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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 • Americans Tap Savings to Cope with Economy • Economists' Panel Sees Prolonged Recession • Getting A Small Business Loan in Bad Economic Times • Jobless Rate Spikes in October • Monthly Job Cuts Hit Five-Year High • Business Economists See More Signs of Recession • What's Ahead For the Economy? • Consumer Confidence Plunges to Record Low • Bankers See Recovery in Second Half of 2009 • Autumn Has Long History as Financial Disaster Season • Finding a Job Takes Longer in Slow Economy • Baby Boomers Scramble to Reassess Future • What's Your Recession Game Plan? • Study Finds Racial Disparity in Retirement Savings • New York Threatens to Prosecute AIG for Fraud • Inflation Not a Factor in September • Retirement Postponed for More Americans • Economic Worry Supplants Terrorism Fear • Wall Street Leaders Missing In Action • Doctors Worry About These Stressful Times • Financial Meltdown Takes Toll on Consumer Confidence • Economic Turnaround Will Take Time • Retirement Plans Hammered in Credit Squeeze • Fed Takes Another Step to Bolster Credit Market • Economists Offer Plan for Stabilizing House Prices • House Passes Bailout Bill; Bush Signs Into Law • Senate Expected to Pass Bailout Bill • FDIC Seeks Increase in Deposit Coverage • Voter Anger Rattles Congress; Bailout Fails • Congress Agrees On Compromise Bailout Bill • Somber Washington Prepares for Bailout • Deal Or No Deal: What The Bailout Means To You • FDIC May Need Additional Funds if Banks Keep Failing • Which Type of Money Market Account Is Right for You? • How Does The Banking Crisis Affect You? • Lehman Files Largest Bankruptcy in U.S. History • Why Individual Investors Shouldn't Buy Individual Stocks • Bear Stearns to Pay $28 Million to FTC for Abusive Lending Practices • When Should You Sell Exchange Traded Funds? • Has the Bear Market Hit Bottom Yet? • How Do You Survive a Bear Market? --- • 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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