The financial crisis of 2007-08 and the subsequent slump in the general economy have hit many Americans hard, but none more so than those approaching retirement. High unemployment rates, plunging housing prices, volatile equity prices, and low interest rates on fixed income investments have combined to make the Great Recession particularly difficult for older Americans. Under the general direction of Alicia Munnell (Boston College), the following three projects, which were proposed by the Center for Retirement Research, will examine the impact of the Great Recession on retirement behavior.
Who Are the Early Claimers? How Much Do They Lose?
Norma B. Coe and Matthew S. Rutledge, Boston College
A record 3.2 million Americans began collecting Social Security benefits in 2009. This surge was surely due in large part to the leading edge of the baby-boom generation reaching retirement age. But the fraction of eligible individuals who claimed benefits also increased; between 2007 and 2009 the take-up rate jumped 4.6% for men and 3.3% for women. Apparently, older Americans turned to Social Security in greater numbers as many were unable to keep jobs or find alternate work.
This project will employ the Health and Retirement Survey (HRS) linked to Social Security Detailed Earnings Records to determine the characteristics of those who applied for Social Security benefits and the long-term effects on their retirement income. Coe and Rutledge will examine the race, gender, education, marital status, health, income, and job status of new applicants for Social Security during the Great Recession and compare their claiming patterns to those in the 2000-02 recession and the 2004-06 expansion. They hypothesize that those who lost jobs during the prolonged high unemployment of the Great Recession will claim benefits at a younger age than in earlier periods and will tend to be better educated, healthier and have higher incomes than early claimants in prior periods. They also conjecture that those who do not lose their jobs may respond to declines in their pension wealth by continuing to work longer and delaying receipt of Social Security. If true, Social Security applications should be more dispersed by age than in earlier periods.
How Has the Composition of Disability Insurance Applicants Changed Across and Within Business Cycles?
Norma B. Coe and Matthew S. Rutledge, Boston College
Some 2.8 million new applications for Social Security Disability Insurance (SSDI) were filed in 2009—a jump of almost 30% since 2007. This is hardly a surprise. SSDI applications normally rise during periods of high unemployment, but the increase in disability claims more than doubles the upticks associated with either of the last two recessions. Coe and Rutledge will examine whether applicants for SSDI are not only more numerous, but also qualitatively different than in earlier periods. They hypothesize that as job losses become more widespread in the Great Recession, unemployment will begin to impact higher-educated workers. And, as long-term joblessness becomes more prevalent, the SSDI option becomes more attractive and is more likely to be successful since employability is a factor in the evaluation of a SSDI application. Thus, Coe and Rutledge expect SSDI applicants in the Great Recession to be younger, better educated, healthier, and have higher pre-disability income than in past applicant pools.
Coe and Rutledge will test these hypotheses using the 2010 wave of the Health and Retirement Study, scheduled for release in mid-2011. They will compare the characteristics of recent SSDI applicants with applicants in the last recession in the 2000 and 2002 waves of the HRS. In a second stage of the project, Coe and Rutledge will link administrative data from the Social Security Administration on the date of application, application outcome, and amount of benefit received to detailed personal and family information in the Survey of Income and Program Participation (SIPP).
How Has the Financial Crisis Affected the Incomes of Households Entering and in Retirement
Richard Kopcke and Anthony Webb, Boston College
The impact of the collapse in stock prices on the financial wealth of households approaching retirement is well documented. But Richard Kopcke and Anthony Webb point out that the expansionary monetary policy necessary to stimulate demand during the Great Recession has also resulted in nominal interest rates falling to record lows. Given the tenacity of high unemployment and the continuing need to stimulate the economy, low interest rates are likely to be with us for some time to come. Households that hold a substantial portion of their wealth in fixed-income investments have seen their income dwindle. And low interest rates not only impact the immediate income of retirees but reduce their future consumption as well. As returns to capital decline, so do optimal decumulation rates, which determine how fast a retiree can sensibly spend down capital in retirement.
This project will investigate the impact of the financial crisis on the incomes that retired households can draw from their accumulated wealth. Using data from the Health and Retirement Survey, which asks detailed questions about financial assets of households entering or in retirement, Kopcke and Webb will calculate prototypical asset allocations for households at various points in the distribution of household wealth. Results will be broken down by married couples vs. singles, by households in the bottom, middle and top thirds of the wealth distribution and by household heads aged 65, 70, 75, 80 and 85. These breakdowns should provide a comprehensive account of how the Great Recession has impacted retirement income and which types of households are now especially at risk.