A retirement mystery: How did workers keep saving through the pandemic?

When the markets crashed in 2008, every part of the U.S. economy felt the impact — including employees' long-term savings. About nine million people lost their jobs, decimating their contributions to retirement plans. Then, more than a decade later, COVID-19 wiped out even more jobs — 22 million, by some estimates.

What, then, was COVID's effect on the money workers stashed away for retirement? The answer is surprising: Not much.

"It was pretty modest," said John Sabelhaus, co-editor of an upcoming report from the Pension Research Council, a non-profit at the University of Pennsylvania. "In the Great Recession there were pretty significant impacts on retirement savings. With COVID, we didn't see that kind of problem."

This is not what experts expected. The Great Recession badly hobbled employees' efforts to contribute to their retirement plans, such as employer-sponsored 401(k)s. From 2007 to 2009, workers' contributions fell by six percent, from $269 billion to $253 billion, according to a study included in the Council's report. And contributions to IRAs plummeted — from 2007 to 2012 they dropped 21 percent, from $73 billion to $58 billion.

And yet with COVID, there was almost no effect on how much workers were able to save. Employee contributions to employer-sponsored plans actually grew in 2020, rising by five percent — roughly the same rate as the previous few years — and contributions to IRAs grew slightly faster than usual, by 10 percent, according to the study.

That's not to say retirement plans haven't suffered at all since the pandemic. Contributions by those workers' employers, in fact, declined by 12 percent in 2020. And today in 2022, many retirement portfolios have tumbled amid the recent bear market — which some experts may attribute indirectly to the COVID crisis. But in terms of employees' — as opposed to employers' — contributions, the first year of the pandemic didn't make a dent in workers' savings.

Multiple studies have come to the same strange conclusion. In September 2020, the investment firm T. Rowe Price found that most 401(k) participants were "largely staying the course in terms of their long-term savings strategies" — less than 10% stopped or reduced their savings. And according to a study by the Employee Benefit Research Institute, the pandemic hasn't significantly changed Americans' expected age of retirement. Those whose work was affected by the pandemic said they expected to retire at age 69.1; those who were unaffected said 69.2 — hardly a major difference.

"COVID really was this non-event for retirement expectations," David Blanchett, head of retirement research at PGIM, said during an EBRI webinar on September 15. "This wasn't what I expected. I thought for sure we would see something happen."

Clearly, in terms of retirement, the pandemic was not the same kind of crisis as the Great Recession. Why was it so different? Experts point to a number of reasons.

A boomerang effect
One major difference has to do with the duration of job loss. During the Great Recession, millions of people were permanently laid off because their employers went out of business. Those jobs never came back. 

During the pandemic, on the other hand, many who lost their jobs due to lockdowns were able to return to them a few months later. In leisure and hospitality, for example, 8.2 million jobs were lost from February to April 2020. But by October, 4.9 million had been regained, according to the Bureau of Labor Statistics. The recovery has continued since then.

"The job loss that occurred during the Great Recession was much more likely to be permanent," Sabelhaus said. Meanwhile, the damage from the pandemic "was very deep but very short, and many people went back to their original jobs."

Low-wage jobs were hit hardest
Another difference pertains not to the number of jobs, but the types of jobs lost. While the Great Recession affected millions of white collar employees, COVID's main economic victims were at the bottom of the income ladder. The effect was disproportionate — although low-wage workers made up 43% of the pre-pandemic workforce, they comprised 52% of the Americans who lost their jobs, according to the Brookings Institution.

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This does a lot to explain the discrepancy in retirement savings, because low-wage employees tend to have the least access to retirement plans. In 2019, according to the Pension Research Council study, 90% of contributions to employer-sponsored plans were made by the top two- fifths of earners. So economically, the people hit hardest by Covid were the ones least likely to have a 401(k).

"In some ways, that's the group who doesn't normally contribute a lot anyway," Sabelhaus said.

Working from home
Meanwhile, those at the middle and upper end of the economic ladder were largely able to keep their jobs, thanks to the transition to remote work. For Americans working in the retail, restaurants or hospitality industries, being sent home meant no longer working. But for Americans with desk jobs, it just meant no longer coming into the office.

"The type of people who are contributing actively to their retirement plans are exactly the same type of people who were much more able to shift pretty seamlessly to working from home," Sabelhaus said. 

In July 2022, unemployment finally fell back to where it had been in February 2020, just before the pandemic hit the U.S. Essentially, the economy has regained the jobs it lost due to COVID, and the jobs it didn't lose have evolved into remote positions. Meanwhile, employees kept saving. As the pandemic transformed other aspects of American life, employee contributions to retirement plans have remained oddly immune.

"Most people did not [permanently] lose their jobs," Sabelhaus said. "Therefore, they kept moving right along in terms of the contributions."