Retirement Savings Lose $2 Trillion in 15 Months

By Richard Shank

The Washington Post reports that the stock market’s downturn has erased about $2 trillion of retirement savings in the U.S. during the past 15 months. Currently, pensions and 401(k) plans are the only form of savings for many Americans. The overall savings rate in the U.S. is low by the standards of advanced international economies and has been declining in the past several decades.

The current decline represents a nearly 20% loss in savings. This decline impacts people who are already grappling with high levels of debt associated with increasing gas prices, growing food prices, educational loans, declining home values, and credit cards.

Though the losses are not as steep as in 401(k) accounts, traditional defined pension plan packages have also experienced steep declines (roughly 15%). Despite the losses, companies are still obligated to pay out these pensions.

These losses impact the economy in two ways. With traditional pension plans, employers will have to recoup the cost of pension plan losses in creative ways that will impact employment and operational budgets. On the other hand, a 401(k) impacts individual Americans directly. The large losses in 401(k) accounts will result in a greater need to work longer, create tighter household budgets, and reduce consumer spending. The Bureau of Labor Statistics estimates that the number of workers aged 65 or older will increase by more than 80% as a result.

These losses highlight the critique of retirement plans that are heavily tied to fluctuations in the stock market. Despite the control that these plans create for individual consumers, the risks imposed on individual savings accounts has become overwhelming. In the current environment, analysts suggest that plan holders spread their money between stock and fixed-income investments, and they also recommend not over-investing in the stock value of their own companies.

Source: Washington Post October 8, 2008.

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