Did Rising Asset Values Spur Early Retirements?

Did gains in the stock market and other assets during the first two years of the COVID-19 pandemic contribute to the Great Retirement? St. Louis Fed Senior Economist Miguel Faria e Castro examined the question in a January Economic Synopses essay.

Last year, Faria e Castro examined the role of retirement in explaining the drop in labor force participation during the pandemic. In that earlier analysis, he suggested several possible reasons for those early retirements, such as the fear of contracting COVID-19 at work and the gains in wealth from rising stocks and house values. In his 2022 essay, the author sought to gauge the possible impact of historically high cumulative real returns on assets like houses or stocks on early retirements.

“These years were associated with significant increases in wealth for households exposed to these assets,” he wrote.

Between January 2020 and September 2021, the labor force participation (LFP) rate dropped 1.8 percentage points (from 63.4% to 61.6%), which represented a net decline of 4.7 million people in the labor force. To quantify how much of this decline was related to increased asset values, Faria e Castro made a series of calculations.

First, the author took data from the 2019 Survey of Consumer Finances to get a detailed picture of what household balance sheets looked like before the pandemic began. He then looked at returns on several types of assets and estimated how the net worth of households evolved; he assumed that the composition of the households’ portfolios remained fixed.

With that information, Faria e Castro estimated how much the LFP rate changed for each household given a change in net worth.

In households with someone who was between ages 51 and 65, the calculated change in value of wealth led to an estimated fall in the LFP rate of 0.92 percentage points; this represents about 700,000 people, or 15% of the net decrease in workers.

However, Faria e Castro cautioned that rising asset values may not have caused people to exit or remain out of the labor force. Instead, the increased wealth may have compounded other reasons to stop working, he posited.

“Finally, it is not clear whether these reductions in LFP are permanent, as people could eventually return from retirement, which is particularly likely for younger households,” he concluded. “Nor is it clear whether these labor supply effects are symmetric: Would people increase their LFP by the same amount if their wealth fell? These questions are left for further research.”