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Retirement Plans Hammered in Credit Squeeze

$2 trillion in wealth lost as stocks continue to plummet

October 8, 2008

Personal Finance • Consumer Spending, Saving, Both Rise • Economic Trends Looking Better For Consumers • Consumers Feeling Better About Financial Security • Banks See Hard Times Even After Bailout • Consumers Remain Thrifty In April • Feds Shut Down Florida Bank • Consumers Reminded to Investigate Before Investing • All 19 Banks Pass Stress Tests • TARP Ripe For Scams, Warns Inspector General • Consumers to Spend Same or More on Entertainment in 2009 • No Sign of Inflation in March • Consumers Cut Spending in March • Key Corporate Earnings Due This Week • Employers Trying To Avoid Further Job Cuts • Two Million Jobs Lost So Far in 2009 • People Feeling Economic Stress At All Turns • Consumer Prices Rise More Than Forecast • Survey Shows Consumers Preparing For The Worst • U.S. Employers Foresee Subdued Hiring Activity • Banks Lost $26 Billion in Fourth Quarter • Congress Takes Up Boomer Retirement Woes • Economists See Recession Continuing Through First Half of 2009 • Derailed Boomers Changing Retirement Plans • Recession Likely to Have Health Consequences • More Than 500,000 Jobs Lost in December • Staying Healthy in a Sick Economy • How Retirees Can Survive the Bear Market • Are Men Hardwired to Overspend? • Feds Report More Signs of Recession • Cheap Oil May Be Economic Stimulus • An Upside to the Down Market: A Lower Tax Bill • Americans Tap Savings to Cope with Economy • Economists' Panel Sees Prolonged Recession --- • More Personal Finance News

Its not just hedge funds and Wall Street banks that have been decimated in the credit crisis. The head of the Congressional Budget Office estimates that consumers' retirement savings have lost nearly $2 trillion in the resulting stock market sell off.

"The turmoil in financial markets has affected many aspects of the economy, including pensions. The most direct effect on pensions is through the prices of financial assets such as corporate equities and bonds," said Peter Orzag, director of the CBO. "The Standard & Poor's 500 stock market index, for example, has fallen by more than 25 percent over the past year as the outlook for the economy and corporate profits has worsened."

Americans approaching retirement have watched in horror as the value of their 401(k) retirement plans has plummeted. The CBO estimates these assets have declined about 20 percent overall.

"Changes in asset prices have also affected the value of assets in defined-contribution pension plans," Orzag told a Congressional committee. "In those plans, the resources available to workers upon retirement depend directly on the value of assets in their plan account. Defined-contribution plans apparently are more heavily weighted toward stocks than defined-benefit plans are; over two-thirds of the assets in defined-contribution plans are invested in equities."

Workers with defined benefit pension plans will be less affected, however, than those with self-directed retirement plans. Companies will still have to meet their pension obligations, and if assets go down in value, will have to find the money somewhere else.

Orzag says the decline in stock prices will not only force many baby boomers to reconsider their retirement plans, but will likely have wide ranging effects on the economy. Increasingly, he says, Americans keep their savings in stocks, bonds, real estate, and other assets that are declining in value.

"In 2006, income from assets outside retirement plans provided almost as much income for households with elderly members as pensions did: Pensions provided 18 percent of the aggregate income for the population age 65 and older, and asset income accounted for 15 percent. Social Security provided 37 percent, on average; and earnings, 28 percent," he said.

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