Recessions and retirement: how stock market and labor market fluctuations affect older workers.

• Author: Coile, Courtney
• Position: Research Summaries

The sharp drop in equity values at the beginning of the recent financial crisis led to widespread concern about the effect of the crisis on retirement security. With defined contribution pension plans largely having replaced defined benefit plans for U.S. workers, (1) millions of individuals experienced deep declines in the value of their retirement savings. It was widely predicted that workers would delay retirement to make up for these losses, as newspaper headlines proclaimed "Economic Crisis Scrambles Retirement Math" and "Will You Retire? New Economic Realities Keep More Americans in the Workforce Longer."

The effect of the sharp rise in the unemployment rate on retirement was a less-publicized element of the crisis. Relative to earlier periods, workers who lost jobs experienced longer spells of unemployment and had a lower probability of finding new jobs. (2) Older workers who experienced job loss and difficulty finding work may have retired earlier than planned. Indeed, the Social Security Administration reported in 2009 that new retired worker benefit claims rose by 10 percent more than expected during 2008 and officials surmised that the weak economy was the cause. (3)

The potential effects of the crisis on retirement are more complex than suggested by the headlines. In a series of studies, we have investigated the effect of stock and labor market fluctuations on retirement decisions and retiree well-being in the United States. This summary reviews our exploration of whether retirement rates are higher when stock markets or labor markets are weak. We also describe our analyses of whether recessions have long-term impacts on retiree income and health.

Does the Stock Market Affect Retirement?

In order for stock market fluctuations to affect retirement decisions, several conditions must be met. First, since equity investors presumably expect a positive rate of return and understand that daily prices are volatile, there must be asset price movements representing larger- or smaller-than-expected returns. Second, workers must have enough stock assets that these price changes constitute meaningful wealth shocks. Third, retirement rates must be sensitive to fluctuations in wealth.

The stock market has experienced unusual equity returns over the past two decades, with two boom-bust cycles, culminating in the dot-com crash of 20002002 and the more recent financial crisis. Whether workers have substantial equity investments is a different matter. In one analysis, we report that 58 percent of U.S. households with a head aged 55 to 64 held stock assets in 2007, just before the recent crisis. (4) The most common form of ownership is through retirement accounts (50 percent of households), though some households own stocks directly (21 percent) or in mutual funds outside of retirement accounts (14 percent). Median stock assets are $78,000 among stockholders. Asset ownership and values are strongly correlated with education. Some 78 percent of households headed by a college graduate own stock, and the median holding is $125,000, while just 21 percent of households headed by high school dropouts hold stock, with a median holding of $10,000. Overall, nearly six in 10 of near-retirement-age households have less than $25,000 in stock assets and only one in eight have assets over $250,000.

If workers respond to financial wealth shocks, the stark differences in stock ownership by education suggest that the impact of stock...