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| The Economics of Retirement in Old Age
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Changing Definition of Retirement
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| People view retirement with different expectations and circumstances, depending on their financial, psychological and social status. A nationwide study conducted by the National Council on the Aging found that half of the persons aged 65 and over who were retired looked forward to it, while the other half did not look forward to retirement. Clearly, individuals react to the idea of retiring in very different ways. However, with increasing life expectancy, retirement has become an expected part of the life course. This phenomenon has occurred mostly during the twentieth century. Retirement was institutionalized when Social Security legislation passed in 1935, establishing the right to financial protection in old age. Social Security was established as a reward for past economic contributions and was set up based on income that a person deferred during their years of participation in the labor force. Percent of Older Men & Women in the U.S. Median Age at Retirement, 1950-2005 |
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Labor Force participation refers to the proportion of an area’s population
who are employed. In general, at all ages, men are more likely to be employed
than women, and the percentage of workers declines with increasing age.
The percentage of men 55-64 and 65+ in the work force declined substantially
(15% and 25%) between 1950 and 1990. Today, more than half of men 65 and
older are outside the work force. Women age 55-64 in the work force, on
the other hand, showed an increase of 25% between 1950 and 1990 and those
over 65 increased 5%. Labor force participation by women has always been
smaller than it is for men. Women tend to have part time, occasional,
and temporary jobs; thus, fewer of them are in the work force at any time.
This pattern is also true for most of the ethnic minority groups that
experienced age and racial discrimination and were not able to find permanent
employment.
Average Female Age of Retirement, 1955-1990 Average Male Age of Retirement, 1955-1990 |
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Sixty-five is the age when the individual is eligible for full retirement benefits from the federal government through Social Security. This age was established in 1935 and reflected the point in time when most people were experiencing some health or functional problems. Today people are healthier and live longer; so the age of 65 is no longer old; 70 or 75 today is more equivalent to what 65 was in the 1930s. Thus, most people are physically able to work longer, but may choose to leave the work force earlier than this, especially if they are financially able to do so. In 1978, The Age Discrimination in Employment Act was amended to ban mandatory retirement before age 70 in many economic sectors. The reduction in older workers has caused the ratio of people in the work force and those outside it to change significantly. In 1955, there were four workers for each person over age 55 who was not employed. By 1995 that ratio had declined to 3.5 workers per older person and the ratio is expected to continue dropping until 2030 when only 1.9 workers will be employed for every 55+ person who is outside the work force. This means that whereas four people were paying taxes into the Social Security system in 1955 for every person receiving benefits, that number will be less than two by 2030. Ratio of Total Labor Force to Persons This reality has prompted several proposals: the privatization of Social Security, increasing taxes, raising the eligibility age or reducing benefits because there will not be enough money coming in to cover the benefits or the growing retired population. It would seem that the terms work and retirement are clearly dichotomous and that it would be easy to determine who is retired and who is not. But that is not the case. It is frequently very difficult to know when a person is retired and when he/she is not. Generally retirement is defined as: being outside the work force, receiving some income from a previous job (social security or pension), and having time to do the things the individual desires. However, many retirees take part-time, part-year jobs, have no retirement income benefits, and can find little in the way of avocations or recreational activities. Leaving Their Last Job - 1941, 1968, 1982 Click Here Why do people work? Of course, many people work for the money that the job provides, and they are most likely to discontinue working when the additional income is no longer needed. However, people work for many different reasons. Some like the way a job structures the day, the social interaction it encourages, the sense of accomplishment it fosters, or the habits it allows. Thus, people are most likely to retire when they perceive that they have enough money to support the life style that they desire. If they anticipate that their income will be inadequate to maintain their lifestyle, they are less likely to retire. Graph: Dream Retirement Age of |
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Most people want to maintain their level of living when they enter retirement. |
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Money is not the only important factor when the decision is made to retire. A study by the University of Pittsburgh in 1995 found that many older workers actually quit their jobs for similar reasons that younger persons might quit their jobs: because they are not satisfied with their work and see no growth potential, even if they do not have a lot of money. Another misconception is that retirement is a one-time event that permanently ends a person’s participation in the work force. State University of New York researchers have found that retirement is a gradual process, particularly for men who have had unstable work histories. A person may leave or be laid off from their job, expecting to then retire but then need to return for income related reasons. Another fascinating finding was that people may retire when they can begin receiving Social Security, but then return to the work force later when they discover they need more income or because retirement is not fulfilling. Other reasons for retiring include encouragement of retirement by the employer and health problems. True or False? Mandatory retirement for employees of most companies is no longer legal. There are several considerations that most people weigh before they retire: the level of their finances during retirement; their health; the enjoyment of the job; and their interest in other ways to spend their time. For most people, retirement is a decision on the work-leisure tradeoff -- is it better to use one’s time to do work and generate income or to enjoy leisure time and not work, but have no or low income. |
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| AgeLine Abstract 1: Raising Social Security Reitrement Age Cons Earlier, we mentioned that Social Security presents an incentive for many people to retire - even though it might be earlier than they would otherwise and many end up returning to the work force. Some have proposed raising the Social Security retirement age while others argue against this strategy. In an article published in Perspective on Aging, Merton Bernstein suggests that there might be some detrimental effects if this should happen. Murton Bernstein
There is much debate about the impact of raising the retirement age. The abstract you just read painted a dim picture of the results of such an action. For a different perspective, go to AgeLine and read the abstract by Joseph Quinn that appeared in the book Economics of Aging.
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People identify extensively with their jobs. When people are introduced, they usually describe themselves by indicating their occupation. This fact alone gives us some insight into their status, education, income and position in society. But when a person retires, he/she loses this role and often, some of this status; the retiree goes through a role transition from worker to consumer of leisure. This can have a positive or a negative outcome. It is a difficult adjustment for those who have made work their chief role. However, lots of people see retirement as more attractive than work, so they leave the work force early in order to enjoy avocations, travel, pursue interests, or find a less pressured job. Thus, retirement can have either a positive or negative impact on the individual. |
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| Retirement Decision Considerations When making the decision to leave a job for possible permanent or temporary retirement, it is generally important to consider the following personal and family considerations:
It is difficult to calculate exactly when a person has sufficient income in order to retire. The needed amount depends upon several factors: the life expectancy of the individual, their level of living, the rate of inflation, the extent of their savings or investments, the percentage of income their investments earn, and changes that occur in expenditures in retirement. Furthermore, most people don’t have a good idea of how their Social Security benefits will be figured upon retirement. The Social Security Administration offers all individuals the opportunity to request a Personal Earnings and Benefit Statement. At age 60, individuals automatically receive this statement from The Social Security Administration. This Statement estimates your benefits based on information you supply; for example, current and expected salary, planned retirement date, etc.
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| Three Main Sources of Retirement Income There are three main retirement income sources commonly identified as three legs of a stool:
Sources of Income by Seniors, 1990 Social Security is the single most important source of income for the elderly today and has been a major factor in reducing the incidence of poverty among the elderly. Older people depend on Social Security for retirement income more than any other source. Over one-third of elderly households rely on Social Security for 80% or more of their retirement income. In a 1996 study of consumer housing preferences, concerns and needs of individuals over the age of 50, the American Association of Retired Persons found that more than a quarter of the respondents said that they would consider a reverse mortgage in the future. Currently, there are several lenders who have reverse mortgage programs. A third major potential source of income for retirees, the third leg of the stool, is the pension provided by the employer or jointly funded by the employer and the employee. Pensions come in two varieties - defined benefit and defined contribution. |
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| Defined Benefit Pension vs. Defined Contribution Pension There are distinct differences between each type of plan. People covered by pensions increased from 23% to 48% from 1950 to 1979. However, as employers realized the size of the commitment they were making and with the tightening of federal government controls, after 1979, the percentage of people being eligible for pensions began falling. Many employers encourage people to retire early, this is what Robert’s employer is proposing -- this is what is often referred to as a "buy out." Sometimes, the employer thinks that older people are less productive, more prone to absence, slower, and not as skilled as younger workers. However, "buy out" decisions are for the most part economically based. Retirement planners, investment companies, and insurance companies put out a variety of forms to be used to estimate retirement costs. These are similar to Exhibit 1. However, while programs that prepare older people for retirement are widely available, they are not usually comprehensive, focusing only on the financial aspects of retirement.
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| Problems Associated with Retirement Planning Even the financial aspects of retirement can present you with many unknown variables. For example:
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The next few sections will focus on two of these issues: attitude and role adjustment, including psychological issues, and housing and lifestyle. In the past, retirement was often considered to be a crisis point in a person’s life. Retirees were expected to lose status, income, and meaning when they left the work force. We have all heard the stories of a man who retires one month and dies of boredom the next. Retirees were expected to need assistance in adjusting to the new status by preparation and counseling. But today, there is great variation in how people adjust to the retirement state.
Common phases in adjustments to retirement have been identified by Robert Atchley. These include pre-retirement, the honeymoon phase, disenchantment, reorientation, stability, and the termination phase. However, these phases do not necessarily take place sequentially. Some individuals may begin at the honeymoon stage, move to disenchantment, and then enter a certain amount of stability. Others may begin at disenchantment and then move to the honeymoon phase. Still others may stay in the honeymoon phase for 30 years! While these phases are not linear, they still help us understand how people adjust or don’t adjust to retirement. Retirement, then, is not only a state of employment (or lack of it) but a process that is lived through by the older person. It includes the decision to leave work, the event of giving up the job, the creation and acceptance of new roles for the individual, and sometimes the eventual onset of medical problems. Even though it is no longer thought of as a crisis, adjustment to the new aspects of retirement can be facilitated when the new retiree has a clear anticipation of what life will be like and planning is done to set goals and develop interests. Preparation for retirement includes:
Being outside the work force does not result in a crisis for most people who adjust easily and find they can keep busy doing things that they have always wanted to do. Studies have found that older people want to retire as soon as financially possible, and once retired, they adjust well to their new situation and enjoy the increased leisure. After retiring from their career job, retirees often find that they would like to (or need to) work. An increasing number are choosing to return to the work force for a few years in part-time or lower-pressure jobs—positions that are often called "bridge jobs," those that help the individual slide into retirement more gradually—than would have been the case with full retirement. The motivation is often financial; they need the money. Other persons like work so well that they have multiple careers — moving into other full- time employment settings. Getting and holding a job is often difficult for many older people because of the stereotypes that employers hold about older workers. Kendig identifies five types of age discrimination related to employment that existed in the past:
In the past, most of these perceptions suggested that the older worker is not as productive as the younger person. In general, this is false. Older workers are as productive as younger people; they avoid accidents, miss few days of work, and are loyal to their employer. The government has shown some interest in the retraining and job placement of older people through several programs — notably the Job Training and Placement Act (JTPA) and the Community Service Careers section of the Older Americans Act. However, for the most part, the government has done relatively little to encourage work in later life. |
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| AgeLine Abstract 3: Faulty Pensions When an older person decides to retire, they may assume that their former employers have correctly computed their pension amount. However, because many times there are pension errors, the National Center for Retirement Benefits Incorporated was established to analyze payouts for people retiring or retired from corporate jobs. Find out more about this problem by going to AgeLine and reading the following abstract: Pamela
Sherrid In conclusion, with retirement, an individual’s focus shifts from playing important roles that involve specific tasks at work that have attached values to a smaller focus on different types of tasks that have dissimilar values and meanings attached to them. This transition requires tremendous adjustment. |
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Economic status has a profound impact on many areas of life - health, housing, relationships, involvement in the community, and education of the individual and the family. Its availability typically means that the individual and the family will get an appropriate diet, they will have special social opportunities, they will have access to books and magazines, they will travel, their behavioral patterns will include sufficient exercise, and it will influence other attributes that lead to status and health. Following the Great Depression, the government’s role in providing for the poor, needy, and elderly expanded. Over the past sixty years, government programs have entered into major sectors of the economy: social services, income, housing. Older people are often depicted and thought of as "rich, greedy geezers" or as "poor, frail, and sick." There is actually great diversity in the income level of the United States' older population. The elderly are similar to other age groups in their economic differences; as a group, they have great income variation. |
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We mentioned the classic three-legged stool in the case on retirement. However, in reality, most individuals rely on five important sources of retirement income:
However, not all older persons have multiple sources of income. Economic security in retirement years depends on actions taken and opportunities available during the working years. It also depends on marital status in old age. More than 9 out of 10 elderly receive Social Security benefits. Approximately two-thirds of the elderly have income from assets. The median income of older persons in 1995 was $16,484 for males and $9,355 for females. Nearly one of every six family households with an elderly head of the household, had incomes less than $15,000, while 38% had incomes of $35,000 or more in 1995. The median net worth, figured as assets minus liabilities, of older households in 1995 was $86,300, well above the U.S. average of $37,600 in 1993. Net worth was below $10,000 for 16% of older households but above $250,000 for 17%. The economic security of older persons is not solely dependent on income sources. There are many other sources which are not as obvious. These include: non-cash benefits, such as food stamps, rental housing assistance, Medicare, Medicaid and employer-provided retiree health benefits; senior discounts, such as reduced prices for public transportation and library fees; preferential tax policies, such as reduced or delayed property tax liability, special capital gains provisions for persons aged 55+ and sales tax exemptions for prescriptions and assistive devices; and other age-targeted policies, such as reverse annuity mortgages. Economic security of today's elderly is also an outcome of governmental and employer policies of the past, such as policies promoting home ownership (for example the GI Bill and the deductibility of mortgage interest), and laws that regulate pensions. Owning a home is the single most important asset of older households of all income levels. The introduction of reverse annuity mortgages permits older homeowners to draw on the equity in their homes to generate monthly income. Many older people have not consistently held jobs or progressed in a career field. During their working life, they have earned at a lower rate, they were likely to have been occasional workers, and they had nothing that resembled a career. With this checkered work history, they receive lower Social Security benefits and are unlikely to receive other types of retirement income. |
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In 1996, the poverty line was $7,740 for a single older person and $10,300 for an older couple. The "tweeners" is a phrase coined by Timothy Smeeding to connote older people who are just barely above the official poverty line. That is, they are at about 125-150% of poverty and therefore too well-off to be eligible for public welfare programs. Their economic well-being, however, is extremely fragile. A major health problem or other catastrophic event is often all it takes to plunge these individuals into poverty. Even from 1970 to 1996, the percentage of Americans aged 65 and over who are below the poverty level has decreased from 24.6% to 10.5%. However, this fact does not take away from the reality that older individuals as a group experience a tremendous drop in their mean income when reaching the age of 65. For example, the mean income for householders aged 55-64 in 1990 was approximately $41,000 whereas the mean income for individuals aged 65 and over was about $25,000. Poverty is high among certain groups of elderly: minorities, non married women and the "oldest old". One of every eleven elderly Whites is poor, compared to 1/4 of older Black and nearly 1/4 of elder Hispanics. The median income of older whites is 80% greater than it is for Hispanics or Blacks. Older women constitute about 60% of the total elderly population but account for nearly three fourths of the elderly poor. The large proportion of non-married women in the oldest age groups contributes greatly to the difference in poverty rates in these last decades of life. Nearly 20% of all persons aged 85+, the "oldest old," are poor. In successively older age groups, the median income decreases. This chart demonstrates how from age 65 to 85 years and over income gradually decreases. The elderly also are more likely to suffer long-term poverty, because unlike other groups, they are less able to work their way out of poverty.
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| Different Sources of Income Among Classes Within the elderly, there are intragroup differences regarding income. Different income-level groups depend on different sources of retirement income more heavily than others. These groups include the upper-income, upper-middle income, middle income, low income and poverty level. The major source of retirement income for upper-income elders is income from assets, followed by pensions and earnings, then Social Security. Elderly in the upper income group are largely the "young old" and couples. For older people with upper-middle income, Social Security is the major source of retirement income, followed by pensions, income from assets and earnings. Older people with middle incomes rely mostly on Social Security, followed by income from assets, pensions and earnings. The retirement income sources of low-income elders are similar to that of middle-income elders, but each source contributes a lesser amount. Social Security is the major source (81%), followed by income from assets, other sources, pensions (minuscule), earnings (minuscule). This is the "tweeners" group because their income amount is not high enough to be middle income, but they do not fall below the poverty rate. Older people at the poverty level or those at 110% of poverty level rely mostly on Social Security, followed by Supplemental Security Income, and asset income. Many are the "oldest old" women and minorities. Married couples are better off than non-married individuals. Married couples have a median income that is almost twice that of non-married men and over 2 ½ times greater than non-married women. As we’ve discussed, there are many differences in income levels within the elderly. Recognition of these intragroup differences has led to some new policies such as the taxation of Social Security benefits for higher income individuals and couples. |
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In
the past, poverty among the elderly was more widespread than for any
other adult age group. A recent Census Bureau report indicates that
this is no longer true. Approximately 10.5% of today's elderly are officially
poor, in contrast with 50% of the elderly who were poor when Social
Security was enacted.
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