5 Truths about Money During the Pandemic

While many people talk about the health crisis brought on by the outbreak of COVID-19, that is not the only challenge causing stress. People are also worrying about their finances, both short-term and long-term. Recent statistics revealed that nearly 40 million people had lost their jobs since the pandemic began.

Here are 5 truths about money during the coronavirus pandemic:

The stimulus. In late March, U.S. President Donald Trump signed into law an unprecedented $2.2 trillion stimulus package to help keep the economy alive amid the deadly coronavirus outbreak that has shuttered countless businesses and put millions of Americans out of work. The Coronavirus Aid, Relief and Economic Security Act or CARES, contains $560 billion that directly benefit individuals in the form of cash payments of up to $1,200. The legislation also expands unemployment and paid sick/family leave benefits, waives penalties on some early retirement withdrawals, and offers student loan relief and protections for renters. The stimulus is widely seen as a lifeboat; in other words, a fairly short-term solution to financial problems. Advisors suggest that people should use the money to consider their personal-finance needs first, like paying bills and boosting emergency funds.

The impact. Experts, including Benjamin Lockwood, a Wharton professor of business economics and public policy, are worried about the impact that the coronavirus crisis will have on income inequality, which refers to the distribution of wealth and is also sometimes called the income gap. Typically, it means that there is a large gap between people who have money and those who don’t. Will income inequality increase? For Lockwood, this question is especially important because even though America enjoyed record low unemployment before the pandemic, there were already economic red flags. An increasing number of people — about 40% of the income distribution — were a paycheck away from homelessness, hustling gig jobs without benefits, working without paid sick leave and living in a general state of financial despair. “Despite how good things looked at the outset, we were actually still pretty fragile in the face of something like this,” Lockwood said. While the stimulus will help some people pay bills or pay for their car to get to and from work, the longer-term effects could cause that income inequality gap to widen.

Relief from retirement funds? Millions of Americans find themselves strapped for cash with reduced work or lost jobs as the coronavirus pandemic hurts the economy. The Coronavirus Aid, Relief and Economic Security Act offers some help with the promise of direct checks of $1,200 for individuals ($2,400 for couples) with an additional $500 for each child, and expanded unemployment insurance benefits. It also opens up a bigger cash window by waiving the 10% penalty on withdrawals of up to $100,000 from 401k retirement accounts by those below 59.5 years of age. But should you actually use the money squirreled away in your retirement fund to help you get through this crisis? Olivia S. Mitchell, a Wharton professor of business economics and public policy who is known for her pension and finance research, cautions against it. “Withdrawing assets from retirement plans should be a last resort, done only after using up the household’s emergency funds, taking a bank loan, or borrowing from family if possible,” she said during an interview on the Wharton Business Daily radio show on SiriusXM. “It has tax consequences, and it may lead to a much poorer retirement.” Those premature withdrawals will not just erode individuals’ money saved for retirement: Those who lose their jobs after they withdraw from those retirement funds will have to either repay that amount within three years or pay additional taxes.

Longer-term look. For many, the level of financial stress will depend on employment trends as the pandemic crisis eases and the economy improves. Nothing is a sure thing, suggest researchers. Industries like the leisure and hospitality sectors have been especially hit hard (think hotels and restaurants). Wharton management professor Matthew Bidwell said, “It will take the economy “a while” before it bounces back to pre-pandemic levels. Many people are likely to be rehired after the social-distancing restrictions ease up. However, Bidwell does not expect all laid-off workers to regain their jobs. “[That is] both because business owners do not want to fully staff up until they know what demand will be like, and because some of their businesses may have gone bankrupt or closed down in the meanwhile.” Still, the hope is that generous unemployment benefits will help people pay for rent, food and health care in the short-term and then they will ideally return to the longer-term stability of their jobs once the quarantine is lifted. “Whether this will be a temporary blip is, of course, the multi-trillion-dollar question,” said Bidwell.

Social Security shortfall. Social security, the federal U.S. program that provides money to senior citizens who are no longer working through taxes that are collected from the nation’s employees, could run out four years sooner than predicted, according to an analysis by the Penn Wharton Budget Model, which provides economic forecasts. Revenue into Social Security has been steadily declining since the start of the coronavirus pandemic, partly because “the loss of jobs, especially concentrated among low-wage workers, reduces payroll tax revenues.” The Penn Wharton Budget Model previously predicted that Social Security would run out in 2036. Its latest report predicts either 2034 or 2032, depending on the type of recovery we have coming out of an economy impacted by COVID-19. The Budget Model’s report on “The Impact of the Coronavirus Pandemic on Social Security’s Finances” provides all the details.

Conversation Starters

What is income inequality? Do you think the pandemic will widen the gap?

Has your family struggled financially during the pandemic? What have you learned about finances during this time?

How will COVID-19 make us smarter money managers? What lessons can we carry forward so we are better prepared for another pandemic?

2 thoughts on “5 Truths about Money During the Pandemic

  1. Great piece! Income inequality is the unequal distribution of income and the distribution of wealth. Will the coronavirus pandemic widen the current gap of inequality? Perhaps, but it is unlikely. Historically, economic recessions tend to shrink the wealth gap. On October 19th, 1987, for example, U.S. markets fell by over 20% in a single day! In the following years, GDP and employment also took significant downturns. While most Americans were affected by this drop, wealthy Americans who owned most of the country’s stocks were the ones who were most affected. From 1987 to 1991, the richest 1% of Americans/ share of national income decreased from 14.8% to 13.9%. The poorest 50% of Americans’ share of national income only decreased from 17.7% to 17.4% (according to the Los Angeles Times). Other groups of high and low-income Americans generally followed similar proportional changes in both income and wealth. In conclusion, the 1987 stock plunge in addition to the recession in the early 1990s that followed decreased the wealth and income gaps in America because the country’s wealthy population lost wealth at a higher rate than the poorest 50%, 25%, 10%, and so on.

    Black Monday of 1987 is only one example, however. Historically, income inequality rises when the economy and stock market do well (both are directly correlated), but it decreases during recessions or bear markets. The same trend happened as stock prices soared in the late 1990s, as the technology bubble popped at the turn of the century, during the real estate boom, the 2007-8 Financial Crisis, and the economic boom of the last decade. Considering that U.S. GDP is projected to fall considerably (some accounts estimating up to 40%), it would make sense that in the coming years, income inequality in the United States should fall.

    Although major American stock indices have not reflected recent economic hardships, the companies that make up the major indices are taking significant hits to revenue and net income, which would decrease the value of those very stocks (even if they do not do the same on paper).

  2. While income inequality directly relates to the Culture of Poverty theory, the US has experienced a continual widening of the gap between the rich and poor. Covid has just accelerated the widening of the gap. The DOW is still at 27K, and fairly healthy, but this isn’t a true reflection on the state of income in our country. The middle-to-lower class section of our society isn’t heavily invested in stocks and many live paycheck to paycheck. So when broad sections of industries (restaurants, hotels, entertainment, etc,) cut millions of jobs, this will most definitely widen the gap.

    As for my family’s experience during the pandemic, we, fortunately, had begun building a business that tied into helping local service businesses a few years prior. So our business wasn’t severely affected. I can say we’ve learned to minimize our expenses where possible.

    While Covid has really made many families focus on eliminating unnecessary spending, this is one of the reasons for the softer economy we’re seeing. However, with the shift in the way everyone is living, this presents an excellent opportunity for people to look for different career paths and ways to excel. While income inequality directly relates to the Culture of Poverty theory, the US has experienced a continual widening of the gap between the rich and poor. Covid has just accelerated the widening of the gap. The DOW is still at 27K, and fairly healthy, but this isn’t a true reflection on the state of income in our country. The middle-to-lower class section of our society isn’t heavily invested in stocks and many live paycheck to paycheck. So when broad sections of industries (restaurants, hotels, entertainment, etc,) cut millions of jobs, this will most definitely widen the gap.

    As for my family’s experience during the pandemic, we, fortunately, had begun building a business that tied into helping local service businesses a few years prior. So our business wasn’t severely affected. I can say we’ve learned to minimize our expenses where possible.

    While Covid has really made many families focus on eliminating unnecessary spending, this is one of the reasons for the softer economy we’re seeing. However, with the shift in the way everyone is living, this presents an excellent opportunity for people to look for different career paths and ways to excel.

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