Work Is What Funds Retirement

The US population and workforce is aging. The median age of Americans--that is, half are above this age and half are below--was 28.1 years back in 1970, 32.9 years in 1990, and now is up to about 38 years. If one looks only at the US workforce, the median age rose from  38.3 years in 1996 to 42.0 years by 2016. By 2035, the Census Bureau projects that the number of over-65 Americans will exceed the number of under-18 Americans for the first time in US history.

As society ages, it needs to redraw the common expectations of when work will end and retirement will begin. Of course, from an individual perspective, retirement age isn't a one-size-fits-all choice. But from an overall social perspective, Robert L. Clark and John B. Shoven write:

The retirement crisis is in no small measure caused by trying to do the impossible. What we mean by this is that it is nearly impossible to finance 30-year retirements with 40-year careers. Yet with today’s average retirement ages (62 for women and 64 for men), we are trying to do just that. If a 64-/62-year-old couple retired today, the survivor of the couple would have about a 40 percent chance of living an additional 30 years. This division of adult life between work and retirement is at the heart of the financial problems of Social Security and state and local pension plans, and it threatens the adequacy of retirement resources for millions of Americans. 

The Brookings Institution and the Kellogg School of Business hosted a conference on these issues in late January. Here, I'll draw on three discussion papers written for that conference:

Some of the adjustment in which longer life expectancies are accompanied by rising labor force participation is already underway. For example, the graph shows the share of those 55 and older who remain in the workforce. Back in the 1950s, about 42-43% of over-55s were in the labor force. By the early 1990s, the proportion had dipped below 30%. It then started rising again--although the upward momentum stalled, at least for now, around the Great Recession.

From the Baily and Harris paper, here's a figure showing labor force participation for older age groups: 55-59, 60-64, 65-69, 70-74, and 75+. Overall labor force participation is rising for each of these groups.

 

Indeed, many people continue to work after starting to claim Social Security. Here's a figure from the Baily-Harris paper:

Again, later retirement age isn't for everyone, of course. But it's worth reconsidering the economic incentives that affect people's decision to keep working, and whether a few more years of accumulating assets and postponing Social Security payments, might be a good choice. After all, as Baily and Harris note: "In July 2018, the Social Security Administration reported that the average monthly benefit paid to retired workers was $1,415 per recipient, a rate of $16,980 a year. This is often insufficient to allow a worker to maintain in retirement the same standard of standard of living enjoyed during their working years. Even if there are two people in a household collecting benefits at this rate, $2,830 a month amounts to a still-modest $33,960 a year. Payments for Medicare coverage and out-of-pocket health costs must be paid for out of this total."

The three papers between them have several suggestions that would tend to have the effect of encouraging those who are on the margin to push back retirement a little, while still leaving open the option of earlier retirement. 

1) Reframe the message from Social Security. Baily and Harris suggest that one basic step might be just to reframe the message that people receive from Social Security. They write:

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