5 retirement security risks that 2020 made worse
Natixis study finds the lingering impacts of the 2008 recession are being compounded by 2020’s unprecedented events.
Retirement security was already on shaky ground when the calendar turned to January 1, ushering in a year of unprecedented and unexpected challenges that have compounded threats to global retirement security.
According to Natixis Investment Managers’ 9th annual Global Retirement Index, the challenges of 2020 have disrupted financial markets, caused widespread unemployment and demanded urgent response from policy-makers, all of which could have long-reaching impacts on retirement security.
The goal of the index is to provide an objective tool for comparing where critical issues are best aligned to ensure individuals can have a secure retirement.
“The factors affecting global retirement security are not stagnant,” said Dave Goodsell, executive director of the Natixis Center for Investor Insight. “They’re dynamic and inextricably linked to world events. Perhaps, no year underscores that more than 2020. When we started the year, retirement security was already on unsteady ground. The demographic and the economic realities of the developed world challenged the math behind traditional retirement. Nine months into the year, retirement security looks downright perilous as the pandemic, an economic decline, climate related disasters and a growing awareness of economic inequality underscore the long-term risks.”
5 areas of risk made worse by events in 2020
Natixis highlighted five areas of risk that have been made worse by the events so far in 2020.
1. Recession
Last year’s index indicated there was already concern about slow economic growth, but nobody was prepared for the pandemic-driven financial realities that 2020 has brought us. Already impacted by the dot-com bust in 2001 and a global recession in 2008, retirees now face an economy expected to shrink by 3 percent this year, according to Natixis.
With recession comes unemployment, which typically puts two types of pressure on retirement security — causing those affected to redirect funds otherwise designated for retirement savings to short-term needs, and reducing the amount of payroll taxes collected that fund pensions.
Pandemic-related unemployment will add a third pressure to the equation — people taking money out of their retirement savings plans to cover immediate expenses, said Natixis. More than 165,000 Americans have already dipped into their retirement savings without incurring early withdrawal penalties thanks to relief measures outlined in the Coronavirus Aid, Relief and Economic Security (CARES) Act.
In addition, recession conditions may prompt employers to suspend matching contributions to retirement savings plans, discouraging participation and causing lost opportunity for retirement assets to grow.
2. Interest rates
Cutting interest rates is a go-to tool to stimulate spending when economies are sluggish. However, interest rates have been at historic lows for more than 12 years, dating back to the financial crisis of 2008.
With a pandemic recession looming, 173 additional cuts have been made worldwide in the first half of the year, according to Natixis.
For individuals, low interest rates can be good, making mortgages and car loans more affordable, but for retirees, low rates make it hard to generate sustainable income, forcing retirees to dip further into their principal and depleting retirement savings more quickly.
3. Public debt
Stimulus packages, while necessary to combat the immediate pandemic-related financial crisis, also pose a long-term threat to retirement security. To offset the choices policy-makers are making today, programs that benefit retirees could be cut down the road.
Public debt levels around the world remained elevated after the 2008 recession. The United States recorded a debt load equal to 107 percent of gross domestic product in 2018, a figure that will likely trend up due to COVID-19, predicted the report.
4. Environment
Environmental issues, including pollution and increasing occurrence of natural disasters, such as the forest fires in Australia and the Western United States, not only have a negative health impact on the elderly, but they also pose a risk to retirees in terms of the financial costs.
Retirees living on a fixed income may have to dig deeper into their retirement savings to pay for health care costs related to environmental factors or face inflated prices for goods during disasters.
5. Economic inequality
Income inequality leads to retirement security inequality, and evidence continues to show a gap in both for women and people of color. These realities came to the forefront this year as social justice movements spread across the country and around the world.
The problem is compounded by the fact that women live about 3.6 years on average longer than men, putting them at greater risk to face poverty during retirement. In addition, people of color are less likely to be covered by an employee-sponsored retirement plan, according to the report.
What can be done?
Everybody has a role to play in working toward a secure retirement for all, including individuals, employers, institutional investors, policy-makers and asset managers, said the report.
“The thing we could do very quickly in this country is make sure everybody who’s employed has access to a workplace savings plan,” said Ed Farrington, head of retirement strategies for Natixis Investment Managers. “And then, we can learn from other countries that have done this well and use tools like automatic enrollment. That little nudge starts people saving. Once they start, they realize it’s not that painful. But it starts with access and it’s amazing to me that we continue to struggle with this in the U.S.”
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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