Many middle-class Americans slashed their retirement contributions in the first half of this year, a new survey found, even as other measures of their financial security remained largely unchanged.
The top reasons for the pullback were smaller tax refunds and, to a lesser extent, fears of a pending recession, according to anecdotal feedback that FinFit, the company that conducted the survey, received. FinFit provided the survey exclusively to Yahoo Finance.
FinFit, which provides financial education benefits to employers and their employees, surveyed 20,000 of its members who predominantly earn between $40,000 and $65,000.
The share of millennial workers saving 2% or more of their income in retirement accounts plunged by 39% from the last half of 2018 to the first half of this year. That figure dropped by 32% among Gen X employees and 22% among baby boomer workers.
Many chose to save much smaller amounts instead during that period. The percentage of those putting 2% or less to retirement tripled or nearly tripled across all three generations, the survey found.
Other metrics in the survey – total savings, spending versus income, debt levels, and ability to keep up with bills -– didn’t change markedly from 2018 to this year.
Tax refunds play a role
The survey didn’t ask why workers suddenly curtailed their retirement savings. But based on its interactions with employees, the company found that “almost across the board” many got tax refunds this year that were smaller than anticipated, FinFit President and Founder Dave Kilby told Yahoo Finance.
Many expected a refund of about $3,200, but received approximately $800 instead, Kilby said. Overall, the average refund this year was 1.7% lower than the previous year, according to the latest statistics from the Internal Revenue Service.
“Having that cut by 75% is substantial,” Kilby said. “It’s not just the loss of cash flow, but also the emotional and psychological impact of it, especially if people planned for the use of the refunds before they got them.”
The refund situation likely stemmed from the major overhaul of the tax code.
While the vast majority of taxpayers received a tax cut under the new law, less than a fifth of workers adjusted their paycheck withholdings to reflect the changes last year, according to H&R Block. That meant many workers received the majority of their tax savings in their paychecks over the year, resulting in a lower refund at tax time.
Kilby doesn’t know how long it will take for workers to recover from the unexpected setback and increase their retirement contributions again. “Will they reverse that course? That’s what we’re looking into,” Kilby said.
Recession fears also a factor
FinFit also found that concerns about a possible recession weighed on millennials in particular and could have affected how much they wanted to save for retirement. Their confidence in the economy and their employment situation dropped by “not an immense, but a measurable” amount in the first half of 2019 from the latter half of 2018, Kilby said.
“They look and think: ‘Do I need to take some income from the long-term plan and pay down credit card debt or put toward emergency funds instead?’” Kilby said.
The economy’s health is worrying for younger adults, because their ability to manage a job loss or other setback is limited, Kilby said. Two in 5 millennials can cover only three months or less in expenses without their main income, the survey found.
“This is a certain demographic where short-term volatility can impact their financial security,” he said. “They don’t have the resources to weather that.”
Janna is an editor for Yahoo Finance. Follow her on Twitter @JannaHerron.