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The End of Retirement
The concept of a comfortable retirement at the end of a long career is a relatively new phenomenon in the United States. Before people worked in factories, retirement didn’t exist. A farmer or blacksmith simply worked until he died on the job.
It wasn’t until 80 years ago that Social Security was enacted to provide a source of income for workers who reach the age of 65. But that situation was the exception, not the rule; in 1935, the average life expectancy was 61.7 years. Social Security was intended to provide an alternative to the poorhouse for people who were healthy enough to stay alive longer than most of their peers, but too frail to keep working.
As lifespans kept rising, the expectation gradually evolved that the vast majority of Americans will retire at the age of 65 and still have several years ahead of them, in relatively good health. By 2012, the average life expectancy had reached 78.8 years. And, among those who reached the age of 65 in 2012, they could expect to live an average of 19.3 more years.
For reasons that are familiar to Trends subscribers by now?the large size of the Baby Boom generation, the declining birth rates that have led to smaller generations since then, the economic malaise, and poor policy decisions?the concept of retirement can no longer be taken for granted.
Social Security is underfunded, paying out more than the program takes in. Corporate pension plans, once ubiquitous, have been cut back to the point that only 45 percent of working-age households participate in them. Individual defined-contribution retirement accounts, such as 401(k)s, which were designed to compensate for the shortcomings of Social Security and pension plans, aren’t getting the job done.
Data from the National Institute on Retirement Security show that working-age households have saved an average of $3,000, while those nearing retirement have saved only $12,000.1
It’s no wonder that nearly half of Americans are worried they won’t have enough to retire. A survey by the Employee Benefit Research Institute found that 43 percent of Americans don’t feel confident about their ability to afford retirement.
Among Millennials, a Gallup Poll found that only 20 percent believe that Social Security will be around when they retire, and 25 percent expect to have to work beyond the traditional retirement age.2
Unless a solution is found, spending on education, research, and infrastructure will be sharply reduced.
Fortunately, there are several promising ideas that could extend Social Security, as we’ll explain when we discuss the forecasts. But the most obvious solution is not a new idea at all. Rather, it’s a return to the pre-industrial idea of retirement, to a time when people worked throughout their lives.
As Chris Farrell suggests in AudioTech’s summary of Unretirement: How Baby Boomers are Changing the Way We Think About Work, Community, and the Good Life, if median earners delay retirement from age 62 to age 70, they can reduce their required savings rate by some two-thirds.3 Plus, holding off the day of retirement means seniors have to use their savings to support themselves for a shorter period of time.
According to The Center for Retirement Research, fewer than half of American workers are on a savings path for a comfortable retirement if they retire at age 65. But if workers wait until age 70 to leave the workforce, 86 percent should be financially secure.4
A study by Richard Johnson and Karen Smith of the Urban Institute found that the Social Security taxes from five additional years of work by older Americans would enable Social Security to remain solvent through 2045 without any benefit cuts.
Not only is a longer working life and a shorter retirement good for the economy; it’s also good for the wellbeing of individuals. Paul Irving, chairman of the Center for the Future of Aging, at the Milken Institute, asserts, “Ongoing work is good for your health and it’s good for your wealth. It’s a good decision, and a decision people should be planning for now.”5
A national study reported in the Journal of Occupational Health Psychology, published by the American Psychological Association, found that retirees who transition from full-time work into a temporary or part-time job experience fewer major diseases and are able to function better day-to-day than people who stop working completely.6
The study’s authors refer to this transition between career and complete retirement as “bridge employment,” which can be a part-time job, self-employment, or a temporary job.
The researchers looked at the national Health and Retirement Study, which is sponsored by the National Institute on Aging. They used data from 12,189 participants who were between the ages of 51 and 61 at the beginning of the study. The participants were interviewed every two years over a six-year period beginning in 1992 about their health, finances, employment history, and work or retirement life.
In order to measure the respondents’ health over the course of the study, the researchers considered only physician-diagnosed health problems, such as high blood pressure, diabetes, cancer, lung disease, heart disease, stroke, and psychiatric problems. The results showed the retirees who continued to work in a bridge job experienced fewer major diseases and fewer functional limitations than those who fully retired.
In another study, described in a National Bureau of Economic Research working paper titled “The Effects of Retirement on Physical and Mental Health Outcomes,” the researchers found that “complete retirement leads to a 5-16 percent increase in difficulties associated with mobility and daily activities, a 5-6 percent increase in illness conditions, and 6-9 percent decline in mental health, over an average post-retirement period of six years.”7
Yet another study, by University of Zurich researchers, found that every year of early retirement lowers lifespan in men, but not women. For every year that a man retires early, his risk of premature death increases by 2.4 percent, for an average drop in lifespan of 1.8 months.8
This may be due to loneliness, which is a typical consequence of leaving the workplace. According to the results of a study from Brigham Young University, being alone gives people the same increased risk of mortality as they would get from smoking 15 cigarettes a day and being an alcoholic.9
Based on an analysis of data from more than 3 million participants from studies that included data for loneliness, social isolation, and living alone, the researchers also found that not only is the risk for mortality in the same category as these well-known risk factors, it also surpasses health risks associated with obesity.
Based on this trend, we offer the following forecasts:
First, contrary to media reports, Social Security is not doomed.
Currently, the program can meet its obligations through 2033, after which it would still be able to pay out at 75 percent. According to Farrell, there are a number of alternatives for improving Social Security finances. We could raise the ceiling on the Social Security payroll tax from $117,000 in 2014 to $250,000, which would extend the date of exhausting trust fund reserves by about four decades. If we eliminated the ceiling completely, the program would be financially sound beyond the Social Security Administration’s official 75-year time horizon for projections.
Second, ironically, the decline of traditional retirement will actually be an enormous blessing to Boomers, Xers, and Millennials alike.
Increasingly people are realizing that purposeless retirement is the quickest path to physical, emotional, and mental decline. In a world with fewer children, fewer stable marriages, and increasing physical isolation due to electronic media, work has become one of the few places where people can have camaraderie and a sense of purpose, which are two of the biggest factors in longevity and happiness, according to research studies.
Third, as the Deployment Phase of the Fifth Techno-Economic Revolution kicks in, the skills gap will widen.
Experienced older workers with skills will be in great demand. For example, according to the Association of American Medical Colleges, the U.S. already has a shortage of doctors, with a need for 13,000 physicians. Many Boomers will need to work in the coming decade to build the wealth they need to retire. Fortunately, the growing economy and the skills gap will make it easy for them to stay on the job. However, as technologies advance and business models change, many people will need to gain new skills, so lifelong training will become a growing priority for workers of all ages.
References
1. To access the report “The Retirement Savings Crisis: Is It Worse Than We Think?” visit the National Institute on Retirement Security website at:
http://www.nirsonline.org/index.php?option=com_content&task=view&id=768&Itemid=48
2. USA Today, October 21, 2013, “Will U.S. Workers Ever Be Able to Retire? ⓒ 2013 USA Today, a division of Gannett Satellite Information Network, Inc. All rights reserved.
3. Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community and the Good Life by Chris Farrell is published by Bloomsbury Press. ⓒ 2014 Chris Farrell. All rights reserved.
4. USA Today, July 4, 2012, “Working Until 70 Could Ease Retirement Finances,” by Susan Tompor. ⓒ 2012 USA Today, a division of Gannett Satellite Information Networks, Inc. All rights reserved.
5. Fast Company, May 18, 2015, “You Will Not Get to Retire: How Old Age Became Unaffordable and Unhealthy, and How We Can Fix It,” by Ben Schiller. ⓒ 2015 Mansueto Ventures, LLC. All rights reserved.
6. Journal of Occupational Health Psychology, October 2009, Vol. 14, No. 4, “Bridge Employment and Retirees’ Health: A Longitudinal Investigation,” by Yujie Zhan, Mo Wang, Songqi Liu, and Kenneth S. Shultz. ⓒ 2009 American Psychological Association. All rights reserved.
http://psycnet.apa.org/journals/ocp/14/4/374/
7. To access the report “The Effects of Retirement on Physical and Mental Health Outcomes,” visit the National Bureau of Economic Research website at:
http://www.nber.org/papers/w12123
8. VOX, March 25, 2012, “Fatal Attraction? Access to Early Retirement and Mortality,” by Andreas Kuhn, Jean-Philippe Wuellrich, and Josef Zwelmuller. ⓒ 2012 The Center for Economic Policy Research. All rights reserved.
http://www.voxeu.org/article/fatal-attraction-access-early-retirement-and-mortality
9. Perspectives on Psychological Science, March 2015, Vol. 10, No. 2, “Loneliness and Social Isolation as Risk Factors for Mortality: A Meta-Analytic Review,” by Julianne Holt-Lunstad, Timothy B. Smith, Mark Baker, Tyler Harris, and David Stephenson. ⓒ 2015 Association for Psychological Science. All rights reserved.
