Income Adequacy

CARES Act, As Implemented, Could Significantly Reduce Retirement Balances

Considerable negative impacts facing employees taking full CRDs and failing to pay them back, especially among older cohorts

Excerpts from a new study by the Employeee benefit Research Institute (EBRI) offers a worse-case scenario for income adequacy. Visit here to access the full report.

A new EBRI study from the Employeee benefit Research Institute (EBRI) examining the conditional impact of the CARES Act on retirement income adequacy projects a minimal impact on the future retirement security for those who take loans or coronavirus-related distributions (CRDs) against their retirement funds but repay them. However, there are considerable negative impacts facing employees taking full CRDs and failing to pay them back. This is especially true among older age cohorts. The study also finds a 54 percent median reduction in retirement balances as a multiple of pay at age 65 if policymakers repeatedly allow access to retirement funds during future emergencies.

“CARES Act: Implications for Retirement Security of American Workers” assesses the potential impact of four different scenarios on the reduction in retirement balances at age 65 as a multiple of pay. These include a one-time withdrawal with no payback, a one-time withdrawal with payback over three years, an “extra” loan with a dollar-for-dollar offset for loan payments against employee contributions, and withdrawal every 10 years with no payback.

This Issue Brief first offers a worst-case analysis of the impact of the CARES Act on retirement income adequacy conditioned on taking full advantage of the CARES Act provisions. This condition assumes employers offer the provision, employees are eligible to take advantage of the provision, and employees takes maximum advantage of the provision. In the last section, EBRI relaxes those assumptions to provide a preliminary estimate of the aggregate impact of these provisions.

Give and Take

“While the CARES Act provisions provide much-needed liquidity for cash-strapped workers during the current pandemic, this study strives to assess how using defined contribution plans as emergency savings impacts the future retirement security of American workers,” said Jack VanDerhei, EBRI’s Director of Research and author of the report. “However, further examination is needed.

Under a scenario in which estimated actual implementation and utilization of CARES Act provisions is low, the aggregate impact is estimated to be less than one-half a percent in the scenario in which employees fail to pay back CRDs. But that could change if more employers choose to implement provisions or if allowing access to retirement funds with no penalty becomes a more commonplace and relied-upon response to emergencies.”

The simulation model used in “CARES Act: Implications for Retirement Security of American Workers” is a variant of EBRI’s full Retirement Security Projection Model.® A future EBRI Issue Brief will provide additional analysis on the aggregate impact of the CARES Act provisions on retirement income adequacy when participant-level information becomes available. This will provide critical information for policymakers, plan sponsors, and providers as they assess ongoing approaches to helping workers navigate emergency savings needs.

CARES Act: Implications for Retirement Security of American Workers

While the CARES Act provisions provide much-needed liquidity for cash-strapped workers during the current pandemic, this study strives to assess how using defined contribution plans as emergency savings impacts the future retirement security of American workers...

Many provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act were designed to provide relief to those American workers who do not have sufficient emergency savings to weather the current storm. These include increasing defined contribution plan loan limits to the greater of $100,000 or 100 percent of the vested account balance; suspending loan payments due on or before December 31, 2020, and deferring loan payments for up to one year; allowing distributions until December 31, 2020, of the lesser of 100 percent of the vested account balance or $100,000; and allowing repayment of coronavirus-related distributions (CRDs) over a three-year period.

The question, however, is as follows: What is the cost of effectively using defined contribution plans as emergency savings vehicles in this way when it comes to the future retirement security of American workers?
Using the Employee Benefit Research Institute’s (EBRI’s) Retirement Security Projection Model® (RSPM), we simulate the impact on retirement balances as a multiple of pay at age 65 for scenarios where employees take full advantage of the CARES Act flexibility to access their defined contribution plan.

We generally find:

  • There are limited reductions in projected retirement balances as a multiple of pay at age 65 in scenarios where employees pay back CRDs within the prescribed three-year timeframe or take new loans — even when workers reduce future contributions dollar for dollar in order to repay those loans.
  • However, we see potentially significant reductions in retirement balances as a multiple of pay at age 65 when employees take full CRDs and fail to pay them back. This is especially true for older age cohorts.
  • The most catastrophic scenario is one in which workers are provided CARES-Act-like access to withdrawals time and again as various crises occur. In other words, this is a scenario in which policymakers essentially turn defined contribution plans into de facto emergency savings vehicles. In this scenario, the overall median reduction in retirement balances as a multiple of pay at age 65 is 54 percent.
  • Still, further analysis is warranted. In our preliminary analysis of potential actual aggregate utilization of CARES Act provisions based on employer responses to a Plan Sponsor Council of America (PSCA) survey, we find that reductions were very small. Even in the scenario in which employees fail to pay back CRDs, the aggregate impact — because of low estimated actual implementation and utilization of CARES Act provisions — is estimated to be less than one-half a percent.

A future EBRI Issue Brief is scheduled to provide additional analysis on the aggregate impact of the CARES Act provisions on retirement income adequacy when comprehensive participant-level information becomes available. This will provide crucial information for policymakers, plan sponsors, and providers as they assess ongoing approaches to helping workers navigate emergency savings needs.