U.S. has been making it easier for people to access long-term savings for emergencies, trading future financial security to stay afloat
The Wall Street Journal
The coronavirus pandemic dealt a one-two punch to Jordan Vassallo, an Australian who owns a theater company and works as a registered marriage celebrant.
Bookings for 10 weddings vanished when lawmakers limited guests at ceremonies to five, blowing a $6,937 hole in his finances. Social-distancing rules closed entertainment venues, losing him $20,747 as plans for a production of “Midsummer Night’s Dream” were canceled and other shows postponed.
Bills mounting, he weighed retirement someday against mortgage payments today. He chose his home and plundered $6,937 from his $69,416 retirement account.
“If the bank takes my house, then my future is that little less secure anyway, so I would rather take the money now,” said Mr. Vassallo, 36 years old, whose wife, Laura, co-owns the theater business.
For decades, governments have used the tax code to prod people to set money aside for old age. Faced with a pandemic that has upended businesses and lives, lawmakers are making it easier for people to raid these accounts. If they suddenly face financial calamity, the idea is, shouldn’t they have access to their savings?
Governments’ answer is increasingly yes. A move to loosen retirement-account rules underscores a growing acceptance of the idea that retirement accounts, which hold trillions in wealth, do double duty as emergency funds.
The shift in thinking coincides with trends under way before the last recession. People are living and working longer while juggling careers interrupted by spells of unemployment and career switching. Saving steadily for 40 years to fund maybe three decades of retirement no longer matches the life cycle of a growing chunk of the population.
The U.S. has allowed those affected by the coronavirus and economic downturn to take up to $100,000 out of retirement savings accounts—either individual retirement accounts or employment-linked 401(k)-type plans—without an early-withdrawal penalty. It has allowed them to borrow up to another $100,000 from 401(k) plans.
Australia is letting people who are unemployed or had their hours cut apply to withdraw up to $13,883 from what are called superannuation retirement accounts. The government approved more than 1.6 million applications as of May 24 and expects Australians to withdraw $18 billion by the program’s end on Sept. 24.
In Malaysia, meanwhile, the government-sponsored retirement savings plan Employees’ Provident Fund has allowed members to apply to withdraw up to $1,408 through March of next year.
Lawmakers are betting that by putting retirement cash into people’s pockets early, they can help households stave off defaults, evictions and bankruptcies with minimal impact on government spending and deficits.
In the U.S., “as the pot of money in 401(k)s has grown, it has become a place legislators turn to for resources” during times of crisis, said Ben Norquist, chief executive of Convergent Retirement Plan Solutions LLC, which provides services to retirement plans.
Loosening the rules on raiding retirement savings entails tradeoffs. People who withdraw now and don’t top up their savings when better times arrive will be poorer when they quit work. They’ll be missing not only the money they took out but also the returns it could have earned through years of tax-advantaged investment.
If the emergency they face is a broad economic one, they are likely to be pulling money out of financial markets when those are down. And letting people spend retirement money risks muddling governments’ messages to the public about the importance of long-term saving.
“There is a danger that people have now seen [retirement accounts] as accessible” and may count on such assistance in the future, said David Knox, a senior partner at consulting firm Mercer LLC who works in Melbourne.
“Once the crisis is over,” he said, “we’ve got to make sure people understand that this was an extraordinary exception.”
Dipping into retirement savings seemed to Clara Lee the only recourse when the coronavirus turned her world upside down.
In January, the Chicago resident quit her job at a city restaurant to meet her parents in Asia and take a vacation. She had grown up partly in Hong Kong and looked forward to seeing relatives.
As the coronavirus spread and countries started shutting their borders, Ms. Lee, 35, bought a $600 plane ticket home. Without a job, she put $2,300 on her credit card to rent an apartment and a car. In March, she found a position at a catering company with a delivery business.
To pay off debt she had run up, Ms. Lee liquidated her $8,000 IRA. Ms. Lee said she plans to contribute to her new employer’s 401(k) plan when she becomes eligible in July.
“I was taught that taking money out of an account for the future is really wrong,” she said. “As of right now, I don’t have any savings. I don’t have anything to fall back on.”
The 401(k) and IRA accounts being treated as emergency funds began supplanting pensions in the 1970s. The new approach was to encourage people to save for retirement by letting them defer income tax on money they put in the accounts. By the end of last year, IRAs and 401(k)-type accounts held about $20 trillion.
Australia’s $2.1 trillion compulsory superannuation system, introduced in 1992, requires employers to make contributions—currently 9.5% of annual pay—to accounts for employees. Australians also can make extra tax-advantaged contributions to the funds, commonly referred to as super accounts. Before this spring, Australia allowed early access to them only for reasons such as terminal illness and severe economic hardship.
The U.S. by contrast, has always given account holders a degree of flexibility. About 30% to 40% of U.S. workers leaving jobs before retirement age cash out their 401(k) accounts, paying deferred taxes and generally a 10% penalty if they are under age 59.
At 401(k) plans that let employees borrow from the accounts, about a fifth of participants have a loan outstanding, says the Investment Company Institute, a mutual-fund industry trade group. Around 10% of such borrowers default on the loans, according to research from economist Olivia Mitchell of the University of Pennsylvania’s Wharton School.
Moves to make it easier to tap retirement plans in emergencies began several years ago. Since hurricane Katrina in 2005, Congress has allowed 401(k) and IRA withdrawals without penalty for people affected by several natural disasters. It also has expanded 401(k) loan limits.
In 2018, lawmakers relaxed certain restrictions on 401(k) hardship withdrawals, which allow people to pull out savings—after paying taxes and typically a penalty—for reasons such as buying a home, preventing foreclosure or paying medical bills.
The following year, Congress let parents withdraw up to $5,000 penalty-free from retirement accounts after a birth or adoption.
“People certainly need emergency cash in the current economic crisis. But these plans were designed purely for long-term savings, and have come to serve as de facto emergency savings products—a function they weren’t set up to serve,” said Timothy Flacke, executive director of Commonwealth, a nonprofit that builds tools to help low-income workers save.
Among problems he sees with dipping into retirement accounts in emergencies is that people are likely to end up selling financial assets when the economy is bad and values are down. He favors adding emergency savings accounts to employers’ benefits programs.
Edward Gomez, 44, turned to his retirement funds in March to repay $325,000 he borrowed last year after three of his five New York-area restaurants were damaged by fire. The Staten Island resident said he had recently reopened the venues when New York told nonessential businesses to close in March.
He negotiated a suspension of his utility and mortgage payments and applied for federal small-business loans. He received $46,800, less than he needed. Mr. Gomez said he has also been unable to collect most of the rent on four houses he owns because they’re mainly occupied by his furloughed employees.
In March, Mr. Gomez said, he liquidated his $630,000 IRA, “against everybody’s advice.” After paying deferred taxes, he plans to repay his debt and use what remains to purchase food when his restaurants reopen.
“My restaurants are my life,” Mr. Gomez said. “I feel like I will come out of this OK. I am just risking everything to start over.”
From late March, when Congress approved easier withdrawals from retirement accounts, through May 8, 1.5% of eligible people with 401(k) accounts handled by Fidelity Investments took some money out, according to Fidelity.
Rival Empower Retirement said about 1% of 401(k) savers in plans it administers that allow the withdrawals took money out through May 31. At Alight Solutions LLC, 1.2% of people took a distribution through the end of May, Alight said, and more than half withdrew $100,000 or their whole balance if it was less than that.
Retirement savings programs sponsored by California, Oregon and Illinois reported increases in distributions following state shutdowns. As of the end of May, 13.7% of IRAs that Illinois residents funded through the state’s Illinois Secure Choice program had been fully or partially liquidated, up from 10.7% on Jan. 1.
Brokerage firms that handle IRAs said they were unable to track coronavirus-related withdrawals.
For people who’ve lost jobs, retirement accounts can be a lifeline.
Heather Semler was laid off from a $105,000-a-year job as a video producer in October. She landed freelance work, but her take-home pay was lower after health-insurance costs and self-employment taxes. The Brooklyn resident put some expenses on a credit card and stopped going out with friends. “I stayed on the couch, I stopped living life,” she said.
When New York City largely shut down in March, her freelance work ended. She claimed unemployment benefits, but with monthly student-loan and credit-card payments of over $1,400, she couldn’t afford her share of the rent.
“I was in huge trouble. I remember thinking I had my 401(k) and was like, ‘I have a lifeline,’” she said.
Ms. Semler withdrew $14,000 from one of two 401(k) retirement accounts she has from past employment. She has used it to pay credit-card bills and buy a car, keeping $3,000 for emergencies. She also moved to her father’s house in Egg Harbor Township, N.J., where she lives rent-free.
Ms. Semler is freelancing again. She says once she gets a permanent job with a 401(k), she might use the $25,000 in her remaining retirement account to wipe out the rest of her debt.
“I always took great pride in the fact that I had a 401(k),” she said. “I am 35 and think I have enough time to figure out a new plan for retirement. My objective is to get back on track and become more financially secure so that after 40, I can really focus on retirement.”
In Australia, Andrea Glynn tapped her super account five years ago and has no regrets.
With her only income at the time coming from unemployment benefits and child support, her finances were “really tight and I got behind on so many” bills, said Ms. Glynn, who lives in a Melbourne suburb. A charity told her she might qualify to take out retirement money on hardship grounds, and she made a withdrawal equal to $6,804 in today’s money.
Ms. Glynn, 50, now works at a store that sells blinds and awnings. It has remained open during the pandemic, but her hours were cut 20%. The hit to her income prompted Ms. Glynn to apply to withdraw $6,937 of her $75,607 retirement-fund balance to pay debt and ensure security for herself and her daughter, now in college. She said she may take out another $6,937 before the government stops allowing the easier access in September.
The money she withdrew five years ago “got me out of debt,” Ms. Glynn said. “I wasn’t making ends meet, and I didn’t have anybody in my family that could give me money. But even if they did, I had no way of paying it back.”
In the U.S., Boston College’s Center for Retirement Research has estimated that even before the coronavirus, early withdrawals were reducing retirement-account balances by about a quarter over 30 years, taking into account the lost returns on savings that were no longer in the accounts.
“For those people who lose jobs, 401(k) balances are in the crosshairs,” said Alicia Munnell, director of the center. “It’s going to endanger retirement security” and accelerate trends toward delayed and partial retirements, she said.
Mr. Gomez, the restaurant owner on Staten Island, said that while he hates the idea of raiding his retirement fund, he feels he had no choice.
Besides, he said, for people like him who love what they do, “there is no such thing as retirement. A retirement account is just a tool we use to save money.”
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