and advisors to quickly inform clients and participants about the danger, and maybe even make some noise so policy makers correct the issue. Taking action now is a good opportunity for brands to demonstrate they are on clients and participants’ side on issues like retirement security.

 

Check our Financial Services COVID-19 Market Research Perspectives as we closely monitor the impacts of the pandemic on the financial services industry.

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1 U.S. BUREAU OF LABOR STATISTICS, https://www.bls.gov/web/empsit/cpsee_e16.htm.

Christopher Barnes
CPO, Managing Director

Chris is chief product officer and managing director of the Financial Services Research division of Escalent, with a deep background in market and public opinion research. His background includes co-founding the Center for Survey Research and Analysis at the University of Connecticut where he led ongoing studies on the business climate presented to regional economists quarterly. He has led studies for many of the nation’s top companies in insurance, banking, wealth and health insurance sectors. His studies have appeared frequently in the national media, including The Wall Street Journal, USA Today, The New York Times and Time cover stories. Chris earned a bachelor’s degree in history from Kenyon College and a master's degree in political science with a concentration in survey research at the University of Connecticut.