The so-called “Great Recession” has taken a permanent bite out of everyone’s retirement and not just at a macro level. Today’s workers will lose an average of $2,300 a year each in retirement benefits because of the anemic wage growth which started in 2008, according to a new study written by Urban Institute analysts and released by Boston College’s Center for Retirement Research. Younger workers and wealthier workers will lose even more.
The study came as Social Security and Medicare trustees reported that both of those programs would run out of money earlier than had been expected. Medicare will exhaust its funds in 2024, not 2029, and Social Security will run out of money in 2036, not 2037, the trustees said. Legislators may be prompted by those findings to shore up or revise those programs, but even if they do, that would not reverse the decline projected by Urban Institute study authors Barbara A. Butrica, Richard W. Johnson and Karen E. Smith.
They said the real impact of the recession for workers was not in transitory unemployment, but was in permanently lowered future wages that would then feed into Social Security formulas in a way that would permanently lower benefits. “The reduction in wage growth affects nearly all workers — not just the relatively few who lost their jobs — and lasts for their entire post-recession career,” the report said.
Young workers will be harder hit, because the length of the careers they have ahead of them will magnify the effect of the lost wage growth, the study said. Their income at age 70 will be almost 5% lower than it would have been, or about $3,000 per person.
But higher income workers will have the most to lose and will lose the most. Young workers in the top 20% of wage earners will lose an average of $7,500 a year in their 70s, the study said.
Besides losing sleep worrying about it, is there anything future retirees can do about the new shortfall? They can be aggressive about their careers, hoping to squeeze bigger than expected raises out of their bosses, or changing jobs more frequently to climb the ladder quickly.
Or, they can try to save more on their own to make up for the loss. A rough rule of thumb is to multiply the amount you need to withdraw every year by 25 to see how much you’d need to accumulate to fund it. So, a 25-year-old who expects to need an extra $2,300 a year when he is 70 would have to build an extra $57,500 nest egg before then. In an account earning 7%, that would mean just tucking away an extra $15 a month.
Finally, they should watch that policy space, too. That $2,300 a year could end up being a drop in the bucket once Washington starts tinkering with Social Security.