Retirement Saving and Crisis Response

As the dust settles from the pandemic and we take stock of the debris, it’s instructive to consider how it affected retirement saving and retirement accounts. A recent study looks at that, and adds an historical perspective that also looks at the effects of another recent significant disruption. — the Great Recession. 

In “Changes in Retirement Savings During the COVID Pandemic,” a working paper from the Pension Research Council at the University of Pennsylvania’s Wharton School, a panel of economists examine the effects of the pandemic, and compare and contrast them with those of the Great Recession of 2008 to 2010. The researchers include Elena Derby and Economists with the Joint Committee on Taxation; Kathleen Mackie, a Senior Economist with the Joint Committee on Taxation; and Lucas Goodman, a Financial Economist at the U.S. Treasury Department’s Office of Tax Analysis. 

Using federal tax data to look at tens of millions of person-year observations and measure retirement savings contributions and withdrawals in order to document changes in retirement saving patterns, the economists note that not only did the pandemic and economic downturn affect retirement savings behavior, so did changes to the law intended to address them. 

Individuals’ Contributions

The researchers found that individuals changed their behavior regarding contributions to their retirement accounts in different ways during the two periods. 

hey say that, while individuals’ contributions to retirement accounts fell during the Great Recession, they “did not meaningfully decline” due to the pandemic. “We find little change in individuals’ contributions to retirement plans in 2020, which increased from the previous year at a rate in line with recent trends, a stark difference from the drop in contributions that occurred during the 2008-09 Great Recession,” they write. 

This may be the case, they say, because the pandemic had worse effects on lower-income employees, who traditionally do not save as much as those in the middle- and high-income groups. The Great Recession, on the other hand, had stronger effects on those whose earnings were higher.  

They also observe that publicly available data from Form 5500 filings show that employers cut their contributions to defined contribution plans. During the Great Recession, they say, the same was true of employees; however, that was not true during the pandemic. Rather, they report, employees’ contributions to DC plans “steadily grew” during that later crisis period. Similarly, they observe, during the Great Recession, IRA contributions fell by 21%; during the pandemic, however, they grew 10% from 2019 to 2020. 

Required Minimum Distributions

The data further shows that suspending the required minimum distribution (RMD) rules resulted in withdrawals from IRAs “substantially” declining in 2020 among those older than age 72. “Withdrawals from IRAs to those over age 70 dropped precipitously,” they write, which suggests that individuals were responding to that suspension. 

Withdrawals

The economists report that withdrawals from workplace pension and DC plans remained similar during the Great Recession, but that there was “a noticeable increase” from the two years before the pandemic to 2020 in the early withdrawals made by those who were approaching retirement age. And they consider it likely that the partial suspension of the penalty for early withdrawal resulted in a higher rate of withdrawals from employer-provided retirement plans among those younger than age 60. 

They also consider it “likely” that the higher level of withdrawals by those of working age in 2020 was attributable to the sudden, sharp negative effect the pandemic had on the economy. They cite research by Lucas Goodman that showed that job separation was associated with a substantial increase in the probability that those of working age would make withdrawals from their retirement accounts. 

Effect of Government Activity

The researchers found evidence that government activity in response to a crisis can affect retirement plan saving. 

Early Withdrawals. Government activity allowed early withdrawals for reasons related to the pandemic and eliminated the 10% penalty for early distributions.

The researchers attribute what they called a “substantial increase” in working-age individuals’ withdrawals from employer-sponsored retirement accounts during 2020 at least, in part, to those changes. Based on a 5% random sample of IRS records derived from tax returns and information returns, they note that, in 2020, total withdrawals from retirement accounts increased 25% over 2019 — by $60 billion — while at the same time, the total penalized distributions fell by almost 50%. “It appears that take-up of the penalty suspension was quite high,” they conclude. 

Another of the steps the federal government took in response to the pandemic was to include a provision in the CARES Act that allowed for the income recognition of withdrawals to be spread over three years. The researchers say that the number of people who availed themselves of that option was low: as evidence, they cite statistics showing that 1.5% of tax units that took withdrawals from retirement accounts reported taxable pension and IRA amounts, approximately equal to one-third of total withdrawals from Form 1099-R. 

RMD Rules. During both the Great Recession and the pandemic, one of the actions the government took was to temporarily relax the RMD rules. The researchers say that during both events, withdrawals from IRAs “fell substantially” among those who would have been subject to the RMD rules. “The effects of the 2020 RMD suspension are consistent with the same 2009 policy change,” they write.

Targeted Programs. The authors write that retirement-related policies implemented during the pandemic “are ambiguous” regarding the relief they provided those facing financial hardships. 

But that is not the case regarding other federal programs intended to mitigate or at least blunt the effect of significant events that create hardship, which they suggest may have reduced draw-down of retirement funds during the pandemic. For instance, they cite forthcoming research by R. A. Moffitt and J. P. Ziliak, “The Safety Net Response to the Covid-19 Pandemic Recession and the Older Population,” in which they found that during recessions, more young people, older people and people with lower incomes took advantage of the Supplemental Nutritional Assistance Program (SNAP) and that there were more unemployment insurance claims by members of several groups — including the elderly and the higher educated. This, the researchers write, may be the reason that Social Security claims did not increase sharply during the pandemic. 

The Bottom Line

The pandemic had many persistent negative consequences, the researchers write.  Nonetheless, they say, aggregate individual contributions to retirement accounts generally held steady and that those of high-income workers were higher than expected. 

“There is clear evidence,” they write, that some individuals younger than retirement age responded to a combination of the policies the government adopted. Those policies, they say, accounted for a “non-trivial” part of the increase in withdrawals during the pandemic, but job losses also helped drive that increase.