The Potential Impact of the Great Recession on Future Retirement Incomes

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This study examines the long-run effects of the Great Recession on the future retirement incomes of working-age individuals in 2008. It compares a “baseline” scenario that incorporates the historic and projected effects of high unemployment and lower wages from the recession with a “no recession” scenario that assumes the recession had not occurred. Using DYNASIM3, the Urban Institute’s dynamic microsimulation model, the analysis compares outcomes by 10-year cohorts, ranging from those age 25 to 34 in 2008 (who turn 70 between 2044 and 2053) to those age 55 to 64 in 2008 (who turn 70 between 2014 and 2023).nThe results show that the recession will reduce average annual incomes at age 70 by $2,300 per person, or 4.3 percent. This drop results almost entirely from the anemic wage growth that occurred during the recession, which the model assumes will permanently reduce future wages. Employment declines will have little effect on future aggregate retirement incomes because most workers remained employed during the recession and the losses that occurred are generally inconsequential when averaged over decades-long careers. Retirement incomes will fall most sharply for those workers who were youngest when the recession began. They are most likely to have lost their jobs and the impact of lower wages will cumulate over their entire careers. But retirement incomes will also fall substantially for those in their late fifties in 2008, because the drop in the economy-wide average wage will lower the index factor in the Social Security benefit formula, reducing future benefits.