The Effects of Recent Turmoil in Financial Markets on Retirement Security

Source: Peter R. Orszag, Congressional Budget Office, Testimony before the Committee on Education and Labor U.S. House of Representatives, October 7, 2008

The turmoil in financial markets has affected many aspects of the economy, including pensions. The most direct effect on pensions is through the prices of financial assets such as corporate equities and bonds. The Standard & Poor’s 500 stock market index, for example, has fallen by more than 25 percent over the past year as the outlook for the economy and corporate profits has worsened.

Because the majority of pension assets are held in equities, drops in stock prices have had a significant adverse effect on pension plans. Data from the Federal Reserve suggest that the decline in the value of financial assets cost pension funds (private-sector and public-sector combined) roughly $1 trillion–almost 10 percent of their assets–from the second quarter of 2007 to the second quarter of 2008 (the latest period for which data are available), and there has been a significant further drop in asset prices since then.
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