New Worker Worry: Pay Cuts, Not Layoffs

In the old days, three or four years ago, most people had two major job concerns — getting laid off or not getting raises and promotions fast enough.

Now many face a new concern — a prolonged pay cut. The New York Times reports that employers are resorting to pay cuts more frequently than at any time since the Great Depression. The Times story describes an airline pilot demoted for budgetary reasons from captain to first officer, slashing his pay in half. Other employers eliminate overtime, shorten work weeks or trim benefits.

For years, American workers have seen income stagnate or decline when inflation was taken into account. But the idea of a dramatic reduction in pay for doing the same job is new for many, and it makes a mess of long-term financial plans.

Tools like BankingMyWay’s Retirement Planner ask users to estimate future income increases, not reductions, and many assume that annual savings will grow as income goes up. Erase these assumptions and the calculations give dramatically different results.

Using the retirement planner, consider a 30-year-old with no current savings but the ability to put aside 8% of a $50,000 annual income. This person could build up a nest egg of about $990,000 by age 65.

But that assumes income would increase at 4% a year, allowing annual savings to increase as well. Cut that figure to zero and the nest egg will grow to less than $635,000. Do that and also cut the current salary to $45,000, and the nest egg would be just $571,000.

In real life, the situation might be even worse, because the pay cut could force the worker to save a smaller percentage of salary. Cut the savings rate from 8% to 5% and the nest egg ends up at only $357,000.

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