The Coronavirus Pandemic has further increased the division of the US economy. Some who had large pension accounts immersed themselves in the money and pushed out a troubled economy, while those who lived from paycheck to paycheck cut and scrambled as best they could.
” There were two different experiences during the pandemic,” Dan Egan, vice president of behavior-based finance and investment at Betterment Financial in New York, told Washington Newsday.
“Those who had an employee job and a healthy nest egg sailed through easily, and many contributed more to their retirement account,” he said. “But if you had a job in the service industry, the pandemic knocked you off the ladder.
Many people with stable jobs deposited the government’s first checks to boost the economy in pension or savings accounts, while those at the bottom of the economic scale used the money to cover routine expenses, he said.
In April, the unemployment rate rose to 14.7 percent. Before the economic shutdown imposed as part of efforts to stem the spread of the coronavirus, it was 3.5 percent. In total, 20.5 million people were unemployed last spring. The current unemployment rate is 6.9%, the Ministry of Labor reported – twice as high as at the beginning of the pandemic.
The U.S. Department of Commerce reported that consumer spending, which accounts for about two-thirds of the country’s economic activity, fell by 13.6% in April, the sharpest decline since the government began tracking consumer spending in 1959. It exceeded the previous record decline of 6.9 percent in March.
Against this background, some people had no choice but to replenish their pension accounts.
Defined contribution pension plans, which are usually funded by automatic withdrawals from an employee’s paycheck, are at the heart of private sector pension plans in the United States. Vanguard, a provider of mutual and exchange-traded funds, said that approximately 100 million workers participate in such programs, with assets estimated at $8.8 trillion.
The Coronavirus Aid, Relief and Economic Security Act (CARES), which came into force in March, provides for easier penalties and greater flexibility in withdrawals from pension accounts by those affected by the COVID 19 pandemic.
The CARES Act allows individuals with traditional IRAs and employer-provided 401(k) plans to withdraw up to $100,000 from a pension account without a 10% penalty for those under 59.5 years of age. Generally, one third of the money withdrawn is considered taxable income for the next three years. The withdrawn money can be returned to the retirement account.
The Investment Company Institute (ICI), a Washington-based trade association for U.S. and international investment companies, reported that withdrawals from defined contribution pension plans were slightly higher in the first three quarters of 2020 than in previous years, but remained low,
In the first three quarters of this year, 3.4% of plan participants withdrew money from their accounts, compared to 3.3% for the same period in 2019. During the economic turmoil in 2009, caused by the collapse of the subprime mortgage market, these withdrawals amounted to 2.6% of all accounts.
The trading group stated that 1.2% of plan participants had suffered hardship cases by September 30 this year, compared to 1.6% for the same period a year ago and 1.3% in 2009 when the collapse of the subprime mortgage market led to the Great Recession. The hardship layoffs since 2019 may “reflect financial problems caused by the coronavirus pandemic,” ICI said.
A preliminary review of the data shows that 2.2% of participants stopped contributing to their pension plan in the first three quarters of 2020, compared to 1.9% in the same period a year ago and 5.0&% in the first three quarters of 2009, the trading group said.
At T. Rowe Price, a global investment management firm based in Baltimore, during the worst phase of the COVID 19 pandemic, 5.7% of participants who saved for retirement reduced their monthly contributions, but only 2.5% stopped saving.
“Employment is the hinge,” Joshua Dietch, director of Retirement Thought Leadership at T. Rowe Price, told Washington Newsday.
“People who were employed by and large remained on track,” he said. “Many people who have taken dividends have consolidated their finances and are saving again-and even more. In fact, they are trying to catch up.”
Most people who automatically enrolled in a pension plan through their employer did not budge. But some were forced to tap into their pension funds during the worst of the pandemic, and that underlines the need to have an emergency fund separate from the pension account, he said.
“It is a mistake to lose this balance,” he said.
Of the participants in the pension plan with assets of more than $25 million, 84% had access to distributions under the CARES law. But of this group, only 7% had access to distributions related to the coronavirus. But 17% of these participants took the maximum allowed amount or the lesser of 100% of their vested account balance or $100,000, T. Rowe Price said in a report.
However, an online survey conducted by Edelman Financial Engines from August 27 to September 1 among 2,000 U.S. adults aged 40 to 65 with annual household incomes of $100,000 or more found that 26% had withdrawn money from their retirement or savings accounts to help a family member or friend during the COVID 19 pandemic, and 51% had tapped into reserves to pay bills.
Those who withdrew money said it would take about six years to replenish their savings.
At the other end of the scale are people whose retirement income is totally or heavily dependent on social security.
In 2020, about 65 million people received an estimated $1 trillion in social security benefits, including retirees, the disabled and addicts, the Social Security Administration (SSA) reported. This means that about 20% of the American population of about 328 million are directly or indirectly dependent on social security benefits.
There are about 45.8 million retired workers in the USA. An estimated 90% received social security benefits totaling $69.4 billion this year. The average monthly benefit for retired employees is $1,514. For many recipients, including approximately 21% of married couples and 45% of singles, social security provided 90% or more of their monthly income, according to the SSA.
Next year, welfare recipients will receive a 1.3% cost-of-living adjustment – the lowest since 2017 – and for those who receive the average $1,514 payment in December, the benefit will increase by $19.68 per month.
Despite the current upturn and the prospect of an effective COVID-19 vaccine that will allow a return to normality, market turbulence is likely to continue. The S&P 500 fell by about 20% in the first quarter, but the index recovered, and in the third quarter it rose 5.6% from year-end 2019, inflating many pension accounts.
But the ups and downs of the market are not necessarily a bad thing for investors.
“When everyone is scared, the market is not the riskiest,” said Egan of Betterment Financial. “It’s when people are exuberant.”