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Job holders in the generation soon to retire will have to work longer than their parents did. How much longer?
The baby boom generation is about to do something absurd.
Just when the youth culture folk seem prepared to grow up, they’re about to grow old. The boomers were born between 1946 and 1962. So the oldest are now 62 and eligible for Social Security. If they do what their parents did, most will claim their benefits and be out of the labor force at 63. And if that happens, old age will become a long and dreary finish for many lives that in the main were lived with much vigor.
The boomers’ parents could retire at 63 because they grew old in a different world. In the 1960s and 1970s, the creation of Medicare and the expansion of Social Security and employer-defined pension plans (which the employer financed and which paid out monthly retirement checks until death), created the Golden Age of retirement. These programs let the World War II generation exit the labor force at a historically young age with enough income to maintain its standard of living, or nearly so. With cutbacks in Social Security and the general disappearance of traditional pensions, that option is gone. If the boomers are to enjoy a reasonably comfortable old age, they have little choice but to stay in the labor force longer.
Americans today are living longer and working a smaller portion of their lives. The boomers are projected to spend about 40 years on the job and 20 in retirement. Two years of work for each year of retirement seems like a great deal. And it would be if the boomers (or their employers) had buried enough acorns during those 40 years, or if the boomers had raised enough children to sustain Social Security with their payroll taxes (as they sustained it for the World War II generation). Then the boomers could continue to live in the style to which they’ve become accustomed. But there are neither enough acorns in the ground nor offspring in the workplace.
The arithmetic has already led Congress to cut the benefits this generation will get from Social Security. By raising the full retirement age from 65 to 66—requiring workers to give up a year’s benefits to get an undiminished monthly Social Security income—Congress in 1983 effectively cut benefits 7 percent across the board, over a six-year period beginning in 2000. Benefits will be cut an additional 7 percent when the full retirement age rises to 67, as it is scheduled to do for workers born in 1960 or later. A greater share of Social Security benefits will also be taxed as income as this generation ages, with the revenues used to shore up the program. Rising Medicare premiums, which are deducted from Social Security checks before they go out, will further cut cash incomes.
During the golden age, the Social Security benefit alone (with Medicare premiums and income taxes netted out) replaced 40 percent of the earnings of the average worker who retired at 65. The youngest boomers who retire at 65 will get just 30 percent. And Social Security still has a serious financing shortfall that must be resolved—roughly equal to an immediate 25 percent cut in benefits or a 4 percentage point increase in payroll taxes, for a lasting fix. No one knows yet what the formula will be, but if solving that deficit involves further cuts in benefits, Social Security will replace even less of workers’ income.
The projected shortfall is typically seen as a financial problem, which boomers should solve by increasing their contributions to 401(k) and other types of savings plans. But for whatever reason, boomers are saving less, not more, than their parents did. The typical household at the cusp of retirement (ages 55–64) in 2004 had just $60,000 in its 401(k) and IRA accounts, with precious little time left to accumulate more.
There is, however, a solution in plain sight. Boomers can still enjoy a comfortable retirement if they choose less retirement. Social Security monthly benefits claimed at age 66 are at least a third higher than benefits claimed at 62; and benefits are at least 75 percent higher if claimed at 70. The increases are more or less actuarial, meaning they reflect the shorter amounts of time that benefits will be paid. And if workers choose to wait as long to begin drawing down their 401(k)s, the increases in income from that source will be similar.
So how much longer must the typical boomer work? Three to four years seems sufficient. With the average retirement age currently at 63, that means boomers will need to stay in the work force—without accessing Social Security, employer pensions, 401(k)s, or other retirement savings—to age 66 or 67. This reckoning, however, includes workers who must retire early due to poor health or the inability to find employment. The retirement age for workers without such issues will need to be a bit higher.
As best we can tell, boomers will probably opt to stay in the labor force somewhat longer than their parents. In addition to that knotty matter of insufficient income, there are several reasons why.
For one, drawing an income out of a 401(k) involves uncertainties and risks absent in the old-style pensions. Where once the employer absorbed the ups and downs of retirement investments, that burden now rests solely on the retiree. Another brake on early retirement is the lifestyle of boomer wives, who are more likely to have jobs than their mothers were; men, statistically, are less likely to retire if their wives are still employed. The Social Security program has added enticements, too. After full retirement age, the program no longer imposes an earnings test (which withholds benefits if you earn too much); and benefit increases have been made actuarially fair for workers who delay claiming. Finally, boomers are more educated than their parents, and educated workers have jobs that typically are less punishing physically and more enjoyable and rewarding.
But it’s hard to predict how persuasive all these factors will be for the boomers. To this point, most workers continue to retire at 62 or 63, pretty much as soon as they can claim Social Security. The availability of that monthly check—lower though it may be for early retirees—seems sufficient to pull people out of gainful employment.
The picture is further complicated by a new instability in employment for older workers. In the early 1980s, the great majority (70 percent) of employed men at the cusp of retirement (ages 58–62) were working full-time for the same employer they had worked for at 50. Today only 44 percent can say the same; 48 percent are working full-time for a different employer, up from 25 percent in the early 1980s. (The remainder—8 percent or under in both eras—reflects part-time employment.)
Job transitions after age 50 are tricky, to say the least. Among workers laid off in their early fifties, just half find another job within a year; among those laid off in their late fifties, it takes two years for half to find employment. If boomers decide to push back their retirement age by three to four years, a greater share of them will probably find themselves negotiating a difficult employment transition.
Whether boomers stay on the job longer is not their decision alone, of course. Employers also have a say, and as best as can be determined, most are not especially eager to retain workers three to four years longer than they do at present. Employers have never been enamored of older workers. Most organizations of any size had mandatory retirement policies in place until these were generally outlawed by Congress in 1978 (for workers under 70) and in 1986 (for workers of any age). Employ-ers built strong financial in-centives into their defined benefit pension plans to usher workers out at a certain age (by giving employees who stayed too long little or no increase in their pensions, for instance). The rationale for such policies is not hard to find. As older workers age, their productive capabilities—their physical strength and stamina, their flexibility (mental, social, and geographic), and the market value of the knowledge and skills they’ve acquired in the past—hold steady at best, but more likely decline. The opposite is true of their compensation: Wages, by convention, are “sticky downward,” in fact, they generally rise. Employers don’t usually increase their contributions to 401(k)s as workers age (which they did with traditional pensions). But they do find themselves paying more for health insurance to cover their older employees.
Surveys consistently show that employers are reasonably satisfied with the performance of their current older employees. Indeed, older workers tend to be more reliable and to possess better people skills than younger workers. But employers are not especially eager to retain them past the organization’s traditional retirement age. A recent survey asked employers how likely they are to accommodate at least half the boomers who will want to stay two to four years longer than the current norm at their company. The median response, on a scale from 1 to 10, was a lukewarm 6.
Many observers in business and government claim this will change over the next 10 years. They say employers will face labor shortages and a loss of institutional intelligence when the baby boom generation exits the labor force, and that these developments will push demand up for older workers. There are other reasons, too, to think older job seekers might have more success in the marketplace in the near future than in the past. Boomers are better educated than their predecessors. And with the aging of the workforce, more hiring will be done by older managers and supervisors, who (surprise) view older workers more favorably.
The notion that employers will face a labor shortage is based on the fact that the population of workers ages 25–54, the traditional prime of working life, will essentially stop growing as the boomers begin to retire. For the economy to continue to expand at its historical rate, it is argued, employers will need alternative sources of labor. Older workers, along with immigrants, are the obvious candidates.
There are a number of difficulties with this line of reasoning. The first rests on the notion that the economy will grow at its historical rate. One should expect, in fact, that the abrupt slowing of labor force growth as the boomers retire will dampen the economy’s upward trajectory. Economic expansion is driven by gains in productivity, labor, and capital. And while productivity could continue to advance at its current pace, the growth of the capital stock should slow as retirees “dissave.” Moreover, those U.S. employers seeking to expand their workforce are increasingly likely to look overseas. The entry of China, India, and the former Soviet Union into the world trading system has doubled the size of the labor force potentially available to U.S. employers over the last 10 to 15 years.
An additional problem many older workers face is that they find themselves in older industries and occupations, where employment is already growing slowly or even declining. Their relative abundance in these areas serves to depress their individual value to employers.
What can boomers do? to begin with, they can learn what lies ahead. Studies regularly show disturbingly high levels of ignorance about the most basic elements of retirement income planning—how much one is likely to get from Social Security, the extent to which delaying retirement can raise future income, how long one can expect to live, the tendency of income other than Social Security to dry up over time. Once boomers know these things, it is reasonable to assume that most will commit to extending their careers.
A willingness to work, however, will not be enough. Most boomers will still need to change employers at some point between age 50 and retirement, that is, 15 to 20 years down the road. Making a successful job transition—or lasting through that span of years with their current employer—will require planning, effort, and luck. The most important steps workers can take to extend their careers is to keep their skills up to date and remain responsive to their employers’ needs. The next most important is to make sure their employer knows their target retirement age and their commitment to remaining productive until then. The labor market value of older workers is generally greatest with their current employer, who can reap the advantages of their institutional memory and experience. But if one’s current employer, industry, occupation, or geographic location is in decline, remaining in place may not be the best option. In that case, the earlier a worker makes a transition, the more “future” he or she can offer the next employer.
In the retirement drama, employers are the most problematic actors. They’re in business not to provide a secure old age for their workers but to produce a profit (or service, in the case of public and nonprofit employers). To do that effectively, however, they too must recognize—and act on—the implications of the sudden aging of the U.S. labor force.
In 1995, when the oldest boomer was 49, there were four workers under 50 for each worker age 50 and over. Today there are barely two and a half, and this ratio is likely to persist. Employers have taken advantage of similar sharp shifts in the labor force in living memory: the rapid influx of young and highly educated wage earners when the boomers joined the job market; the growth of the female workforce as boomer wives entered, or reentered, the labor pool; and the more recent swelling in the number of immigrant workers. Employers must now learn how to accommodate an older U.S. labor force—not out of a sense of social responsibility, but because those who successfully utilize this expanding resource will gain a competitive edge in the marketplace.
Employers will generally find it advantageous to develop activities and production methods that draw on experience, people skills, and reliability and to de-emphasize (or shift overseas) some activities better suited to a younger workforce. As the productivity of older workers tends to flatten or decline, employers will need to rethink the escalation of wages tied to tenure or age. But they should also keep in mind that a modest amount of on-the-job training can generally keep older workers productively employed; this has proven true in the high-tech sector.
As the Golden Age recedes into the past, employers will increasingly find themselves uncomfortably at sea when it comes to planning for and managing workforce retirements. With the boomers’ parents, retirement was a highly institutionalized transition. They neither quit nor were fired, but merely conformed to well-established expectations about the age at which they would exit. Today’s 401(k) world is messier. Boomers are approaching retirement with wildly different amounts in their 401(k)s and IRAs. They also have wildly different notions about how much is enough to retire on. Employers no longer know when their older workers will leave. Unless some order and predictability can be injected into the retirement process, employing older workers could come to seem more trouble than it’s worth.
Government can make a difference. First of all, it can help make older workers more attractive by spending more than it does now on skills training. A United Nations study found that the United States spends a much smaller share of gross domestic product on training (under 0.5 percent) than any of the 20 European and North American countries surveyed. Denmark, for example, spends more than 4.5 percent of per capita GDP on labor market programs, and Canada spends more than 2 percent. Since most older workers already have significant skills and experience, expanding employee/employer matching services and job counseling could be an even more productive approach for government to take.
Government can also reduce the cost of hiring or retaining older workers. It’s been suggested by some experts that Congress should eliminate the employer payroll tax for workers above a certain age. Another proposal would change the Medicare rules: Employers currently see no reduction in their health care expense when a worker becomes eligible for Medicare at age 65, because Medicare only covers costs not covered by an employer plan. If Medicare were instead to become the primary payer at that point, older workers would immediately become more attractive. It must be said, however, that both of these measures would widen shortfalls in programs already facing enormous long-term deficits; they would make sense only as part of larger reforms in overall retirement or health care policy.
But the federal government already has in its hands the most powerful lever possible for ensuring that older workers keep working: that is, the authority to raise the earliest age at which workers can claim Social Security. As we have seen, most workers opt to claim their Social Security benefits pretty much as soon as they can, at 62 or 63. Raising the earliest eligibility age, say to 64, or even to 65, will keep most workers in the labor force longer and assure them a significantly higher income over the rest of their lives.
Some accommodation would need to be made for individuals ages 62 to 64 (or 65) who cannot work or find employment. Studies show that perhaps 15–20 percent of that age group has some work-limiting health condition. Special provision may be necessary also for workers who have had a difficult time earning a reasonable wage even in their prime working years. Addressing the needs of such workers will have to be part of the cost of assuring a more secure retirement for the majority.
For all the financial gains to be obtained from raising Social Security’s earliest claiming age, the most important effect of the measure would be to shift expectations. Workers would be forced to change their retirement plans. When employers recognize that workers will remain on the job into their mid-sixties, they will be far more likely to create training and advancement opportunities for employees in their fifties. And employees will be more likely to pursue those opportunities. No other initiative will go half as far toward improving the boomers’ retirement income security.
Steven A. Sass is associate director for research at the Center for Retirement Research at Boston College. His essay is based on Working Longer: The Solution to the Retirement Income Challenge (Brookings, 2008), which he co-wrote with Alicia H. Munnell, the center’s director.
There isn’t much to cheer in the finding that most Americans will need to work at least a few years longer than their parents did, but the unvarnished projections coming out of Boston College’s Center for Retirement Research have been well received in the Economist, the Wall Street Journal, the New York Times, and other leading publications. Started in 1998, the retirement center—whose director, Alicia Munnell, sat on the President’s Council of Economic Advisors—is one of five centers established in the Carroll School of Management to serve as both “engines of knowledge creation” and vehicles for sparking the curiosity of students, business executives, and the general public, says Carroll School Dean Andrew Boynton ’78.
“What these centers do is build on the existing train system—the course work and the research—that we have at Boston College and the Carroll School,” explains Boynton, who has overseen the founding of two of these organizations—the Winston Center for Leadership and Ethics, and the Center for Asset Management. The Winston Center addresses business issues from what Boynton calls “the sweet spot of Boston College,” a tradition of concern for the greater good. Under program director Richard Keeley, the center’s Clough Colloquium has brought
lecturers to the University such as the historian David McCullough (speaking on leadership and the Founding Fathers); the Nobel Peace Prize laureate and former South Africa President F.W. de Klerk; and Ray Offenheiser, president of Oxfam America. Director of research Mary Ann Glynn, the Joseph F. Cotter Professor of Organizational Studies, has been steering the Winston Center toward such timely questions as how effective leadership can deliver a company from a severe ethics scandal (Chris Coughlin ’74, the chief financial officer of Tyco—whose former CEO is now behind bars—spoke at the inaugural Winston Forum on Business Ethics in November 2007).
The newest center, spearheaded by Boynton and finance department chair Hassan Tehranian, is the Center for Asset Management. Its purpose is to bring scholars and finance executives together to discuss challenges such as the subprime mortgage debacle (a lively topic of conversation at the Center’s 2008 Finance Conference on campus this past June), and the lagging performance of some private equity funds. Among the prominent alumni who have been drawn into the center’s work are T.J. Maloney ’76, president of the private equity firm Lincolnshire Management, and State Street Corporation President Jay Hooley ’79, both of whom rubbed elbows at the center’s June conference with the 1997 Nobel Prize winner in economics, Robert Merton, who delivered a keynote address.
Also making its home in the Carroll School is the Center for Corporate Citizenship, founded in 1985 by Bradley K. Googins ’67, MSW’69. With nearly 350 corporate members (from AT&T to Microsoft to Disney), the center holds dozens of conferences annually under such titles as “Enhancing and Improving Your Employee Volunteer Program” (Boston, June 18–20). In 1990, Googins founded the Center for Work and Family. It has since spawned the Global Workforce Roundtable, which held its second summit this past February, in Shanghai, China, highlighting best practices among multinational companies in areas such as employee development and support for working families.
William Bole is a writer in the Boston area.
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