A tidal wave of baby boomers will begin turning 62 next year, making them eligible for Social Security. How to keep this swell of beneficiaries from swamping the country’s retirement system looms as one of the toughest questions confronting the new 110th Congress.
The answer hinges partly on how long boomers are willing to work and the incentives to keep them on the job. If they follow their parents’ path to early retirement, the number of workers per retiree will plummet, reducing the tax base and squeezing budgets for Social Security and all other government programs.
New research suggests that aging boomers plan to work longer than people born just a dozen years earlier. If they do, the economy will pump out more goods and services and mitigate the economic pressures created by an aging population.
This good news bucks a century-long trend toward earlier retirement, which petered out about 20 years ago. Labor-force-participation rates for men 65 and older fell from 84 percent in 1870 to 46 percent in 1950 to 16 percent in 1990. In 2005, they inched back up to 20 percent.
Economic, demographic and social changes are transforming retirement incentives. Social Security reforms have boosted the normal retirement age to 67, deep-sixed penalties for Social Security beneficiaries who work past the normal retirement age and bolstered benefits for those who catch the Social Security train a bit farther down the line. All of the changes make work more lucrative.
Meanwhile, changes in employer-provided retirement benefits also promote employment. Between 1992 and 2004, the share of workers ages 51 to 56 with traditional pension plans fell from 40 percent to 31 percent while the share with 401(k)-type plans increased from 33 percent to 46 percent.
Traditional pension plans discourage work by making participants sacrifice a month of benefits for every month worked past the plan’s retirement age. The 401(k) plans have no such penalty.
And nobody needs to remind workers that employer-sponsored retiree health benefits have plunged recently, raising the cost of stopping work before Medicare eligibility kicks in at 65.
Fewer physically demanding jobs also have an effect. As the manufacturing sector shrinks and workplace computerization continues, the demand for physical work lessens, making it easier for older workers to stay on the job longer. An educated workforce also tends to delay retirement; in 2004, 37 percent of workers ages 51 to 56 had completed college, up from 22 percent in 1992.
Small wonder that older Americans aren’t all planning the shortest route to retirement.
The National Institute on Aging’s Health and Retirement Study for years has been popping the question about how likely respondents will be to work full-time at older ages. In 1992, 47 percent ages 51 to 56 planned to work until 62; in 2004, 51 percent did. When asked about working full-time past age 65 — so long the magic pivot point — the percentages leapt from 27 to 33 percent.
Of course, the way to under funded retirement is paved with good intentions; many healthy boomers may yet bail out of the workforce before turning 65. And layoffs may force others into early retirement.
Congress can help with reforms that encourage older people to work longer and employers to hire them.
For example, it can make older workers cheaper by allowing Medicare to pick up their costly health-care tab, instead of forcing employer health plans to foot the bill for workers over 65. And it could help displaced older workers find new jobs by better targeting job training and job-search services.
Congress could also promote phased retirement programs — which could allow older workers to collect pensions while remaining on the job — by clarifying the rules governing them.
Many older Americans say they want to remain employed, but they want part-time, flexible work, preferably with their current employers, where they can contribute the most. However, to cover living expenses on a shorter workweek, they must be able to dip into their pensions. Few employers have set up programs for these types of phased retirements, partly out of fear that they will run afoul of ambiguous government regulations.
The boomers’ current work plans alone won’t best all of the challenges that an aging population poses. But they bode well indeed for stronger economic growth, higher government revenue and better financial security at older ages.
(Richard W. Johnson and Gordon B.T. Mermin are research associates at the Urban Institute in Washington. Reach them at feedback(at)ui.urban.org.)