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COVID-19 Exacerbated Financial Disparities And The Retirement Savings Gap

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The economic hardships caused by Covid-19 have been felt unevenly among Americans, with worse outcomes for women, people of color, lower-income workers and those with less formal education. New government and private sector research highlights the financial challenges that existed before the pandemic and demonstrates the impact of the past year on the lives of retirees and non-retirees alike.

Many families faced the reality of one or more earners suffering a layoff or reduced hours. Some dipped into rainy day funds or raided retirement accounts to make ends meet, while others needed government assistance. Even as we begin to put some of the health and financial impacts in the rearview mirror, it is clear more must be done to strengthen the financial resiliency and well-being of America’s workers and retirees.

Evidence suggests that government policy initiatives like the CARES Act helped to blunt the near-term effects, but we still do not know all the long-term consequences for the economy in general and retirement savings in particular. There are some early indicators worth considering as policymakers continue to focus on improving retirement security.

Demographic Disparities

Even before the daily activities of most Americans were disrupted in 2020, more than 60% of U.S. working-age adults reported feeling anxious about their finances, according to research from the Global Financial Literacy Excellence Center (GFLEC) at George Washington University and the FINRA Investor Education Foundation. That concern was noticeably higher among those earning less money: Approximately two-thirds of households with less than $50,000 in annual income reported anxiety compared to fewer than half of those earning more than $100,000 per year.

In 2018, 56% of all women felt stressed when discussing finances, compared to just 44% of men. As the economic turmoil unfolded over the past year, women were more likely to experience a negative impact. For example, the 2020 Federal Reserve report on the Economic Well-Being of U.S. Households in 2020 explained that “women who were not working disproportionately said that childcare and family obligations kept them from formal employment.”

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Women also feel less comfortable managing retirement investments than men, with fewer than one in three expressing that confidence — regardless of education level. Meanwhile, 60% of men with bachelor’s degrees said they were comfortable managing retirement savings accounts.

Race plays an important role in both how individuals feel about their finances and the way they have been affected in the past year. The GFLEC/FINRA survey revealed that Hispanic adults were significantly more likely to feel stressed about their finances. Meanwhile, the Federal Reserve’s data suggest that only two-thirds of Black and Hispanic adults felt that they were doing “okay financially” compared to 80% of White adults.

That disparity carries over to retirement planning: “Black and Hispanic non-retirees were less likely to have retirement savings and to view their retirement savings as on track,” according to the Federal Reserve.

While many households struggled financially in 2020, those with adults holding bachelor’s degrees were more likely than others to end the year with a larger bank account balance or a higher income than in previous years. In fact, the Federal Reserve’s report found that “adults with at least a bachelor’s degree were significantly more likely to be doing at least okay financially (89 percent) than those with less than a high school degree (45 percent).”

Layoffs hit those with less formal education especially hard. Individuals without a bachelor’s degree were nearly twice as likely to be laid off in 2020 compared to college graduates. Part of the disparity may be explained by the ability of those college-educated individuals to work remotely, with 46% telecommuting exclusively throughout the pandemic.

Debt as a Driver

While demographics illuminate some of the pre- and post-pandemic financial challenges for Americans, debt weighs heavily on workers and retirees alike. The Government Accountability Office recently reported that 71% of older Americans now have debt compared to just 58% in 1989. The same research found that “from 2003 to 2019, individuals in their late 70s often had higher shares of credit card and student loan debt that was late than those aged 50–74.”

With families trying to deal with the impact of layoffs, income decreases, and higher expenses associated with Covid-19, many reported that they would be forced to turn to lenders, including credit cards, banks, and payday loans, to meet even a $400 emergency expense. In November 2020, nearly half of workers who had been laid off indicated that they would not be able to pay their bills in full that month or would be unable to meet that minimum emergency expense threshold.

As their debt burdens increase, working households find it even more challenging to focus on retirement security. But making ends meet today represents a much more imminent concern for those families. For example, the Federal Reserve report found that 36% of renters having trouble paying their bills would have nowhere to go if they were forced to move out for non-payment of rent.

Retirement Readiness

According to the Federal Reserve, Covid-19 proved to be a factor in the timing of the decision to stop working for at least 29% of new retirees, while also making it more difficult for non-retirees to prepare for their own golden years. One American in 10 tapped their retirement savings account for non-retirement expenses in 2020, and 14% of workers experiencing a layoff did the same. While this may have made it easier to meet short-term expenses, it also creates a wider retirement savings gap for those individuals.

Of non-retirees who experienced a layoff in 2020, 42% did not have any self-directed retirement savings. Perhaps even more concerning is the fact that having such savings was, in part, an indicator of the likelihood of experiencing a layoff. In fact, 74% of those who were not laid off had self-directed retirement savings accounts.

Ultimately, Covid-19 served to worsen the retirement readiness of those who were already least prepared.

Looking to the Future

Improved financial literacy may help to alleviate the worries that many Americans have, with the GFLEC/FINRA research showing that those who could correctly answer three key financial literacy questions were less likely to feel anxious about their finances. But more must be done than simply putting more information and education in the hands of workers and retirees.

Planning for retirement plays an important role, with a strong correlation between the level of reported financial stress and anxiety, and the likelihood of engaging in retirement preparation. At the same time, retirement preparedness has been shown to be a strong predictor of wealth, demonstrating the dual benefit of emphasizing not just financial literacy but creating opportunities for workers and families to save and strengthen overall financial resiliency.

These new reports highlight the importance of comprehensive efforts to address retirement security and overall financial well-being that deal with the needs of workers and retirees. Policymakers must consider new ways to address the disparate challenges individuals face and must account for the different experiences we now know households have had throughout the pandemic and its aftermath.