With more research and data coming out since COVID-19, the US is facing an economic and retirement crisis. Still, many of the world’s countries are reporting the same retirement crisis as they borrow to make pension contributions. When discussing a ‘crisis,’ there are many things to consider leading to this situation for future retirees:
A World Financial Crisis. Governments have over-spent going into COVID-19 and are anticipating a lower-level of tax collection in 2020 and possibly 2021. This shortfall will impact their ability to fund social retirement programs at the level they once did. Worldwide, tens of millions of people have become unemployed since 2019. The lasting effects of this financial crisis will impact both higher taxes and inflation for future generations.
Prematurely Accessing Retirement Accounts. Throughout COVID-19, one in four Americans tapped their retirement accounts to make ends meet by exercising ‘hardship’ distributions due to the pandemic. Hardship classification under federal law includes medical costs, death of a family member, or hardship debts that will result in the individual’s standard of living being affected. The CARES Act legislation now includes COVID-19 impacts as a hardship, and the standard 10% early distribution penalty for those under age 59 ½ will NOT apply if it impacts in any of these ways:
- They or an immediate family member diagnoses with COVID-19.
- They were not able to work due to a lack of childcare.
- Their job eliminates, reduces operational hours, lays them off, or quarantines, resulting in financial duress.
- Half of all Americans furloughed, laid off, or terminated from employment due to COVID-19 have saved less than $500 for retirement this past year.
An aging World Population. Globally, family size has continued to decrease in the U.S. since World War II. There are not enough younger workers replacing retiring workers, and as a result, fewer taxes are collecting into the government retirement systems. Coupled with less tax collection to pay back Federal CARES Act stimulus, public health funding, and social unrest, we face a dire problem of covering our social programs.
The U.S. is not the only country experiencing this, but also China, Italy, South Korea, and much of the world. Over 40 countries have a similar system to our Social Security Benefit system. As a result, the Social Security Administration continues to change the age for full retirement benefits for those born after 1967.
End of Traditional Pension Plans. Companies have moved from pension plans, where everyone gets a retirement plan depending on years of service, to 401K plans. Unfortunately, in the US, legislation was passed in 2006, and employees can now ‘opt-out’ of their employee retirement plan, resulting in 40% of opting-out of saving for retirement.
Now more than ever, it is up to you to plan and save for your retirement. Develop an emergency fund, so if you become unemployed, you will be less likely to access your retirement accounts to cover financial obligations. Pay off your debts and focus on saving for your financial future. If COVID-19 has taught us anything, it has taught us to be financially prepared for anything, even a pandemic.