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January 18, 2012 |
Many Clients Won't Be Able To Work Past Retirement Age |
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Conventional wisdom is that more older workers are delaying retirement and clients who haven't saved enough to retire will just continue working. But Peter Orszag of Citigroup says that's not what's really happening.
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By Peter Orszag
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(Bloomberg News) Has the ailing economy forced older workers to delay their retirement? The conventional wisdom certainly suggests so. A recent front-page story in the Washington Post was headlined: “Ranks of older workers swelling: Data show employment surged among those 55 and over since recession.”
The reality, though, is more complicated. The financial crisis caused more workers to want to delay retirement, but the labor market limited their ability to do it. The net effect of these opposing supply and demand forces has, if anything, been to reduce the employment rate among older workers.
By the time the recent recession began, in 2008, Americans were already well into a reversal of the 20th-century trend toward earlier and earlier retirement. The employment rate for older women started rising in the mid-1980s, and for older men soon afterward. The effects were most pronounced among people 65 and older, but were noticeable for those in their early 60s as well. In 1994, 43 percent of people ages 60 to 64 were employed; by 2006, 51 percent were.
Social Security data tell a similar story. The percentage of 62-year-olds claiming early retirement benefits began declining in the mid-1990s, and dropped from about half of those turning 62 in 1994 to less than 40 percent in 2006.
Rethinking Early Retirement
Then along came the recession. Housing equity -- the biggest asset most older workers have -- plummeted, as did the value of 401(k) plans and other financial assets. As a result, many workers planned to delay their retirement. From 2006 to 2010, the percentage of Americans age 50 or more who expected to retire by 65 fell from 29 percent to 24 percent.
In this, the conventional wisdom is right: To offset the adverse effects of the downturn, more older workers planned to defer retirement. But the world didn’t conform to all of these plans. A 2011 survey by the Employee Benefit Research Institute found that almost half (45 percent) of retirees left the workforce earlier than they planned, almost always for negative reasons such as health problems or losing a job. In the midst of a very weak labor market, work may not be available for all the older workers who want to keep working.
As a consequence of this push and pull, the share of 60- to 64-year-olds who are employed, after rising through the 1990s and early 2000s, has in the past few years gone sideways. In 2011, 51 percent of 60- to 64-year-olds were employed, the same share as in 2006. The employment rate among people 65 and older continues to rise, but at a slower pace than before the downturn.
A more rigorous analysis by Barry P. Bosworth and Gary Burtless of the Brookings Institution has found the same limitation on older people’s, or at least older men’s, employment prospects. “The 4.6 percentage-point increase in prime-age unemployment between 2007 and 2009 reduced the participation rate of 60-74-year-old men by between 0.8 and 1.7 percentage points,” they concluded. “This effect has offset the impact of declining household wealth on old-age labor force participation.” For women, Bosworth and Burtless found little net effect, as the opposing forces of desire to work and reduced job opportunities were roughly balanced.
Benefits Increase
How does this affect Social Security? If workers were able to delay their retirement, we would expect to see the share of those claiming benefits at age 62 decline. Yet it actually rose significantly in 2009, research by economists Jason J. Fichtner of George Mason University and John W.R. Phillips of the National Institute on Aging shows. In states with relatively high unemployment rates, the increases were larger -- suggesting that the rise was driven by lack of work opportunities.
(The 2009 increase was partially reversed in 2010, which is consistent with other analysis by Bosworth and Burtless suggesting the initial blip upward from a weak labor market is partly offset over time.)
The bottom line is that people’s retirement decisions aren’t always entirely voluntary. In the current debate over the retirement age, that’s worth remembering. Just last week, the Congressional Budget Office estimated that raising the age at which Social Security retirement benefits can first be claimed from 62 to 64 would ultimately increase the size of the labor force and the economy by a bit more than 1 percent. That sounds pretty attractive.
But many people claimed early retirement benefits in 2009 and 2010 out of desperation. Even under more normal conditions, some of the people who want to work longer won’t be able to. That’s why Peter Diamond, a Nobel Prize-winning economist at the Massachusetts Institute of Technology, and I have proposed ways of insulating Social Security’s finances from the effects of rising life expectancy without increasing the age at which workers first become eligible for benefits.
Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own. |
Many Clients Won't Be Able To Work Past Retirement Age |
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