Retirement Against the Demographic Trend: More Older People Living Longer, Working Less, and Saving Less
The American population is aging rapidly and individuals are living longer. Yet Americans are saving less and older workers are leaving the labor force at younger and younger ages. In spite of the rapid aging of the population and the increase in life expectancy, the labor force participation of older Americans has decreased dramatically over the past 3 or 4 decades. The accelerated drop in labor force participation corresponds roughly to the introduction of Social Security and the adaption of employer-provided pension plans. Wise has illustrated that Social Security and employer provided pension plans provide substantial incentive to leave the labor force early. The quantitative effect of this inducement is illustrated by simulating the effects of changes in pension plan and Social Security provisions on the retirement decisions of employees in a large firm, who are covered by a typical defined benefit plan. Scheduled Social Security changes (increasing retirement age to 67, early retirement remains at 62) would have little effect on the retirement decisions of employees with a typical defined benefit pension plan like the one considered here. But if the pension plan provisions were changed to correspond to the Social Security changes, the effect would be very large. And, although not contemplated by current legislation, it is clear that an increase in the Social Security early retirement age would have a substantial effect on the early retirement rates of the large number of employees not covered by a pension plan. Health status is also an important determinant of retirement, and the effect of health status may interact with the effect of pension plan provisions. Available data also suggest that employer-provided retiree health insurance may facilitate early retirement and the insurance effect may, in turn, interact with health status and with pension plan provisions. Wise also emphasizes that personal saving cannot explain the trend toward earlier departure from the labor force. Indeed, low personal saving magnifies the pressure that population trends place on the Social Security system.