Pandemic has been 'extremely disruptive' for retirement plans for some Americans

Dhara Singh
·Reporter
·6 min read

As the pandemic disrupted employment for millions of workers, many Americans were forced to adjust their vision of their golden years.

“For a lot of people, [2020] was extremely disruptive,” said Chad Parks, CEO of Ubiquity Retirement and Savings, a financial firm. “If you’ve been negatively impacted by the events of this past year, you may need to adjust your expectations on what retirement looks like and when that will take place.”

Read more: Here's how to recession-proof your retirement plan

Some jobless Americans raided their savings to stay afloat, while those who count on state pensions for their retirement saw state budgets dwindle during the COVID-19 outbreak, potentially threatening their future plans.

On the other end of the spectrum, those who remained employed saw their retirement security grow as the stock market rebounded with velocity. The election of Joe Biden also created a potential opening to strengthen the future of Social Security.

Here’s how the pandemic and the last year so far have affected Americans’ retirement dreams.

Senior Tourist Couple Travellers Hiking in Nature, Walking and Talking While Wearing Face Protective Masks During Coronavirus Outbreak. Hiking Adventure Travel People Living Active Healthy Lifestyle on COVID 19 Period
As the pandemic disrupted employment for millions of workers, many Americans were forced to adjust their vision of their golden years. (Photo: Getty Creative)

‘Ugly outlook for 2021’ for some

By mid-year in 2020, the unforeseen health crisis — coupled with a lack of emergency and retirement savings — led to nearly a third of Americans thinking that retirement is no longer a possibility.

Others used funds earmarked for their golden years to help through the pandemic’s economic crisis. The government had a hand in that. The CARES Act allowed Americans to withdraw up to $100,000 from their 401(k) early without the 10% penalty for a pandemic-related hardship.

A New York Times report found that more than 2.1 million Americans withdrew funds from their retirement accounts at the five largest plan administrators since the pandemic began. That represented 5% of account holders, a higher level of withdrawal versus a typical year.

Read more: Here's what to do if your employer cuts your 401k match

Adding to the stress of saving for retirement was the pullback in company matches to 401(k) plans. Some employers, such as Tenet Health and Macy’s, temporarily paused their matches as the economy remained uncertain.

“There is a combined ugly outlook for 2021,” said Leon LaBrecque, chief growth officer of Sequoia Financial, a financial firm. “Fewer employees paying in, and employers deferring their share, which I think is a nightmare.”

‘The ripple effects of 2020 in public sector pensions’

New Jersey has the lowest funded ratio of 38.4% amongst all 50 states and the third largest shortfall at $130.7 billion, according to the <a href="https://247wallst.com/special-report/2020/12/04/every-states-pension-crisis-ranked-3/10/" rel="nofollow noopener" target="_blank" data-ylk="slk:24/7 Wall Street analysis." class="link rapid-noclick-resp">24/7 Wall Street analysis.</a> (Source: Getty Creative)
New Jersey has the lowest funded ratio of 38.4% amongst all 50 states and the third largest shortfall at $130.7 billion, according to the 24/7 Wall Street analysis. (Source: Getty Creative)

State pension funds remain in trouble. South Dakota remained the only state with a surplus for its pension plan, according to a recent study. New Jersey has the lowest funded ratio at 38.4% among the 50 states and the third largest shortfall at $130.7 billion, according to the 24/7 Wall Street analysis.

The shortfalls take place when state funding has come under greater scrutiny during the pandemic and state revenues have been battered. The National Conference of State Legislatures forecasted an average 10-20% drop in revenue for states in the fiscal year 2021, with New Mexico falling as much as 30%.

The recent stimulus bill passed by Congress did not include additional state or local aid, which some Republicans called a “blue state bailout.”

“If the organizations that sponsor pensions are not able to put funding in, they’re going to have to adjust payouts to pension recipients,” Parks said. “We may not see this this year, but in years to come we will see the ripple effects of 2020 in public sector pensions.”

Some ‘doing better than ever’

Side view portrait of active man in his 50s drinking pink liquid fruit juice, head and shoulders, grey hair and beard, back from morning run, recovering, thirsty
Around 262,000 Americans had at least $1 million in their 401(k) retirement accounts, up 17% from the second quarter. (Photo: Getty Creative)

Not everyone has suffered. In the third quarter, Fidelity found the number of so-called 401(k) and IRA millionaires had reached a new record.

Around 262,000 Americans had at least $1 million in their 401(k) retirement accounts, up 17% from the second quarter, while 234,000 investors had that much or more in their IRA accounts, up 15% from the previous quarter.

Read more: 401k plan and how it works: The full breakdown

Average 401(k) balances also increased 5% to $109,600 in the third quarter from $104,400 the quarter before. This was a 4% year-over-year increase.

“It’s not surprising that the markets reached another record high last quarter and may continue to reach new highs through 2021,” said Jon Ulin, CEO of Ulin & Co. Wealth Management, a financial firm. “As many individuals, small businesses, and corporations have learned to adapt — if not thrive — through COVID, a substantial sliver of America has been doing better than ever, or at least just fine.”

Social Security ‘issues in the system will persist’

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At a time when 7 in 10 Americans don’t expect much, if any, payout from Social Security when they retire, President-Elect Biden has put forth numerous proposals to expand retirement security to millions of low- and middle-income Americans.

From enacting a new 6.2% Social Security tax on earnings above $400,000 to increasing minimum benefits to 125% of the federal poverty level, Biden’s plan could lift 1.4 million Americans out of poverty, according one analysis.

Read more: 4 Social Security tips to plan your retirement

But headwinds remain. The surplus in the Social Security is expected to run out in 2035, at which point payroll taxes will cover up to 80% of the benefits. Biden’s plan to extend the surplus life would only add another 5 years before it runs out.

“We’ve known for years that if the surplus runs out, a reduction of benefits may be necessary,” Parks said. “Unless key changes are made, such as an increase in taxes across the board or adjusting retirement age, these issues in the system will persist.”

Dhara Singh is a reporter at Cashay and Yahoo Finance. Follow her on Twitter at @Dsinghx.

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