Did Americans raid retirement savings during COVID?

Retirement savings patterns during the beginning of the COVID-19 pandemic showed meaningful differences when compared to a previous rapid and severe economic decline – the Great Recession – according to a paper published in August.

The paper, which was written for the Joint Committee on Taxation, demonstrates that individual contributions to retirement savings vehicles did not show a significant decline at the outset of the pandemic, unlike during the Great Recession. The researchers, who used tax data to measure retirement savings contributions and withdrawals, also found that IRA withdrawals substantially declined in 2020 for people older than 72, while employer-plan withdrawals increased for those under 60.

The paper, “Changes in Retirement Savings during the COVID-19 Pandemic,” was published through the Pension Research Council of the Wharton School at the University of Pennsylvania. Researchers aimed to explore how retirement savings were affected by the pandemic, the accompanying recession and the policy actions Congress took to respond to the effects of the pandemic.

In the years 2008-2009 of the Great Recession, individuals’ contributions to retirement plans saw a sharp decline. However, researchers found there was “little change” in individuals’ contributions to retirement plans in 2020. In fact, individuals’ contributions increased from 2019 at a rate consistent with recent trends. The paper suggests the difference in contributions between the recessions may be traced to who was most affected by the respective economic downturns.

“This may have occurred because the effects of the COVID-19 pandemic were disproportionately worse for workers at the bottom of the income distribution, who save at much lower rates than middle- and high-income earners, while the earnings shocks during the Great Recession affected middle- and high-income workers to a greater degree than during COVID-19,” according to the paper.

Related: Staying optimistic: Despite COVID, older Americans’ retirement expectations right on target

The paper’s authors also note that the stock market may have played a role. While the Great Recession featured a lengthy bear market, the stock market made a quick V-shaped recovery during the pandemic, making it less likely for workers to reduce their contributions.

Changes in withdrawal behavior during pandemic

Though retirement contribution patterns remained steady, withdrawal behavior in 2020 experienced a stark change, likely due to policy changes, the paper’s authors said.

First, retirement withdrawals for those older than 72 fell. Key to that trend is that Congress suspended required minimum distributions for those individuals in 2020. Typically, owners of IRAs and defined-contribution accounts must take minimum distributions from their accounts starting with the year they turn 72. As part of the CARES Act passed in 2020, those distributions were suspended for the rest of the year. Congress enacted a similar suspension in 2009 for the same age group, leading to a similar decline in distributions.

“We find that people responded to this policy by sharply reducing their withdrawals, much as they did in response to the suspension of those same requirements in 2009,” the authors wrote.

Secondly, those under the age of 60 increased their early withdrawals. This also appears to have been a direct response to the CARES Act. Normally, non-rollover withdrawals from IRAs and defined-contribution plans that are made before the age of 59½ carry a 10% penalty (and also are subject to ordinary income tax). The CARES Act included a broad exception to the penalty, allowing for withdrawals of up to $100,000 to individuals who claimed economic or health hardships in 2020 with the penalty.

“We find clear evidence that some individuals responded to this policy by taking large withdrawals near the exemption limit (approximately $100,000),” according to the paper, which noted the importance of the rise in job separations created by the pandemic. “Individuals who took such withdrawals were more likely to have experienced business losses and to have unemployment insurance income in 2020. At the same time, we also find that many people (at least, those near age 59½) took withdrawals consistent with the penalty remaining in place.”

The paper stops short of identifying how effective the CARES Act policies were in providing support during a difficult economic period.

“In general, the effects of retirement-related policies implemented during the COVID-19 pandemic are ambiguous when it comes to providing relief for people facing financial difficulties, especially in comparison to other targeted policies such as expansions in Unemployment Insurance, the Supplemental Nutritional Assistance Program (SNAP), Medicare and Medicaid,” according to the authors.