"Working" It Out

It is routinely reported that 10,000 Baby Boomers are retiring every day, and yet surveys continue to indicate that Americans plan to postpone retirement.

This raises the question: are more older Americans working?

A recent Wall Street Journal article notes (subscription required) that one of the biggest changes in the U.S. labor market over the past two decades has been the increasing number of people working over the age of 55. As recently as 1993, only 29% of people that age were in the labor force, but by 2012 more than 41% of that age group were still in the labor force, the highest since the early 1960s.

It’s hard to find a workplace survey these days that doesn’t find workers planning to work past the traditional retirement age of 65. For example, a recent survey by the Federal Reserve found that fewer than one in five workers age 55 to 64 planned to follow the traditional retirement model of working full time until a set date and then stop working altogether.

A recent report by the Employee Benefit Research Institute (EBRI) noted that the percentage of civilian, noninstitutionalized Americans near or at retirement age (age 55 or older) in the labor force declined from 34.7% in 1975 to 29.4% in 1993. However, since then the overall labor-force participation rate of this group has increased steadily, reaching 40.5% in 2012 — the highest level over the 1975-2013 period — before decreasing to 40.3% in 2013.

Venus and Mars?
The labor-force participation rate for men ages 55 and older followed the same pattern through 2010, falling from 49.4% in 1975 to 37.7% in 1993 before increasing to 46.4% in 2010, roughly where it stood in 2013. On the other hand, the labor-force participation rate of women in this age group was essentially flat from 1975 to 1993 (23.1% and 22.8%, respectively). But after 1993, the women’s rate also increased, reaching its highest level in 2010 (35.1%), where it remained though 2013.

The increase in labor-force participation for the age groups below age 65 was primarily driven by the increases in female labor-force participation rates, as the male labor-force participation rates of those ages 55-59 and 60-64 were lower in 2013 than they were in 1975. In contrast, female labor-force participation rates for those ages 55-59 and 60-64 increased sharply from 1975 to 2013, despite some leveling off in 2010-2013.

The Journal article draws on some Department of Labor data that show that while there are fewer men working at every age, at any given age, more men were working in 2013 than in 2000. By way of example, the article notes that at the turn of the century, about 66% of 60-year-old men and 20% of 70-year-old men were still in the labor force — participation rates that stand today at 72% and 25%, respectively.

So, while there are clearly more people retiring, and thus more not working, there also appear to be more older individuals (on a percentage of workforce basis) working today — though perhaps not as many as once thought they might.

“Last” Chances

While many Americans seem to lack a definitive sense of what living in retirement will be like, how long it will last, or how much it will cost, their sense of when it will begin has been trending older. The 2012 Retirement Confidence Survey (RCS) noted that, whereas in 1991, just 11 percent of workers expected to retire after age 65, in 2012, more than three times as many (37 percent) report they expect to wait until after age 65 to retire—and most of those indicated an expected retirement age of 70 or older.¹

Those expecting to delay retirement perhaps found solace in a recent report by the Center for Retirement Research (CRR) at Boston College which concluded that by postponing retirement until age 70, the vast majority of households (86 percent) were “…projected to be prepared for retirement.”

That sounds good – but what about the assumptions underlying that conclusion?

In 2003, the Employee Benefit Research Institute (EBRI) constructed the EBRI-ERF Retirement Security Projection Model® (RSPM)—the first nationally representative, micro-simulation model based on actual 401(k) participant behavior and a stochastic decumulation model. And though we have explicitly recognized that many individuals were retiring at earlier ages, a retirement age of 65 was chosen for baseline results, based upon the assumption that most workers would have the flexibility to work until that age, if they so chose.

Last year we modified the RSPM to determine whether just “working a few more years after age 65” would indeed be a feasible financial solution for those determined to be “at risk.” Unfortunately, for those counting on that as a retirement savings “solution”, the answer is not always “yes.”

Indeed, results from the EBRI modeling indicated that the lowest pre-retirement income quartile would need to defer retirement to age 84 before 90 percent of the households would have even a break-even (50‒50) chance of success.

Working longer does help, of course. A recent EBRI Notes article titled “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?²” finds that 23 percent of those who would have been at risk of running out money in retirement if they retired at age 65 would be “ready to retire” if they kept working to 70. Better still, if those individuals are assumed not only to delay retirement, but also to keep participating in a defined contribution plan, a full third of those who would have been at risk of running short of money if they retired at age 65 would be “ready” to retire at age 70.³

What accounts for the difference in the projections? For a household to be classified as “ready for retirement” under the CRR method, a projected replacement rate is simply compared with a benchmark rate, while the RSPM uses a fully developed stochastic decumulation process to determine whether a family will run short of money in retirement (and, if so, at what age) under each of a thousand alternative, simulated retirement paths. Unlike the CRR model, EBRI’s RSPM model simultaneously considers the impact of longevity risk, investment risk, and the risk of potentially catastrophic health care costs (such as prolonged stays in a nursing home).⁵

Which, as it so happens, are the same things that those trying to make sure they have enough money to last through retirement—and those trying to help them do so—need to consider.

Nevin E. Adams, JD

¹ see “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?”

² Also from the above article, “It’s worth nothing that a significant portion of the improvement in readiness takes place in the first four years after age 65, but that tends to level off in the early 70s before picking up in the late 70s and early 80s. Higher-income households would be in a much better situation: 90 percent of the highest-income quartile would already have a 50 percent probability of success by age 65, while those in the next-highest income quartile would need to wait until age 72 for 90 percent of their group to have a 50 percent probability. Those in the second-lowest income quartile would need to wait until age 81 before 90 percent of their group had a 50 percent probability of success.

³ At the same time, the percentage of workers expecting to retire before age 65 has decreased from 50 percent in 1991 to 24 percent (see this EBRI analysis, online here). A sizable proportion of retirees report each year that they retired sooner than they had planned (50 percent in 2012). Those who retire early often do so for negative reasons, such as a health problem or disability (51 percent) or company downsizing or closure (21 percent). The 2011 RCS found that the poor economy (36 percent), lack of faith in Social Security or the government (16 percent) and a change in employment situation (15 percent) were the most frequently cited reasons for postponing retirement.

⁴. For more on how this modeling works, see “Single Best Answer.”

⁵ For an explanation of four things that are sometimes overlooked by retirement-needs projection models, see “Generation ‘Gaps,’” online here.