Closing the Deficit: How Much Can Later Retirement Help?

Overview

As the average age of the population continues to rise in industrialized nations, the fiscal impacts of aging demand ever-closer attention. Closing the Deficit examines one oft-discussed approach to the issue—encouraging people to work longer than they now do.

Workers would spend more years paying taxes and fewer years drawing pension and health benefits. But how much difference to spending and revenues would longer working lives make? What steps could be taken to make longer ...

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Closing the Deficit: How Much Can Later Retirement Help?

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Overview

As the average age of the population continues to rise in industrialized nations, the fiscal impacts of aging demand ever-closer attention. Closing the Deficit examines one oft-discussed approach to the issue—encouraging people to work longer than they now do.

Workers would spend more years paying taxes and fewer years drawing pension and health benefits. But how much difference to spending and revenues would longer working lives make? What steps could be taken to make longer working lives attractive? And what would happen to older Americans not in a position to prolong their work lives? Leading scholars examine these issues in Closing the Deficit, edited by Brookings economists Gary Burtless and Henry Aaron.

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Product Details

  • ISBN-13: 9780815704034
  • Publisher: Brookings Institution Press
  • Publication date: 9/20/2013
  • Pages: 142
  • Product dimensions: 6.09 (w) x 8.97 (h) x 0.40 (d)

Meet the Author

Gary Burtless is a senior fellow in Economic Studies at Brookings and a former economist with the U.S. Department of Labor. His previous books include A Future of
Lousy Jobs?
and Does Money Matter? (both Brookings), and he is a former editor of the Brookings-Wharton Papers on Urban Affairs. Henry J. Aaron is a senior fellow in Economic Studies at the Brookings Institution and the author or editor of numerous books, including Using Taxes to Reform Health Insurance (with Leonard E. Burman),
The Problem That Won't Go Away, and Behavioral Dimensions of Retirement Economics,
all published by Brookings.

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Read an Excerpt

Closing the Deficit

How Much Can Later Retirement Help?


By Henry J. Aaron, Gary Burtless

Brookings Institution Press

Copyright © 2013 THE BROOKINGS INSTITUTION
All rights reserved.
ISBN: 978-0-8157-0403-4



CHAPTER 1

Who Is Delaying Retirement? Analyzing the Increase in Employment among Older Workers

GARY BURTLESS


Americans past age 60 are delaying their withdrawal from the workforce. This development reverses a trend toward early retirement that lasted longer than a century. The trend toward earlier labor force exit came to an end for U.S. men between the mid-1980s and mid-1990s. After reaching a low point in the 1985–95 decade, the labor force participation rate of 60–64-year-old men has increased more than 6 percentage points (about one-eighth), and the participation rate among 65–69-year-old men has increased about 13 percentage points (more than half ). Participation rates among American women in the same age groups have increased even faster, especially when the change is measured in proportional terms.

One explanation for this reversal is the change in incentives for work in later life, a result of reforms in the U.S. Social Security system, the gradual evolution of the nation's employer-based pension system, and the increasing expense of health insurance outside employer-provided group plans. Compared with the 1970s and early 1980s, Social Security retirement benefits now provide fewer and smaller disincentives to work after workers reach the benefit-claiming age. Employer-sponsored retirement plans are now more likely to offer defined-contribution pensions rather than defined-benefit pensions. The latter type of plan can create powerful incentives for workers to leave career jobs after they have attained the earliest benefit-claiming age. In contrast, defined-contribution plans provide stronger incentives for older workers to keep working. Finally, the elimination of many employer-funded retiree health plans combined with steep increases in the cost of health insurance has made it riskier for workers too young for Medicare to leave jobs that provide a health plan.

The goal of this chapter is to identify the groups in successive birth cohorts that have delayed their retirement in the era since the retirement age began to rise. It aims to answer a handful of questions about the trend toward later job exit in the past quarter century: How big is the delay in retirement compared with job exit patterns observed in the late 1980s? Do groups delaying retirement earn above-average wages? Do the workers retiring at later ages have more schooling than average, or do they have below-average educational credentials? Does later retirement primarily take the form of part-time work, or have aged workers also seen an increase in full-time employment? Have older workers delayed their departure from their career jobs? Or have they taken "bridge jobs" that have less responsibility, fewer hours, or worse pay than their previous jobs?

The analysis was performed using Current Population Survey (CPS), which provides detailed monthly data on the labor force status of adults in approximately 60,000 households every month. The available monthly files cover 1977 to the present. During the first decade of the period, the average retirement age declined; during the most recent two and a half decades, the average age at retirement has increased. Each section of this chapter addresses one of the questions mentioned earlier. The chapter concludes with a summary of findings.


How Much Has Workforce Participation Increased at Older Ages?

At the beginning of the twentieth century, retirement was uncommon but not unknown. Just one out of three men past age 65 was outside the paid workforce. By 1950 retirement was more common. Only about 46 percent of men 65 and older held a job or were actively seeking work. The labor force participation rate of aged men continued to decline and reached a low point in 1991, when less than 16 percent of men over 65 were employed or actively seeking a job. The proportion of women over 65 who were employed also fell during much of the twentieth century, but the reduction was far smaller than among men because the percentage of older women in paid work had always been modest.


Changes in Age-Specific Participation Rates

The decline followed by the increase in participation rates among aged Americans in the post–World War II era can be clearly seen in the Bureau of Labor Statistics (BLS) estimates of labor force behavior over the past six decades (see appendix table A-1). The statistics for people 65 and older can be somewhat misleading, however, because the ages they cover include both 65–74-year-olds, who tend to have higher workforce participation rates, and people who are past age 75, nearly all of whom have left the workforce. The percentage of the older population in the labor force is affected by both age-specific participation rates and the age profile of elderly Americans. As survival rates have improved, the number of people living past 75 has increased. Conversely, the entry of the large baby boom generation into its retirement years is temporarily increasing the proportion of the aged population that is older than 65 but younger than 75. To eliminate the effect of the changing age composition of the elderly population, we can examine the trend in labor force participation rates at specific ages. Figure 1-1 shows participation rates at ages 60, 62, 65, and 68 during the forty-five years after 1965. The figure shows participation rates for women and men, respectively. The tabulations, performed by the BLS based on monthly CPS data, show a decline in participation rates through the early to mid-1980s among women and a drop through the early 1990s among men. For both men and women, participation rates have increased in the past two decades. They have also increased by proportionately larger amounts at older ages. Among 68-year-old men, for example, the participation rate increased by more than half between 1991 and 2010. Among 68-year-old women, the participation rate increased by about two-thirds.

The estimates of male participation rates in figure 1-1 can be compared with those of Ransom, Sutch, and Williamson (1991) for 1910, derived from the decennial census for that year. Between 1910 and 1991 there were sizeable drops in male participation rates at ages 60, 62, 65, and 68. At age 65, for example, the male participation rate shrank 46 percentage points, falling from 77 percent in 1910 to 31 percent in 1991. At age 60, the male participation rate continued to decline, although very slightly, after 1991. At ages 62, 65, and 68, however, participation rates have rebounded since 1991, erasing about one-quarter of the participation-rate drop that had occurred between 1910 and 1991. Participation rates at older ages remain far below their levels at the beginning of the twentieth century, but at ages past 62, participation rates have increased substantially above the low point they reached in the early 1990s.


Persistence in the Labor Force

Another way to interpret age-specific participation rate trends over time is to calculate the rate at which workers who were in the labor force in a given year and at a given age (say, age 57) remain in the workforce at successively higher ages. For example, men who were age 57 in 1972 had a labor force participation rate of about 87 percent. When they attained age 62 in 1977, men in this cohort had a participation rate of 60 percent, or about 68 percent of their participation rate when they were 57. By age 65 their participation rate fell to 35 percent, or just four-tenths of their participation rate when they were 57. I define the ratio of a cohort's participation rate at ages over 57 to their participation rate at age 57 as an indicator of the cohort's labor force "persistence" at the later age. A higher rate of persistence at a given age after 57 indicates a slower rate of exit from the labor force.

I estimated cohort labor force participation persistence rates at successive ages between 60 and 80 separately for women and men. Figure 1-2 shows my estimates for four cohorts of workers for ages 62 through 74. The estimates were obtained using BLS-supplied tabulations of monthly CPS files covering calendar years 1976–2010.5 For each calendar year, BLS analysts calculated the participation rate for persons at each year of age between 60 and 80. The cohort persistence rate at a given age is simply the participation rate at that age measured as a percentage of the participation rate of persons in the cohort when the cohort was 57 years old. The second part of figure 1-2 shows the results of these calculations for four cohorts of men. The oldest cohort was age 60 in 1975; the youngest was 60 in 2005. The other two cohorts were 60 in 1985 and 1995, respectively. Each line in the chart shows the rate of labor force withdrawal of a cohort at successive years of age from 62 through 74. For example, when the youngest male cohort was 62 years old, the participation rate of men in that cohort was 74 percent of the participation rate of the cohort when it was 57 years old (see figure 1-2). At age 63, the participation rate of this same cohort was 70 percent of the cohort's participation rate when it was 57 years old. Not surprisingly, the participation rate of a cohort generally falls in successive years. For the youngest cohorts, I display only four years of labor force persistence rates, because persistence rates in the fifth and later years could not be calculated with data available when the calculations were performed.

The crucial point in figure 1-2 is that labor force persistence has increased in recent cohorts compared with earlier ones. For example, in the oldest male cohort, which was 60 in 1975, the participation rate at age 66 was 33 percent of the cohort's participation rate at age 57. In the male cohort that was 60 in 1995, the participation rate at age 66 was 43 percent of the cohort's participation rate at age 57. Thus the participation rate fell considerably more slowly between ages 57 and 66 for the younger cohort compared with the older one. The persistence rates through age 65 for the cohort that attained 60 in 2005 suggest that this trend continues and, in fact, has become more pronounced between ages 62 and 65. The results in figure 1-2 imply that men who are in the labor force in their late 50s are now leaving the workforce at a slower pace than twenty years ago. In other words, the younger cohort is more persistent in remaining in the labor force. The same pattern of delayed retirement is evident among women (see figure 1-2); recent cohorts have been more persistent in remaining in the workforce than was common two decades ago.

Figure 1-3 shows how much labor force persistence has increased at various ages between 60 and 79. I have calculated the increase in the participation rate at successive ages measured as a percent of the cohort's participation rate at age 57. The calculations are performed at individual ages between 60 and 79. After tabulating the persistence rates in 1988–90 and 2008–10, I calculated the increase in persistence at the indicated ages between the two sets of years. (I averaged the persistence rates for three years at the start and the end of the analysis period to reduce the impact of year-to-year variability in measuring cohorts' persistence rates.) The top panel in figure 1-3 shows the increased persistence of old-age labor-force participation among women. The bottom panel shows the same set of results for men. For both women and men, the trends in persistence are comparable. The increase in persistence is modest at ages 60 and 61, peaks at age 65, remains relatively high through age 72, and then declines. Except at ages 60 to 61 and 77 to 79, the increase in labor force persistence has been greater among men than among women.


Do Workers Postponing Retirement Earn Below-Average Wages?

The tabulations in figures 1-1 through 1-3 show unambiguously that both labor force participation and the persistence of labor force engagement has increased in the past quarter century. The statistics do not, however, shed any light on the kinds of workers who are postponing retirement. The next two sections attempt to provide some answers to this question. This section shows how the relative wages of the older working population have changed over time. I focus on wage and salary earners who are 62 years old or older, because these are the older workers who have seen the largest proportionate increases in participation and labor force persistence (see figure 1-3).

To perform the analysis, I estimated the age profile of hourly wages separately for calendar years 1985–91 and 2004–10 using wage data reported in the monthly outgoing rotation group (ORG) CPS files. The files contain about 25,000 worker records per month, or approximately 300,000 per calendar year. Given the large sample size, it is possible to estimate average and median earnings within narrow age groups. I divided each year's 25-to-74-year-old male and female samples into nine five-year age groups plus two age groups—60–61 and 62–64—that separate people in their early 60s on the basis of their potential eligibility for Social Security retired worker benefits. The first seven years of the analysis period, 1985–91, represent the final years of the trend toward early retirement. The last seven years, 2004–10, represent recent years in which old-age labor force participation rates have rebounded. Even though the second period includes one of the worst recessions since World War II, the average unemployment rates in the two sets of years are similar. The civilian unemployment rate averaged 6.2 percent between 1985 and 1991 and 6.4 percent between 2004 and 2010.

Table 1-1 shows estimates of the change in a variety of indicators of women's and men's old-age labor supply between 1985–91 and 2004–10. (These estimates were derived from tabulations of all the monthly CPS files in 1985–91 and 2004–10 rather than just the ORG files.) Labor supply changes are shown separately for women and men between ages 62–64, 65–69, and 70–74. In the nearly two decades between the two sets of estimates, labor force participation rates increased between 6.4 and 13.2 percentage points in the case of older women and increased between 6.9 and 9.1 percentage points in the case of older men. The other indicators of labor supply increased in these age groups as well, and the increases were proportionately as large, relative to baseline labor supply, as the increases in labor force participation.

Figure 1-4 shows the age profiles of relative hourly earnings in the two sets of years. In each narrow age group, the average wage is measured relative to the mean wage of women or men who are between 35 and 54 years old. Clearly, the relative hourly earnings of older women and men have improved compared with those of prime-age workers. In all three of the older age groups, women's hourly wages in 1985–91 were below the average wages earned by 35-to-54-year-olds. In 2004–10 they remained below the average hourly wage of 35-to-54-year-old women, but the discrepancy was significantly smaller. The improvement in relative wages of 62-to-74-year-old women was about 8 percent. The improvement in older men's relative earnings compared with 35-to-54-year-old men was even greater (see lower panel of figure 1-4). In all three of the older age groups, men's hourly wages in the earlier period were below the average wages earned by 35-to-54-year-old men. By 2004–10 earnings of 62-to-64-year-olds were slightly higher than those of 35-to-54-year-old men, and the earnings of 65-to-74-year-olds were much closer to the hourly wages of 35-to-54-year-olds. The relative earnings of older men improved 8 percent among 62-to-64-year-olds, 20 percent among 65-to-69-year-olds, and 26 percent among men between 70 and 74. Thus, the increase in the labor supply of older workers was accompanied by an improvement rather than a decline in their relative hourly wages.


Are Workers Who Postpone Retirement Better Educated than Average?

One reason that the average hourly pay of older workers has improved compared with that of prime-age workers is that older workers are now relatively better educated than older workers in the past. Among male wage earners between 62 and 74, the proportion who have graduated from college increased about one-seventh between 1985–91 and 2004–10 and the fraction who failed to complete high school fell about one-fifth. The improvement in educational credentials among older female workers was smaller but still impressive. The gains in college education and the drop in the proportion of older workers who are high school dropouts are relatively larger than the changes seen among prime-age workers. Thus, some of the relative wage gains of older workers are traceable to the fact that gains in schooling among prime-age workers were smaller between 1985–91 and 2004–10 than they were among workers who are between 62 and 74 years old. In part this reflects the rapid gains in schooling attainment that occurred after World War II, when people who are now 62 to 74 years old were enrolled in secondary school and college. In some measure it also reflects the divergence between retirement patterns among older Americans with good educational credentials and those who have less schooling.
(Continues...)


Excerpted from Closing the Deficit by Henry J. Aaron, Gary Burtless. Copyright © 2013 THE BROOKINGS INSTITUTION. Excerpted by permission of Brookings Institution Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents

Preface....................     vii     

Introduction Gary Burtless and Henry J. Aaron....................     1     

1 Who Is Delaying Retirement? Analyzing the Increase in Employment among
Older Workers Gary Burtless....................     11     

2 Future Labor Force Participation among the Aged: Forecasts from the
Social Security Administration and the Author Gary Burtless...............     36     

3 Impact of Higher Retirement Ages on Public Budgets Simulation Results
from DYNASIM3 Karen E. Smith and Richard W. Johnson....................     46     

4 Nudged, Pushed, or Mugged: Policies to Encourage Older Workers to Retire
Later Henry J. Aaron....................     72     

5 Thoughts on Working Longer and Retirement John B. Shoven................     121     

Contributors....................     137     

Index....................     139     


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