How Did the Great Recession Affect Near Retirement-Age Households?

The Great Recession that began in late 2007 was marked by sharp downturns in U.S. stock, housing, and labor markets. While these events would be expected to negatively affect households in all age groups, households that are approaching retirement age may be particularly vulnerable. Older households who have seen their retirement nest egg diminish in value have little time to increase saving. Postponing retirement may be an option for some who are still working, but will be difficult for those who have lost jobs or are in poor health.

While much has been written in the media about the potential effects of the recession on U.S. households, analysts are just beginning to explore this question empirically. One recent entry in this literature is How Did the Recession of 2007-2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study? (NBER Working Paper 17547) by Alan Gustman, Thomas Steinmeier, and Nahid Tabatabai.

In their analysis, the authors make use of the Health and Retirement Study (HRS)'s long-running and longitudinal nature. Specifically, they calculate changes in outcome measures for the "Early Boomers" (households with a member aged 53 to 58 in 2006) between 2006 and 2010. By comparing the results for Early Boomers to those for earlier cohorts who experienced more favorable economic conditions while in their mid-50s, the authors can provide some sense of the recession's effects, although they caution "there are many reasons for the differences in retirement behavior [and other outcomes] of members of different cohorts, so a simple comparison may not isolate the effects of the recession."

Looking first at changes over time in the wealth holdings of Early Boomer households, including pensions, Social Security, housing and other forms of wealth, they find that the total wealth of this population was 2.8 percent lower in 2010 than it had been in 2006, prior to the onset of the recession. Changes in wealth were not spread evenly throughout the population. While those in the middle ten percent of the wealth distribution experienced a 4.3 percent drop in wealth, there was essentially no drop in total wealth for households in the lowest wealth quartile. One key reason for this is that Social Security wealth (which was unaffected by the recession) makes up a much larger share of total wealth for poorer households.

Turning to the question of how earlier cohorts fared, the authors look at the change in assets from 1994 to 1998 for the "HRS Cohort" (ages 53 to 58 in 1994) and the change from 2000 to 2004 for the "War Babies" (ages 53 to 58 in 2000). Wealth grew by 7.6 percent for the HRS Cohort and 3.2 percent for the War Babies. As the authors note, "with the two earlier cohorts enjoying average gains of 5.4 percentage points, the net wealth at the end of the Great Recession would have been about 8 percentage points higher had the Early Boomers' wealth grown at that same rate as seen for members of older cohorts." Yet overall these results "suggest the Early Boomers experienced only a modest decline in total wealth over the period of the recession. They accumulated less wealth over the period of the recession than they would have were they members of cohorts born six or twelve years earlier, but a good part of that difference is due to the fact that members of the War Baby cohort enjoyed a wealth increase from the housing bubble."

The authors also compare the labor force transitions of the three cohorts. The labor force participation rates of the three cohorts at the beginning of their respective periods are fairly similar - for Early Boomers, 63 percent are classified as not retired (working at least 30 weeks and 1500 hours per year), as compared to 65 percent for War Babies and 61 percent for the HRS Cohort. These figures decline over the next four years, as workers begin to exit the labor force. The declines are fairly similar in the three groups - 14 percentage points for both the Early Boomers and War Babies, 11 points for the HRS Cohort.

The similarity of these figures is perhaps a bit surprisingly given the striking differences in the increase in the overall unemployment rate facing these cohorts. The Early Boomers saw the labor market unemployment rate rise by 5 points over this period, from 4.6 to 9.6 percent, while the rate changed only modestly (staying in the 4 to 6 percent range) in the labor markets facing the other cohorts. Consistent with the overall rates of unemployment, for those who transition out of "not retired" status over the four-year period, there is roughly twice as great a chance that Early Boomers will move to "not working, not retired" status, a category that would include those who are unemployed and still looking for work, than there is for the other groups. Similarly, the share of individuals classified as not working and not retired rose by 5 percentage points over the four years for Early Boomers, vs. rising by 1 point for War Babies and falling by 7 points for the HRS Cohort.

"This is evidence of an adverse effect of the Great Recession on retirement flows," the authors write. Yet based on a lack of differences in full-time work or partial retirement, they conclude "the bottom line here is that reported unemployment is higher for those experiencing the Great Recession, but other measures of activity or related outcomes do not differ much between those affected by the recession and members of older cohorts when they were the same age. All told, the retirement behavior of the Early Boomer cohort looks similar, at least so far, to the behavior observed for members of older cohorts at comparable ages."

This work was supported by a grant from the Social Security Administration through the Michigan Retirement Research Center (Grant #5 RRC08098401-03-00).