By Mark Miller
(Reuters) – The U.S. economy is in much better shape today than it was during the Great Recession. But persistent inflation and last year’s sharp stock market decline have shaken the confidence of American workers and retirees about their retirement prospects in a way not seen since 2008.
That is the key finding of the 2023 Retirement Confidence Survey – the longest-running survey of its kind measuring worker and retiree confidence. Conducted by the Employee Benefit Research Institute (EBRI) and Greenwald Research, the survey is in its 33rd year.
The survey was fielded during January this year, fresh on the heels of a painful drop of 19.4% in the S&P 500 in 2022. Equity markets have recovered since then, and inflation also has moderated this year, although it remains above the level policymakers would like to see.
EBRI queries both working people and retirees each year about a range of retirement-related topics. This year, 64% of workers said they are confident about their ability to live comfortably throughout retirement, down significantly from 73% in 2022. Among current retirees, the comparable figures fell from 77% to 73%. The last time those figures fell that sharply was in 2008, when the U.S. was in the grip of the global financial crisis, according to EBRI.
Meanwhile, 84% of workers and 67% of retirees are worried that rising living costs will make it harder to save money. Nearly nine in 10 workers are concerned inflation will stay high for another year, and eight in 10 workers are concerned about a recession in the next year and further interest rate increases.
At the same time, debt levels are rising, with six in 10 workers reporting that debt is a problem. The largest increases appear to be high-interest credit card debt – a separate report by EBRI and Greenwald last year found that among those reporting debt as a problem, 78% cite credit card debt as a problem. Other types of debt mentioned are medical or health-related as well as student loans.
“This is really the first time we’ve seen a significant change in confidence since the pandemic,” said Craig Copeland, director of wealth benefits research at EBRI. “And it’s the largest we’ve seen since the Great Recession.”
RETIREES AND INFLATION: A CLOSER LOOK
Gyrations in stocks mainly impact near-retired and retired households that have significant stakes in the market – a segment of the market that is limited to about 40% of U.S. households, according to Federal Reserve data.
But inflation affects everyone, and it is a constant risk factor in retirement plans – even when it is not making headlines. One hundred dollars, assuming a moderate inflation rate of 2%, would have the same purchasing power as $164 after 25 years.
But the impact of inflation on retirees is complex and variable. For starters, most retirees depend on Social Security for a substantial portion of retirement income – and it comes with built-in inflation protection. Since 1975, the program has awarded an annual cost-of-living adjustment (COLA) that aims to keep benefits even with inflation. It is a unique benefit feature – some defined-benefit pensions come with COLAs, and you can purchase inflation protection with long-term insurance policies and a few annuities – but that is about the extent of it.
The Social Security COLA is determined each fall by averaging together the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter. Annual COLAs are applied to future benefit amounts starting in the year that you turn age 62, so even if you are delaying your claim, future benefits will keep pace with inflation. This year, the COLA was a whopping 8.7%, the largest inflation adjustment in four decades.
Social Security replaces a higher amount of pre-retirement income for lower income-households than it does for affluent people, so the degree of protection provided by the program varies. According to Social Security’s actuaries, for workers claiming benefits at their full retirement age last year, Social Security will replace 54.8% of income for people with low average earnings ($27,011 annually) compared with 26.7% for someone with maximum qualifying earnings ($147,775 annually).
Spending patterns in retirement vary, with younger retirees spending more on entertainment, dining out and travel than older seniors. After that, healthcare looms large, and its cost has been rising more quickly than overall inflation in recent decades, eroding living standards for seniors. The possibility of a large long-term care expense also poses risks.
Overall, among households aged 75 and higher, housing is the largest single category of expense. And since most seniors own their homes, this cost is partially protected from the effects of inflation. If you carry a fixed-rate mortgage or own your home outright, housing costs are partly immune from inflation, with the exceptions of property taxes, maintenance costs and utility bills.
Should you change your retirement plan to assume higher inflation? Probably not. Research by J.P. Morgan Asset Management notes that inflation averaged 2.9% per year from 1982 to 2022, so a long-range assumption of 2 to 3 percent still seems reasonable. If you want to stress-test your plan, you can always push the numbers higher.
But good luck making the numbers work.
The opinions expressed here are those of the author, a columnist for Reuters.
(Writing by Mark Miller; Editing by Matthew Lewis)
