Covid-19 exacerbated monetary disparities and the pension hole
New research outweighs the pre-pandemic financial challenges and the effects of last year … [+]
The economic hardship caused by Covid-19 was felt unevenly among Americans, with worse outcomes for women, people of color, low-income workers, and those with less formal education. New government and private research highlights the financial challenges that existed before the pandemic and shows the impact of the past year on the lives of retirees and non-retirees alike.
Many families were confronted with the reality that one or more earners had to suffer a layoff or short-time work. Some reached into rainy daily allowances or searched retirement accounts to make ends meet, while others needed government assistance. Even as we begin to put some of the health and financial repercussions in the rearview mirror, it is clear that more needs to be done to strengthen the financial resilience and wellbeing of American workers and retirees.
There is evidence that government policy initiatives such as the CARES Act have helped mitigate the short-term impact, but we still do not understand all of the long-term implications for the economy in general and retirement provision in particular. There are some leading indicators that should be considered as policy makers continue to focus on improving pension security.
Even before most Americans’ daily activities were disrupted in 2020, more than 60% of working-age adults in the United States said they were worried about their finances, according to a study by the Global Financial Literacy Excellence Center (GFLEC) George Washington University and the FINRA Foundation for Investor Education. That concern was significantly greater in those who earn less money: about two-thirds of households with an annual income of less than $ 50,000 reported having anxiety, compared with less than half of households on more than $ 100,000 each Year earn.
In 2018, 56% of women felt stressed when they talked about finances, compared to just 44% of men. As the economic turmoil unfolded last year, women were more likely to be affected by the negative effects. For example, the 2020 Federal Reserve Report on the Economic Welfare of US Households in 2020 stated that “women who did not work disproportionately say that childcare and family responsibilities are keeping them from formal employment.”
Women are also less comfortable than men with managing retirement investments, with less than a third expressing this confidence regardless of educational level. 60% of men with bachelor’s degrees said they were comfortable managing retirement savings accounts.
Race plays an important role in both how individuals feel about their finances and how they have been affected over the past year. The GFLEC / FINRA survey found that Hispanic adults are significantly more likely to feel stressed about their finances. Meanwhile, Federal Reserve data suggests that only two-thirds of black and Hispanic adults felt they were “financially okay” compared to 80% of white adults.
This discrepancy carries over to retirement provision: “Black and Hispanic non-retirees were less likely to have retirement savings and consider their retirement provisions to be on track,” according to the Federal Reserve.
While many households struggled financially in 2020, those with adults with a bachelor’s degree were more likely than others to end the year than others with higher bank balances or incomes than in previous years. In fact, the Federal Reserve report found that “Adults with at least a bachelor’s degree were significantly more likely to be at least financially okay (89 percent) than those with less than a high school degree (45 percent).”
Layoffs hit those with less formal education particularly hard. In 2020, people without a bachelor’s degree were laid off almost twice as often as university graduates. Part of the inequality can be explained by the ability of these higher educated people to work remotely, with 46% teleworking exclusively during the pandemic.
Debt as a driver
While demographics highlight some of the financial challenges Americans face before and after the pandemic, debt weighs on workers and retirees alike. The Government Accountability Office recently reported that 71% of older Americans are in debt today, compared with 58% in 1989. The same study found that “From 2003 to 2019, people in their late 70s often had higher rates of credit card and student loan debt.” that was late than the 50-74 year olds. “
As families tried to deal with the effects of layoffs, falls in income, and higher spending related to Covid-19, many reported that they would be forced to turn to lenders, including credit cards, banks, and payday loans, for as much as $ 400 to meet emergency costs. In November 2020, nearly half of laid-off workers said they could not pay their bills in full that month or could not meet this minimum amount for emergency expenses.
As the debt burden increases, working households find it even more difficult to focus on old-age provision. But making ends meet today is a much-pressing concern for these families. For example, the Federal Reserve report found that 36% of renters struggling to pay their bills would have nowhere to go if they were forced to move out for non-payment of rent.
Readiness for retirement
According to the Federal Reserve, Covid-19 was found to be a factor in when to stop working for at least 29% of new retirees, and also made it difficult for non-retirees to prepare for their own golden years. One in ten Americans tapped their retirement savings accounts for non-retirement spending in 2020, and 14% of workers who saw layoffs did the same. While this has made it easier to cover short-term expenses, it has also created a larger retirement pension gap for these people.
Of the non-retirees who were laid off in 2020, 42% did not have a self-directed retirement plan. Perhaps even more worrying is the fact that such savings were in part an indicator of the likelihood of layoffs. In fact, 74% of those who were not laid off had a self-managed retirement savings account.
Ultimately, Covid-19 served to worsen the retirement readiness of those who were least prepared anyway.
Look to the future
Improved financial literacy can help alleviate the worries of many Americans. The GFLEC / FINRA study shows that those who correctly answer three key questions about financial literacy are less concerned about their finances. But more needs to be done than just putting more information and education into the hands of workers and retirees.
Retirement planning plays an important role as there is a strong correlation between the level of reported financial stress and anxiety and likelihood of preparing for retirement. At the same time, retirement planning has proven to be a powerful predictor of wealth, showing the dual benefit of not only emphasizing financial literacy, but also creating opportunities for workers and families to save and strengthen overall financial resilience.
These new reports underscore the importance of comprehensive efforts to ensure pension security and general financial well-being that meet the needs of workers and retirees. Policy makers need to consider new ways to address the different challenges individuals face and the different experiences households have had during the pandemic and its aftermath.