The American economy is significantly stronger today than during the Great Recession. However, persistent inflation and last year’s sharp stock market decline have shaken American workers’ and retirees’ confidence in their retirement prospects to levels not seen since 2008.
This is the main conclusion of the 2023 Retirement Confidence poll, the longest-running poll of its type, which measures worker and retiree confidence. The 33rd annual poll is being conducted by the EBRI (Employee Benefit Research Institute) and Greenwald Research.
The study was conducted in January of this year, following a severe 19.4% plunge in the S&P 500 in 2024. Since then, equity markets have rebounded, and inflation has softened this year, albeit higher than policymakers would like to see.
Every year, EBRI polls working people and retirees on various retirement-related subjects. This year, 64% of employees indicated they feel confident in their capacity to live well in retirement, a decrease from 73% in 2024. Comparable statistics among existing retirees declined from 77% to 73%. According to EBRI, the last time those percentages decreased so dramatically was in 2008, when the United States was in the throes of the global financial crisis.
Currently, 84% of workers and 67% of retirees are worried about the increase in the cost of living as it may hinder their ability to save money. Nearly nine out of ten workers are concerned that inflation will remain high for another year, and eight out of ten workers are concerned about a recession and further interest rate increases in the coming year.
Simultaneously, debt levels are rising, with six out of ten workers reporting that debt is a problem. The highest rises appear to be in high-interest credit card debt – a second survey released last year by EBRI and Greenwald revealed that 78% of those identifying debt as a concern name credit card debt as a problem. Medical or health-related debt, as well as school loans, was also highlighted.
According to Craig Copeland, the head of wealth benefits research at EBRI, there has been a notable change in confidence for the first time since the pandemic. This decrease in retirement confidence is the largest seen since the Great Recession.
A CLOSER LOOK AT RETIREES AND INFLATION
According to Federal Reserve data, around 40% of U.S. households are near-retired or retired families who have significant investments in the stock market. Therefore, they are most impacted by stock market fluctuations. However, inflation is a constant risk factor in retirement plans that affects everyone, regardless of their investment portfolio. It is important to consider this risk even when it is not making headlines. After 25 years, one hundred dollars would have the same purchasing power as $164, assuming a 2% inflation rate.
However, the effect of inflation on retirees is complicated and variable. To begin, most retirees rely on Social Security for a significant amount of their retirement income – and it has built-in inflation protection. Since 1975, the program has provided an annual cost-of-living adjustment (COLA) to ensure that benefits remain constant, notwithstanding inflation. It is a unique benefit provision – certain defined-benefit pensions include COLAs and inflation protection may be purchased through long-term insurance plans and a few annuities – but that is about it.
Every autumn, the Social Security COLA is determined by taking the average of the CPI-W during the third quarter. Annual COLAs are applied to future benefit levels when you turn 62, so even if you postpone filing, your benefits will keep up with inflation. The COLA was 8.7% this past year, the highest inflation adjustment in four decades.
Because Social Security replaces a greater portion of pre-retirement income for lower-income households than it does for affluent people, the program’s level of protection varies. According to Social Security’s actuaries, for employees claiming benefits at full retirement age last year, Social Security will replace 54.8% of income for those with low average wages ($27,011 per year), compared to 26.7% for those with maximum qualifying earnings ($147,775 per year).
Retirement spending habits vary, as younger retirees spend more on entertainment, dining out, and travel than older seniors. Following that, healthcare costs have risen faster than overall inflation in recent decades, eroding seniors’ living standards. Risks include the likelihood of a substantial long-term care bill.
“HOUSING” IS THE MOST CRUCIAL ISSUE
Housing is the most expensive single area of spending for households aged 75 and over. In addition, since the majority of seniors possess their own homes, this expense is somewhat shielded from inflation’s impact. Housing expenditures are partially immune to inflation if you have a fixed-rate mortgage or own your house outright, except for property taxes, maintenance costs, and utility bills.
Should you revise your retirement plans to account for increasing inflation? Most likely not. According to J.P. Morgan Asset Management, inflation averaged 2.9% annually from 1982 to 2024, so a long-term projection of 2 to 3% still looks plausible. You may always raise the numbers to stress-test your strategy. But good luck getting the math to work.