When the COVID-19 Pandemic ground the gears of the world to a screeching halt in March of 2020, I do not think I was alone in dreaming of the day when we could get back to normal. Yet “normal” is an ever-evolving concept, and many of us may not recognize our post-pandemic selves.
Major crises have a way of refocusing our attention. One day you might be mildly irritated that your favorite brand of toilet paper is not available in the 36-roll quantity and the next day you find yourself locking your arms around a six-roll package and running to the checkout before a horde of crazed shoppers pries it from your grip.
Nearly everyone I know has had a family member come down with one of the five major variants of COVID-19 and many have lost a family member to the disease. Normal may be normal, but it is not going to turn back the hands of time. We can only go forward, and so we need to understand what is happening. Discovering why things happen can help us chart our course for the future. This series will attempt to explain the Great Resignation, which is a contributor to inflation, but not its only cause.
What does that term encompass? Despite what pundits might have you believe, it is not one simple thing causing people to change jobs or retire. Just as a mighty river is a confluence of many babbling brooks and crooked creeks, the sources of the Great Resignation are at once demographic, generational, and cultural. Understanding those sources may give us clues on how to better manage it.
To understand why there were so many retirements in 2021, one must look at who is retiring. The actual increase in the retirement rate over 2019 is only 2%, but rates are a fraction. This fraction has a numerator of retirees over a denominator representing the entire population of the age cohort. In 2021, Baby Boomers (age 58-76) numbered 70 million.1 Two percent of 70 million is 1.4 million EXTRA retirements. So, let’s revisit how so many Boomers found themselves piling into retirement.
The parents of Baby Boomers were the last generation to enjoy robust defined benefit pension plans that assured a monthly benefit for life after age 65. They were also the last generation to receive full retirement age (FRA) Social Security benefits at age 65.
People still tend to retire at 65, but this is because they become eligible for Medicare. In recent years, I’ve noticed people staying on the job to complete a project, or to ease the transition for new leadership. These people were working past their FRA earning an 8% bump in Social Security benefits for each year past FRA, but securing that benefit bump was not their primary goal.
You might wonder what happened to pension plans. In the 1980s, companies started terminating pension plans. This was also the decade when real-life versions of Wall Street’s Gordon Gekko raided companies to loot their rich pensions. Those that weren’t terminated might be converted. If one can imagine a pension as a cup of coffee, there were pensions that went from being a piping hot Venti Caramel Macchiato to a tepid tipple of Nescafe.
With pensions diminished, 401(K) Plans became the primary retirement savings vehicle. But where pensions required the employer to adequately fund the plan to meet the benefit obligations, defined contribution plans like 401(K), 403(b) and 457 Plans were subject to a host of ailments. Participation was not mandatory, and many employers did not even offer them. They also required a basic knowledge of investing that most employees did not possess. So where 401(K) plans did exist, employees did not adequately fund them and remained utterly bewildered by the investment process.
While pensions were not portable, defined contribution plans could be moved from employer to employer, or to an Individual Retirement Account (IRA) upon severance. They could also be cashed out upon severance by paying some whopping taxes (usually about 40% between federal, state and penalty taxes), and, sadly, the thirst for immediate money often won out.
By 2000, the oldest baby boomers were reaching early retirement age, but many found themselves with inadequate retirement resources, so they decided to work longer to accumulate more. Even though retirement is not a car you buy on the day you retire, but a process that unfurls over decades, people continue to correlate overall portfolio returns with “good” and “bad” times to retire. People who might have retired in the third quarter of 2008 held off until they could see the market recovery that began in March 2009 hold firm.
During the Pandemic, those who could work from home continued to do so in the first and second quarters of 2020. You may remember that the market took a deep dive in March 2020 as the nation locked down. Therefore, the Pandemic Panic in the first quarter was not a good time to retire, but the market rebound that quickly ensued turned the fourth quarter of 2020 into fabulous time to retire.
The bull market continued into 2021, but perhaps the reason so many baby boomers decided to leave the workforce was that the U.S. saw a 19% increase in deaths in 2020. Between 2019 and 2021, Baby Boomers lost 2 million lives. This unprecedented spike had many baby boomers reevaluating what they wanted to do with the rest of their lives and working longer was not an attractive option.