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Impact of the COVID-19 Pandemic on Retirement Income Adequacy

Evidence From EBRI’s Retirement Security Projection Model®

EBRI explored the aggregate potential impact of the 2020 market crisis as well as assumptions with respect to future employee and employer behavior in response to the current situation and potential decreases in defined contribution eligibility arising from increased unemployment. The combined impact of all intermediate assumptions (including the investment losses already experienced in the first quarter of 2020) certainly appears to be manageable: The $3.68 trillion aggregate deficit for all U.S. households ages 35–64 as of January 1, 2020, only increased 4.5 percent or $166.21 billion. Even the combination of pessimistic assumptions in this analysis only increased the aggregate retirement deficits by 11.2 percent or $412.77 billion.

Of course, the crisis could result in unexpectedly worse outcomes — market losses could be even greater, plan terminations more common, etc. Further, the analysis is not meant to minimize the potential impact of the current situation on specific individuals who are most affected. A future Insight will analyze the impact of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on retirement income adequacy, factoring in the potential ability of affected workers to take much bigger loans and withdrawals than they could even during the 2007–2009 financial crisis.

The analysis finds:

  • Market volatility may be the largest factor during this crisis in increasing retirement savings shortfalls and decreasing savings surpluses, especially in a worst-case scenario.

Projected Deficit Increase Due to the Current Pandemic Under Optimistic, Intermediate and Pessimistic Market Loss Assumptions

  • Match suspensions by plan sponsors, contribution suspensions by workers, increases in withdrawals, and decreased eligibility do not have as much impact when spread over all U.S. households. (However, they may have a significant influence on those impacted by these factors.) Plan terminations would have the greatest impact on retirement income adequacy. For the youngest workers, permanent termination of the defined contribution (DC) plans under $10 million in assets could have a large impact.

Increase in Retirement Deficits Above the $136.43 Billion Experienced in the Intermediate Market Loss Assumption

  • The combined impact of all intermediate assumptions, although damaging, appears manageable. Even the combination of pessimistic assumptions only increased the aggregated retirement deficits by 11.2%.

Aggregate Market Loss Assumptions Combines with Scenarios 1-5 Above

While employers and policymakers cannot control market fluctuations, they can be aware of the impact of plan sponsor and participant behavior on retirement income adequacy and develop approaches that can help mitigate damaging behavior today and position plans for robust utilization when the crisis ends.

Source: Jack VanDerhei, “Impact of the COVID-19 Pandemic on Retirement Income Adequacy: Evidence From EBRI’s Retirement Security Projection Model®,” EBRI Issue Brief, no. 505 (Employee Benefit Research Institute, April 21, 2020).