The Potential Impact of the Great Recession on Future Retirement Incomes

Abstract

This study uses DYNASIM3, the Urban Institute’s dynamic microsimulation model, to examine 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.

The results show that the recession will reduce average annual incomes at age 70 by 4.3 percent, or $2,300 per person. 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 an entire career. Retirement incomes will fall most for high-socioeconomic-status groups, who have the most to lose, but relative income losses will not vary much across groups. Those workers who were youngest when the recession began will be hit hard. They are most likely to have lost their jobs and the impact of lower wages will accumulate over much of their working lives. 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, permanently reducing their annual benefits. Also, many workers who lost jobs late in life will never become reemployed.