Older Americans nearing retirement age weren’t exactly financially healthy in early 2020, and now the economic tsunami caused by the coronavirus has made their situation even more dangerous.
At the start of the year, some 15 million Americans over the age of 62 were living in poverty. It is now likely to explode by 67% over the next decade to nearly 25 million, according to a study by Pension Equity Lab (ReLab) at The New School in New York.
And it’s not even using the federal government’s absurdly low poverty level of $ 12,760 per person. The new school doubles this number, to which economics professor ReLab Teresa Ghilarducci calls a basic “level of economic deprivation”. Yet the poverty of the elderly will continue to explode.
“We have to be honest about the likely reality,” said Ghilarducci. “Millions of older Americans will have to accept austerity and a lower standard of living.”
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What is hidden behind the gloomy forecast is not a surprise: the double blow of job loss and a punitive bear market. They both need a little context.
On the employment front, the unemployment rate of Americans over 55 quadrupled last month to 13.6%. This is a full point below the overall national rate of 14.7%, but it is misleading. You know why? Because older workers will be the last to be hired at the end of this overwhelming recession.
Based on past recoveries, here is what will happen: employers will opt for younger, cheaper and more agile workers than older people who are perceived (often wrongly) to be up to date with the latest skills and technologies. As a result, the unemployment rate for older workers will continue to be higher and longer.
And when they find work, probably for a lot less. In the “Great Recession” a dozen years ago, the average older worker had an average wage drop of 23% (the median means half, so half had a worse drop than that). In contrast, workers aged 25 to 34 generally experienced a drop of 11%.
Conclusion: the double problem of a long job search followed by a drop in wages means that older workers, when (and if) they find a new job, will have less money to save and less time to save him.
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The sharp drop in the market also requires an additional context. I heard someone say on Monday that the S&P 500
SPX
, Which fell 35% during the bear market, has now made up for lost ground, because with Monday’s big gain, it has now risen 35% from the trough in March. Unfortunately, that is not how it works. When it drops 35% (say 100 to 65), it takes a profit of 53.8% (35/65 = 0.538) just to get back to where it started. If you hold on, you’re still well underwater. Time is a great friend of the young investor; for seniors about to retire, not so much
Another reason for the increase in poverty is the lack of pensions for workers in the private sector. Half a century ago, it was very common to have a defined benefit pension plan. Today, it is relatively rare: only around 15%. It makes a huge difference.
And then there is not enough time and not enough money. This is what will drive millions more into poverty during what they bragged about, for a lifetime of work, it would be their golden years.
We always hear that it is the millennials (born between 1981 and 1996) who are in trouble, and they will be the first generation in American history to be worse than their parents. After all, they are burdened with college debt, forced to delay everything, from raising a family to buying a house and more. Yes, millions of millennials are already late. However, these young Americans, aged 25 to 40, have parents who may soon fall into poverty.
The fact is that 50-year-old workers are now approaching retirement “with far less money than their grandparents, relative to their standard of living and poverty rate,” said Ghilarducci. “This is a real investment of the kind of progress we were making in this country when we reduced the poverty rate among our seniors.”
It is not the millennials who will be the first generation in a worse situation. It seems their parents will defeat them.