Forty-eight percent of Americans said that they occasionally lose sleep over money-related issues, according to a recent Bankrate poll. However, that is actually down considerably from the 2019 survey, and reported concerns about being able to cover shelter costs, credit card payments, and other monthly expenses decreased across the board. Given the economic weakness brought about by the coronavirus and related containment efforts, the apparent decline in financial stress may at first seem perplexing but it is really just a reflection of the $1200 relief checks, enhanced unemployment insurance, and other support provided under the CARES Act. Moreover, many households have seen their balance sheets improve considerably compared to before the pandemic, not just because of the government’s stimulus efforts but also due to a virus-related drop in discretionary spending that has caused the average savings rate to spike.
The latter should help better prepare Americans for any new disruptions caused by the “second wave” of COVID-19 or some other unforeseen shock down the road, something that too many households were not ready for prior to the coronavirus. Separate Bankrate surveys, for instance, found that the biggest financial regret for Americans throughout the pandemic has been their lack of emergency savings, and half of recently unemployed respondents admitted that they had to tap into their retirement funds as an immediate source of income during the pandemic. Many of those who dipped into their old-age savings early likely did so because their financial need occurred before the CARES Act support kicked in. Others, though, may simply be trying to take advantage of the more relaxed hardship rules, and 18 percent said they have lowered the amount of money they regularly contribute to their retirement plan relative to before the coronavirus outbreak. Although these statistics would likely have been even worse in not for the CARES Act and related relief measures, the figures still suggest that too many people as a result of the crisis may have to rely more heavily on the government in old age.
This is the opposite of what we have regularly recommended given the potential long-term sustainability risk looming over the Social Security program. However, even if these solvency issues suddenly vanished, many Americans are likely still relying (or going to rely) too heavily on Social Security in retirement. At least that is what a new NIRS study suggests after finding that the typical (median) household in retirement already (pre-COVID) derived around half of its income from Social Security. This proportion unsurprisingly changes a lot based on pre-retirement income, and lower-earning households were found to depend on Social Security for as much as three-quarters of their old-age income needs. Such figures present a clear problem since the Social Security program was only designed to replace around 40 percent of pre-retirement income. Naturally for these individuals the best strategy may be to try to delay retirement because we learned in May that even just a brief postponement can result in a significant boost in the benefit received from the government.
Sources: Bankrate, National Institute on Retirement Security, The Motley Fool