How Did the Recession of 2007-2009 Affect the Wealth and Retirement of the Nearar Retirement Age Population in the Health and Retirement Study?

By Gustman, Alan L.; Steinmeier, Thomas L. et al. | Social Security Bulletin, October 1, 2012 | Go to article overview

How Did the Recession of 2007-2009 Affect the Wealth and Retirement of the Nearar Retirement Age Population in the Health and Retirement Study?


Gustman, Alan L., Steinmeier, Thomas L., Tabatabai, Nahid, Social Security Bulletin


This article uses household wealth and labor market data from the Health and Retirement Study (HRS) to investigate how the recent "Great Recession" has affected the wealth and retirement of those approaching retirement age as the recession began, a potentially vulnerable population. The retirement wealth of people aged 53-58 in 2006 declined by a relatively modest 2.8 percent by 2010. Relative losses were greatest among those with the highest wealth when the recession began. Most of the loss in wealth is due to a declining net value of housing, but several factors may provide this cohort with time to recover its housing losses. Although unemployment rose during the Great Recession, that increase was not mirrored by flows out of full-time work or partial retirement. To date, the retirement behavior of the Early Boomer cohort does not differ much from that of older cohorts at comparable ages.

Introduction

This article uses household wealth and labor market data from the Health and Retirement Study (HRS) to investigate how the "Great Recession" of December 2007-June 2009 has affected the wealth and retirement of people who were approaching retirement age as the recession began. Near-retirees would seem to be highly vulnerable to an unexpected downturn, as they have very few effective options for adjusting their behavior in the short term. They can postpone retirement and save at a higher rate, but postponing retirement is of little help to those who have lost their jobs. Moreover, there is little time to increase savings, so any large losses from the recession are likely to be permanent, affecting welfare throughout retirement.

HRS data enable us to introduce four analytical innovations. First, the HRS provides panel data that allow us to calculate changes in key outcomes for the same individuals over the full course of the recession. Second, HRS data enable us to compare the changes in outcomes between cohorts-during the recession for those nearing retirement age at its onset, and over a comparable age span for members of older cohorts. Third, we can identify the prevalence of those who gained or lost wealth in the recession according to their place in the wealth distribution. Fourth, although speculation about the recession's effects usually focuses on measures of retirement expectations, the HRS provides detailed data on actual retirement outcomes.

Our analysis measures wealth comprehensively, accounting for the values of defined benefit (DB) and defined contribution (DC) pensions, lifetime Social Security benefits, individual retirement accounts (IRAs), the net value of housing, and other accumulated financial and nonfinancial wealth. With these data, we measure the extent to which the recession's effects on volatile assets were cushioned by more stable assets.

Measures of employment-related outcomes reported by the HRS include the extent of full-time work, full and partial retirement, hours of work, and unemployment, as well as the number of people who report themselves being not retired but also not working. We measure flows among these statuses between 2006 and 2010. The HRS data also allow us to understand what underlies changes in employment patterns and how conditions in the job market affect retirement flows. For example, the HRS reports involuntary layoffs, as well as other reasons for changes in employment status, including anticipation of a job loss. It also reports enrollment in disability programs.

When we examine the cohort approaching retirement age during the Great Recession, we find that on average their real wealth fell by 2.8 percent. When members of cohorts 6 and 12 years older were the same age (53 to 58), their wealth increased about 5 percent in real terms. To be sure, the economic environment facing the Great Recession's near-retirees differed from that experienced by cohorts who approached retirement in more stable economic times. Workers nearing retirement 6 and 12 years before the Great Recession benefitted disproportionately from the boom in housing prices and the stock market. …

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