Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

Longer Average Lifespans Are Changing Retirement

 by Sam Dibble

 

The participation rate in the general labor force in America has been steadily declining in recent years--from 66% in 2004 to 62.8% in 2014.  In a marked contrast, older workers have been bucking this trend with increased participation rates.  In the same time period, older workers (those 65 and older) went from a 14.4% participation rate in 2004 to 18.6% in 2014, and are expected to hit 21.7% in 2024. [1] 

Life expectancies in America have been on the rise, but the prescription medicines that help sustain this trend are not cheap.  Increasingly the onus of paying for the more costly retirements has fallen on the retiree as the government and businesses try to avoid the ballooning costs.  Older Americans considering retirement must carefully weigh factors such as Social Security, health insurance, and how much savings they have in their “nest egg” for retirement with longer life expectances.  As the cost of retirement becomes increasingly expensive, more and more Americans will delay retirement and continue work.  The seniors’ participation rate is further impacted by the changing nature of the job market: the shift to service-type employment means less physically demanding jobs.  Moreover, there are signs that in some industries age and experience are regaining some of the value they once enjoyed.

The need for income is a major factor for most Americans considering retirement, and the federal Social Security program strongly influences this decision.  The earliest one can claim Social Security is age 62. The effects of Social Security in the labor market can be seen by the thirteen-point drop in participation rate, from 63.4% LFPR (Labor Force Participation Rate) for 60-61 year-olds to a 50.2% LFPR of 62-64 year-olds.[2]  Older Americans who are not financially prepared for these costs of retirement may consider forfeiting an 8% return in order for immediate income.  Considering that Social Security payments compound 8% every year starting at 62 and continuing to age 70 if one delays payment, if a person contemplating retirement crunches the numbers, they will realize that in today’s low-interest rate environment there are no better guaranteed returns to be found.  The Government Accountability Office published a report this year that showed only “2 percent of men and 4 percent of women waited until 70 to claim benefits.”[3]  Since Americans are living longer - life expectancy is now 76.6 for American males and 81.4 for American females, up from 67.1 and 74.7 in 1970 respectively - Americans are not adequately prepared financially for retirement, thus creating the need to work longer in their life. 

The cost of living longer is also growing faster than inflation for senior citizens due to disproportionate medical spending, and many Americans do not factor this into their retirement decisions.  The average cost in health insurance premiums varies greatly year over year but a National Business Group on Health study showed that companies expected health insurance premiums to increase by “five percent in 2017.”[4]  Many companies are finding this unsustainable, and are cutting plans and encouraging the creation of tax-advantaged Health Savings Accounts.  The HSAs have many tax benefits, but require high deductiblesl; these are manageable with proper planning, but can be a challenge if sprung on a soon-to-be retiree who failed to take these costs into account.  For people over 65 who are in the work force, 56% worked full-time in a 2007 study, and 44% worked part-time.  In 1995, the percentages were reversed.  A partial explanation for this growth is that job-related health insurance benefits are generally only available to full-time employees.

The increase in older Americans remaining in the labor force is not completely due to rising costs.  Two economists from the World Bank analyzed the trend, and concluded that part of the reason older workers are staying in the labor force is an increase in “cognitive skills” as well as skills that become more valuable with experience.  In America’s modern labor market, “the age of one’s physical peak is often divorced from the best years of productivity.”[5]  The research shows that in the modern economy, working full time until 65 then completely retiring is not the best path for many Americans.  In fact, studies have shown that some senior citizens can gain not just economic benefits, but social benefits from remaining in the labor force, even if it is just part time.

The generation of workers facing retirement today has experienced more labor market and economic changes in their lifetimes than many generations before them.  Since many older Americans were unprepared for the increasingly common shift, many are currently in less than ideal financial situations.  Even with individuals becoming more responsible for their retirement costs, if properly planned for, retirement is still feasible for most Americans. Along with a later average retirement age comes a longer lifespan, meaning that most Americans will still be able to live out their golden years in retirement.

 

[1] United States. Bureau of Labor Statistics. Labor Force Projections to 2024: The Labor Force Is Growing, but Slowly. Washington: n.p., 2015. Print.

[2] United States. Bureau of Labor Statistics. Labor Force Projections to 2024: The Labor Force Is Growing, but Slowly. Washington: n.p., 2015. Print.

[3] Ambrose, Eileen. "Consumers Hurt by What They Don’t Know About Social Security." AARP. N.p., 16 Sept. 2016. Web.

[4] Mercado, Darla. "Expect Your Health Insurance Costs to Rise in 2017." CNBC. N.p., 11 Aug. 2016. Web.

[5] Lam, Bourree. "Nine to Five, After 65." The Atlantic. N.p., 22 Aug. 2015. Web.

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