The economic implosion over the last 20 months caught many of us by surprise. We had confidently ridden the stock market’s ascent to the heady all-time highs of the Dow Jones Industrial and Standard & Poor’s 500 indexes in October 2007, and then hung on dearly as those numbers plummeted to 13-year lows earlier this year. The roller-coaster ride left many of us dizzy and wondering what in the world had happened. Not to mention a whole lot less financially solvent.
For our cover story this month, we asked Washington, D.C.-based writer Dan Vock to analyze what caused the collapse, as well as what the recession has meant to Illinoisans, and report it in terms that are understandable to those of us who weren’t economics majors. He consulted financial experts and pored over congressional testimony, position papers, news accounts and federal and business reports to assemble his findings, which appear on page 16.
Hilary Russell, one of our master’s degree interns in the Public Affairs Reporting program at the University of Illinois at Springfield, also looks at another result of the economic crisis: student loan defaults.
As our colleges and universities dispatch another class of students into the working world this month, many new graduates are saddled with huge student loans and face diminished prospects of being able to repay them in an uncertain job market.
On the other end of the employment spectrum are the Baby Boomers who are reaching retirement age — or at least what they thought it would be before their 401(k) accounts began to shrivel like once-green leaves after a late-autumn cold snap.
A study released in February by the American Institute of Certified Public Accountants shows that nearly 35 percent of their clients are postponing retirement because of the economic downturn. That number has increased by 3 percentage points from a year earlier, during the recession’s early days.
Another analysis published in February by the nonprofit Employee Benefit Research Institute said the S&P 500 lost 37 percent of its value in 2008, which translated into corresponding losses in 401(k) retirement accounts. Those losses became even more severe early this year, but as of this writing, the S&P index has rebounded to near its New Year’s Day level, so the 37 percent loss is still probably a valid estimate. Among those hardest hit during the 20-month slide were 401(k) account holders who are nearing retirement age and had “exceptionally high exposure” to equity investments, the study said.
Their 401(k) accounts are the only connection many Americans have with the stock market. The accounts are named after a section of the Internal Revenue Code that was established in 1978 as a savings vehicle to allow employees to postpone paying taxes on any portion of their income they receive as deferred compensation rather than direct cash payments. In the early ’80s, many employers began replacing their workers’ defined benefit retirement plans with 401(k) accounts, matching some or all of their employees’ contributions.
As employers suffered economic misfortunes of their own over the past year and a half, many stopped contributing their portions to employees’ 401(k)s. That will only add to the difficult task that many older employees face in rebuilding their accounts.
Many senior employees will have to work longer and postpone their retirements. And that will affect the nation’s economy for years to come, even when the hard times improve.
With many older workers staying in their jobs longer than they had expected, the workforce won’t experience its normal churn, where younger employees are hired to fill positions vacated by retirees, and where midlevel employees are promoted into positions of greater responsibility within organizations. In an already tough job market, that translates into even fewer opportunities for both younger and midlevel employees.
And for the organizations, that means they won’t be re-energized and revitalized by younger, enthusiastic workers who bring fresh eyes and new ideas to bear in solving the ongoing challenges that organizations face.
I’m reluctant to concede that those of us with gray in what little hair we have left are no longer able to adapt to changing business conditions and technology. But I’m the first to acknowledge that our organizations could benefit by more input from workers who have never known a time when personal computers, cell phones and electronic communication weren’t a daily fact of life.
It is a natural progression for older employees to step aside and younger ones to take their places. When that isn’t occurring, not only will younger workers face more difficulties in building their lives, organizations will stagnate.
The effect on organizations could become dangerous as both younger and older workers become disillusioned: the former by the lack of employment opportunities, and the latter as they watch their dreams of relaxing during their autumn years — dreams they had thought they were about to achieve — fade into the drudgery of another day of work at jobs they had thought they were going to leave behind.
Left too long to fester, that dis- illusionment on both ends of the employment spectrum could eventually turn into anger and resentment, causing even more damage to the workers, the organizations and society at large.
The solution is not to throw older employees onto the street to make room for newer blood. Aside from being morally reprehensible, that would only create a class of unemployed and nearly destitute older workers whose savings will run out long before their life spans do.
Two-thirds of the older workers who are now delaying their retirements say they won’t wait more than five years, according to the American Institute of Certified Public Accountants’ study. During that time, even if the economy stays in its current doldrums, businesses and other employers need to look for creative opportunities — whether through part-time work, contracts or other efforts — to allow younger workers to gain some experience in their organizations. The organizations also must seek opportunities — whether through early retirement offers or part-time work — to ease the now-painful transition into retirement for older employees who have lost much of their life savings in the stock market collapse and the value of their largest single investments — their homes — in the real estate crash.
That may be the only way that the once-normal rejuvenation process in American businesses will resume anytime soon.
On the other end of the employment spectrum are the Baby Boomers who are reaching retirement age — at least what they thought it would be before their 401(k) accounts began to shrivel like once-green leaves after a late-autumn cold snap.
Dana Heupel can be reached at heupel.dana@uis.edu.
Illinois Issues, June 2009
