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Retirement Plans Hammered in Credit Squeeze

$2 trillion in wealth lost as stocks continue to plummet

October 8, 2008

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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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