By: Julie Heath
The news about the labor market continues to be a mixed bag. The headlines have told us for quite some time that young workers are struggling to find full-time—or any—employment; that although long-term unemployment is dropping slightly, it remains a significant issue for many Americans; that while the unemployment rate has fallen slightly, large numbers of people have simply dropped out of the labor force. Of particular concern is the drop in the labor force participation rate. At 63.2 percent, it is the lowest it has been in 35 years. The exception to this trend is the labor market experience of older workers.
Older workers’ participation in the labor market has increased steadily since 1990. Workers in the oldest age groups, ages 55 and older, have all shown increases in their participation rates, with the largest increases seen in those aged 65-69, as shown below:
These increases in participation rates have important public policy implications. For example, one of the fixes for Social Security being discussed is to raise the age at which full retirement benefits can be collected. These discussions start with the premise that the average retirement age is 62, the age at which workers are first eligible for reduced-benefits Social Security, and a number supported by the U.S. Census Bureau. But this number is misleading because it fails to separate those who receive retired worker benefits and those who collect disability benefits. Even if it was confined to those Social Security recipients, it would ignore those workers who continue to work while receiving benefits, 45 percent of recipient households age 62-64. Self-reported data are also misleading as many respondents indicate they are retired while, in fact, they continue to work for pay.
A measure that removes both disability recipients and those who continue to work after Social Security take-up puts the average age at retirement at 65.5 years of age. This leads to three important issues in the discussion of raising the age at which full Social Security benefits can be taken. First, raising this age will not save the Social Security system any money. Benefits are adjusted (up to age 70) such that lifetime benefits are equalized. Social Security benefits increase 7-8 percent per year between the ages of 62 and 70, so taking earlier retirement means a smaller benefit over more years, as opposed to delaying retirement and taking a larger benefit over fewer years (and longer life expectancies are already built into the system). The system is designed to equalize those two options.
Second, raising the retirement age is equivalent to enacting a cut in benefits. Retiring at what is now full retirement at age 66, for example, would—after raising the qualifying age—result in reduced benefits. The suggestion that these cuts could be offset by working longer is disputed by the fact that people are already working longer, as we have seen. Politically, it is more palatable to advocate for those in their early 60’s to work longer than it is to advocate that those in their late 60s work longer, which would be the result with an increase in retirement age.
Finally, the companion argument to raising the retirement age is that it is justified because we are living longer. However, an increased retirement age would apply to everyone, but gains in life expectancy are not felt equally. At age 65, lower income males have a life expectancy of 1 year longer than their counterparts of 25 years ago. The life expectancy of upper income men, however, is 5 years longer during the same period. At age 65, upper income women—compared to 25 years ago—have experienced very modest gains in life expectancy, while for lower income women, it has actually decreased.
How does this all connect to economic and financial education? Young workers new to the labor force face a difficult road. Their retirement age is already 67; if it is increased, their income-replacement rate during retirement will be further reduced. If the Social Security trust fund is not replenished, benefits will be reduced. The reduction of defined benefit pensions means that they will be more reliant on private savings than previous generations. But, young workers’ ability to adequately prepare for retirement is significantly curtailed by their assumption of student loan debt.
Laying the groundwork for a lifetime of good decision-making behavior in our youngest students will help in both regards. Students would apply the appropriate cost/benefit analysis to their college and student loan decisions, refraining from taking on levels that are incompatible with their incomes. They would also incorporate savings as a normal part of their financial lives, giving them the ability to more adequately supplement whatever Social Security system will exist when they are ready to retire.
Political leaders have the opportunity to formulate Social Security policy based on sound data. The current labor force participation rates of older workers are an important component of these discussions, but Social Security policy is typically set with a 75-year window (the average length of time a worker is in the system as a contributor or recipient). This means that any reforms will disproportionately affect our youngest workers, the very population who will be in the most vulnerable position. All the more reason to provide them today with the decision-making tools they will need to successfully navigate these issues, starting early and often.