Posted by Jeffrey Brown on Jul 27, 2010
Filed Under (Retirement Policy)
When the financial crisis hit last year, a lot of news sources started speculating that people would be forced to work longer to make up for the losses in their 401(k) plans. Yet there seemed to be some puzzlement when data started indicating that more people were retiring earlier. What happened here?
Some new research sheds a bit of light on this. The answer to the puzzle is essentially that there are different groups out there who were affected differently. Higher income individuals with large 401(k) balances were indeed likely to postpone retirement as a result of the negative wealth shock.
However, the financial crisis was also accompanied by a deep and prolonged recession that significantly increased unemployment, or more broadly, joblessness. A study by Courtney Coile and Phil Levine of Wellesley College shows that a rise in unemployment during a recession leads to earlier retirement. In essence, older individuals choose to retire rather than try to find another job.
In aggregate, it appears that the unemployment-induced increase in retirement outweighs the 401(k)-loss-induced delay in retirement. The net result is the average person retiring earlier, not working longer.
Of course, the most important point of all is that both effects are likely to reduce retirement security. Whether forced out of the labor force early due to job loss or forced to stay in the labor force longer due to a negative wealth shock, individuals are made worse off. And that, ultimately, is the real story.