The COVID-19 pandemic could upend retirement planning, jeopardizing financial security for the next generation of retirees. Experience from the 2007–08 financial crisis and Great Recession that followed suggests the current crisis could wipe out existing retirement savings, hinder additional savings, and threaten public and private retirement systems.

Here’s how:

1. Trillions of dollars of retirement savings could disappear

In 2008, the Russell 3000 index, designed to reflect the performance of the entire US stock market, plunged 39 percent. The value of US retirement accounts, including employer-sponsored defined-contribution plans, such as 401(k)s, and individual retirement accounts fell 24 percent that year, erasing $2 trillion of retirement savings.

In 2020, the Russell 3000 index fell 25 percent through April 3, wiping out an estimated $3.8 trillion of retirement savings.

Chart: value of retirement accounts

2. Employee contributions to 401(k) plans could shrivel

Ten million workers have filed unemployment claims in just the past two weeks. Workers can no longer contribute to their 401(k) plan after they’ve been laid off.

During the Great Recession, about 4 in 10 employees reduced their 401(k) plan contributions by at least 39 percent.

During the current crisis, job losses have been concentrated among service workers, especially those in the hospitality and food service industries, who are only about one-third as likely as management, business, and financial workers to participate in a workplace retirement plan (PDF). Lost 401(k) contributions are likely to increase, however, as job losses spread.

3. Employers might cut 401(k)-matching contributions

Nearly all employers with a 401(k) plan match a portion of their employees’ contributions, and those matches average 5 percent of participants’ pay. As the economy slows, some employers are already cutting costs by trimming these contributions, and more are likely to follow. In 2008–09, more than 200 employers suspended their 401(k) matches.

4. Working-age people may have to dip into their retirement savings

When facing financial emergency, such as job loss or unusual medical costs, many people turn to their retirement accounts, which hold most household savings. Withdrawals from 401(k) plans spiked during the Great Recession, and the recently signed Coronavirus Aid, Relief, and Economic Security Act eases withdrawals this year. Unless funds are paid back, however, these withdrawals leave workers less prepared for retirement.

5. Defined-benefit pension plans may be at risk

Fifteen percent of full-time private-sector workers (PDF), 83 percent of full-time state and local government workers (PDF), and nearly all federal government workers participate in a defined-benefit pension plan, which guarantees retirees a lifetime stream of cash payments, typically based on their years of service and salary earned near the end of their career. As we saw after the 2008 financial crisis, stock market losses and an economic downturn could worsen plan finances and lead to benefit cuts.

Compared with 2008, twice as many employers terminated their pension plan in 2009 because they were unable to meet their obligations. Although the federal government insures most private pension benefits, retirees in terminated plans don’t always receive their full benefits, and workers no longer continue to accrue benefits.

Investment losses in the wake of the 2007–08 financial crisis also created significant financial problems for state and local pension plans. Data compiled by the Center for Retirement Research at Boston College show that funding shortfalls for the largest 190 state and local plans grew $244 billion in 2009, a 47 percent increase.

Most plans still haven’t recovered more than a decade later, and many states have cut benefits for recently hired public employees. Pension plans in both the private and public sectors weren’t as well funded in 2019 as they were in 2008, so financial losses could have a bigger impact today.

6. Workers may retire early

Social Security provides a crucial lifeline to unemployed workers ages 62 and older, who are much less likely than younger workers to become reemployed. Social Security claiming spiked in 2009, when unemployment surged. However, Social Security permanently cuts monthly payments for early retirees.

In 2020, beneficiaries who begin collecting when they turn 62 will receive 28 percent less each month than if they instead had begun collecting at age 66 and 8 months, their full retirement age. Those losses generally sting once beneficiaries reach their 80s, when out-of-pocket medical expenses and spending on home and residential care often surge.

7. Social Security’s financial outlook could deteriorate

Before the pandemic broke out, the Social Security trustees projected that program benefits would exceed revenues in 2020 and every subsequent year for the foreseeable future. Unless policymakers close this shortfall, Social Security’s trust fund would run out by 2035, leading to across-the-board benefit cuts of about 25 percent.

Slow wage growth and extended unemployment would reduce payroll taxes collected by Social Security and further strain the program’s finances. The program’s payroll tax revenue fell $4.2 billion in 2009 and another $26 billion in 2010, when unemployment peaked after the financial crisis. A repeat of that scenario could lead to benefit cuts in coming years.

What are the policy solutions?

Most younger workers can recoup their lost retirement savings before they stop working by saving more each year and extending their careers. The retirement security threat is more serious for older workers, who don’t have much time to rebuild their nest egg.

Policymakers can help by shoring up Social Security’s finances. Raising Social Security revenues so that the program’s trust fund does not run out would prevent a 40 percent increase in the number of older adults living in poverty.

Policymakers could also reduce economic hardship at older ages by creating a meaningful minimum benefit in Social Security, improving Supplemental Security Income for low-income retirees, or providing refundable tax credits for low-income seniors.

Policies that improve medical and long-term care coverage for seniors would also help retirement income go further. Seniors’ out-of-pocket medical costs are projected to increase 40 percent relative to income over the next two decades, and the need for expensive home or residential care after mobility or cognitive limitations emerge may be the greatest financial risk most older adults face.