UP IN SMOKE

More older Americans will have to rely on Social Security as retirement savings dwindle

“I’m always looking for a job. Always,” she says. “This time, I think I’m going to pass.” Once a middle manager at a food company, Dominguez used to consider herself upper middle class. But she lost her job and, at 59, discovered no one would hire her for comparable work. She never thought that in her late 60s she’d be contemplating risking her health for the chance at a part-time job.

“I’m right there at the edge,” Dominguez says.

For older people, the coronavirus crisis has been especially shocking. Many can’t go anywhere or see grandchildren. Even buying groceries is a risk. Their life savings are melting as the economy shuts down and financial markets plummet. The pain may be particularly acute in the U.S., where Americans rely on a retirement system that was broken before the pandemic.

Almost half of U.S. households 55 and older have nothing saved for retirement. Many of the rest were already doing worse than earlier waves of retirees. After a 40-year-long shift from traditional pensions to individual

401(k) retirement accounts, Americans’ financial security is now defenseless against whatever crisis comes along.

Just before the markets tumbled, Alicia Munnell, a professor and director of Boston College’s Center for Retirement Research, and her colleagues examined the retirement savings of late Baby Boomers, now 55 to 60 years old, the first cohort to spend their careers with 401(k) accounts rather than pensions. What she found was “really horrifying,” she says.

With just a decade or more to retirement, late boomers had far less saved in 401(k)-style defined contribution plans than older cohorts did at the same ages. Middle-income late boomers had less than $30,000 saved in their early 50s, |

Ceci Dominguez celebrated her 67th birthday alone in her home in Los Angeles. The threat of coronavirus kept her from friends and family — and from the part-time jobs and informal gigs that keep her frugal budget balanced.

As her few investments were plunging in value, she’d thought about driving to the Census Bureau, where a job was waiting. The Census Bureau would pay $25 an hour, almost $11 more than the rate she earned working 19 hours a week at a private school that abruptly closed the week before. But the news of the virus spread persuaded her to stay in.

vs. $55,787 for early boomers and $50,787 for mid-boomers.

The more time Americans spent in the 401(k) system, the less they were managing to save. The prime culprit, researchers concluded, was the Great Recession, which hit the 401(k)-reliant late boomers harder than older cohorts. The younger boomers were actually doing a good job of saving until their mid-40s.

Then the 2008 financial crisis destroyed their wealth just as the resulting recession derailed millions of careers. In the aftermath, they earned less and saved less than older boomers had at the same ages. The study warns that Generation X and millennials seem to be on a similar trajectory.

Now, another economic shock is putting livelihoods and retirement savings in jeopardy. The ultimate damage is impossible to predict, with U.S. stocks more volatile than at any time since the start of the Great Depression.

The sell-off highlights “the vulnerability of workers relying on defined contribution plans, where they absorb all the risk,” Munnell says. It also highlights the importance of Social Security, the economic lifeline created during the similarly grave crisis of 90 years ago.

“Those checks are going to go out every month and continue no matter what happens to the stock market,” she says. “That really is the backbone of the retirement system.”

Social Security can be credited with creating the very notion of retirement. For centuries before the program was launched in 1935, only the wealthy could afford to stop working. As the

U.S. recovered from the Great Depression and then boomed, a new retirement system for the middle class took root.

Employers attracted workers with pensions that, like Social Security, guaranteed income for life. Starting in the 1980s, however, the 401(k) — almost an accident of the tax code — began replacing pensions, pushing more risk and responsibility onto the shoulders of American workers.

The system was a boon for many thrifty upper-middle-class professionals, but showed flaws early on. Many amateur investors made big bets on high-promise, zero-profit tech stocks in the 1990s and got slammed when the bubble burst. Wide swaths of the workforce never got access to a 401(k) at all.

Even affluent Americans faced a persistent problem with the 401(k) system — one that’s hitting hard right now. It’s known as sequence of return risk. For anyone about to retire, what matters to their financial well-being is not just the long-term return their portfolio can deliver, but also what happens in the markets in those first years after they stop working.

A big blow at the start, even if it’s followed by a rally, can set people off course for good.

“Savings are important for shortterm needs,” says Nancy Altman, a former pension lawyer who cofounded the advocacy group Social Security Works in 2010. “But what you need for retirement is insurance, and that’s what Social Security provides.”

But according to calculations by the system’s trustees last year, the program’s income and reserves won’t be enough to pay for scheduled benefits by 2035, forcing the U.S. to reduce benefits by about 20%, unless changes are made. The coronavirus pandemic makes those calculations worse, though no one can fathom by how much right now. As unemployment rises, there will be fewer workers to support the system through their payroll taxes.

As things get tighter, many Americans may have to cancel a big chunk of their retirement. A couple years of extra work can dramatically lower the risk of running out of money later.

But this crisis was perfectly designed to throw a wrench into such plans. Jobs dealing with the public are unsafe for those over 60, who are likelier to die if they catch the virus. Now, Baby Boomers like Dominguez have little to fall back on beyond Social Security.