The Federal Reserve announced in mid-September that it expects to hold interest rates near zero at least until 2023 because of the pandemic. That spells lower returns for retirement accounts, and it adds to the underfunding of pensions that has worried retirees for many years now.
The implications of lower returns on investments are that retirees may save less, dip into their retirement savings, and start collecting Social Security benefits earlier than planned, according to Olivia S. Mitchell, Wharton professor of business economics and public policy and executive director of the School’s Pension Research Council.
“Low returns from the market are essentially a tax on retirees,” Mitchell says, and retirees may respond to the prospect of low returns by saving less. “If you’re not rewarded for deferring your consumption as much, then why do it?”
In times of desperation, some people may claim their Social Security benefits sooner than they may have planned—despite the fact that every year of delay could boost their eventual benefit by 7% to 8%, Mitchell says. “People who don’t have any retirement savings may have to go ahead and claim their [Social Security] benefits early, thereby experiencing a lower payout the rest of their lives.”
“Going into the fall and winter, I do worry that [early withdrawals from retirement accounts] will become more of an option if the labor market doesn’t recover,” Mitchell says. “And so, people might end up biting off their nose to spite their face. Yes, they’ll get some cash, but what does it say about their retirement?”
Read more at Knowledge@Wharton.