The Great Recession had a significant effect on many people's retirement planning, but Barry Bosworth, a senior fellow with the Brookings Institution, says it's probably not the effect you might have thought it was.
He has examined a variety of economic studies about the downturn and concluded that for most people older than 50, losing money wasn't the problem. As long as people didn't panic and pull money out of their 401(k)s and other retirement accounts when the market hit bottom, their investments have mostly recovered. Plus, for many retirees and those close to retirement, savings accounts are nice to have, but they rely or will rely on pensions and Social Security to pay the bills.
The downturn in the real estate market also didn't damage those older than 50 very much because they were unlikely to have significant mortgages -- and maybe they had no mortgage at all. So, while the paper loss might have made them feel insecure, it didn't have a significant effect on their budgets.
"Older people were less likely to think 'Oh, I'm rich' and take out a new second mortgage or home equity loan, unlike younger people who, by the millions, saw their homes appreciating in value, took out home equity loans and spent the money." Bosworth says.
High unemployment was what really affected people older than 50. "For many, losing their jobs was a triggering event that caused them to give up and retire. They took reduced Social Security benefits, and they are using up their own assets earlier than they anticipated," Bosworth says.
For the moment, these young retirees are financially OK, but Bosworth believes that about 10 years from now -- when inflation starts to erode meager incomes and their health declines -- "We're going to be seeing the negative effects of that decision," he predicts.
This reality makes it particularly important to shore up Social Security, Bosworth says, because so many people will be heavily dependent on it.
He is particularly critical of the payroll tax cut, which is now in its second year. He says it "destroyed the notion that Social Security was a fund that we paid into and made it clear we're just transferring some money that we have borrowed from the Chinese. We're just playing a game that is going to be very costly in the future."
He thinks the financial recovery emphasis should have been on job creation -- spending tax dollars on public works to put people back on the job, especially men between 50 and 65, who have retired in droves because they can't find work.
"We would have gotten a lot bigger bang for the buck," he says.