At the conclusion of FRONTLINE's "Can You Afford to Retire?" Notre Dame economist Teresa Ghilarducci says that the only way many workers with underfunded 401(k) plans will be able to afford to retire will be to keep working. "So what is the meaning of retirement if the only way you can live is to work?" she asks. "The answer is, there is no meaning to retirement anymore. It's the end of retirement."
FRONTLINE invited Professor Ghilarducci and two other experts on work, retirement and aging to discuss the new reality confronting many middle class Americans.
- What's Behind the New Reality
- Is It Really "The End of Retirement?"
- Challenges for Government and the Private Sector
Teresa Ghilarducci is a professor of economics and director of the Higgins Labor Research Center at the University of Notre Dame. She previously sat on the advisory board of the Pensions Benefit Guaranty Corporation.
Joseph F. Quinn is a professor of economics and dean of the College of Arts and Sciences at Boston College. He conducts research as part of BC's Center for Retirement Research and its Center for Aging and Work.
John Rother is Group Executive Officer of Policy and Strategy for AARP, directing the organization's public policies initiatives. He has also served as counsel to U.S. Senate committees on retirement and aging issues.
WHAT'S BEHIND THE NEW REALITY
Prior to the mid-1980s, labor force participation rates for older American men had been declining for over a century, reflecting Americans' increased wealth, some of which they chose to "spend" on earlier retirement. This trend accelerated after World War II. In 1950, 72 percent of men aged 65 were still in the labor force; by 1985, this had dropped to 30 percent. For men aged 70, the decline was even more dramatic, from 50 to 15 percent. For men aged 62, who were not eligible for Social Security benefits until 1961, the rate dropped from 81 percent in 1950 to 51 percent in 1985, a decline of over one-third.
However, since the mid-1980s these long-term trends have stopped, and even reversed. Between 1985 and 2004, the participation rates for men all increased, by 10 percent among 62 year-olds, 24 percent among 65 year-olds and by nearly 50 percent among 70 year-olds.
For older women, the story is both different and the same. Between the mid-1960s and the mid-1980s, their workforce participation rates were flat. But since the mid-1980s, participation rates for older women have increased dramatically and continue to rise today. So many more older men and women are working today than the pre-1985 trends would have predicted.
Why the change in employment trends? There are two sets of hypotheses, one focusing on cyclical (and therefore temporary) changes in the economy since the mid-1980s, and the other emphasizing permanent changes in the retirement environment.
The past two decades have, in general, been years with a strong economy. The unemployment rate declined from near 10 percent in 1983 to about 5 percent in 1989. By 2000 it had fallen to 4 percent -- the lowest unemployment rate since the late-1960s. Strong labor demand creates employment options for workers of all ages, including older workers, and some older workers took advantage of these favorable labor market conditions.
But there were also important permanent changes in the retirement environment. Mandatory retirement provisions, which once covered about half of the American workforce, were outlawed for the vast majority of American workers in 1986. Social Security benefit rules that used to penalize those who worked beyond age 65 have been eliminated. Defined-benefit employer pensions, which contain incentives to leave the job at a particular age as Social Security used to, are becoming less important and are being replaced by defined-contribution plans, which do not contain these incentives.
In addition, older Americans are healthier and are living longer. Jobs are becoming less strenuous -- fewer assembly line jobs, more service employment -- and technology, from computers to improved hearing aids, is increasing older Americans' options of how long and where to work. All of these permanent changes have shifted the trade-off between work and leisure late in life in favor of additional work.
University of Notre Dame
The elderly work force is varied. Some are working because they want to work despite having adequate income security. These are mainly professionals who enjoy their jobs and are well paid. Others are working because they don't have adequate and secure incomes. I want a society where the elderly can work if they want, but also have some financial ability to walk away from jobs they don't like or can't do.
In the most recent recession -- 2001 to 2004 -- compared to previous ones, increases in the labor force participation of the elderly were not accompanied by wage increases and lower unemployment rates. And economist Richard Johnson reports that the jobs the elderly hold have worsened more than they have improved.
A recent survey of employers in 20 countries reveals that most employers feel that older workers are more loyal than younger workers and are as reliable, flexible, and productive. But many employers view older workers as more expensive.
Based on these findings, and on a study by Sharon Hermes and me, I am concerned that the elderly are not being pulled and enticed into the labor market but instead are being pushed, because they have more uncertain and inadequate retirement income and health insurance.
IS IT REALLY THE "END OF RETIREMENT?"
While declaring "the end of retirement" is overstated, it certainly makes the point that the world is changing, and personal expectations need to change with it. My own view is that boomer retirees can be grouped into three catagories: the well-prepared (the top 25 percent); the minimally prepared (the middle 50 percent); and the unprepared (the bottom 25 percent). Each of these groups faces very distinct challenges looking forward to their remaining years.
We have lots of evidence that people aren't retiring quite so early, with a very gradual turnaround since the mid 1980's. I suspect health care costs and a generally growing economy have a lot to do with this. When we've asked boomers about their retirement expectations, a surprising number (80 percent) say they expect to work in some fashion during their "retirement years." They generally mean flexible jobs, self-employment, or even volunteering. About 20 percent of income to the 65+ group is currently from earnings, and we expect this to grow. Much will depend on the labor market and the attitudes of employers as to whether these types of jobs will be available.
Recent research on retirement trends (when older Americans leave the labor force) and retirement patterns (how they leave) suggest that significant changes have occurred -- changes that I think signal a new age of retirement, and that for many Americans, retirement is a process rather than a single event.
Research shows that many older Americans retire gradually, in stages, utilizing "bridge jobs" between their full-time career jobs and complete retirement. When older Americans leave their career jobs late in life, more than half of them do not leave the labor force. Rather, they move to part-time employment, or sometimes a full-time job, nearly always for another employer and often in a new line of work.
These bridge jobs are more likely among those at both ends of the socio-economic scale than among those in the middle. Many at the lower end keep working because they have to in order to make ends meet, while many at the upper end, some of whom could easily afford to retire, choose to remain employed because they want to -- it's a quality of life issue. In both cases, labor market withdrawal is a multi-step process rather than a single event.
In many cases, this is good news. Retirement is a job of sorts, requiring certain skills for success. It seems reasonable to try this in stages, rather than all at once. Employers wise enough to hire these experienced workers benefit, as does the economy, with more goods and services to provide for an aging population. And for individuals justifiably concerned about finances for retirement, especially in an era of declining defined-benefit pension coverage and anticipated Social Security and Medicare deficits, working a few more years, for those able to do so, is a decision that can be made at the time, unlike saving more during your lifetime, which would have had to have started decades before. I anticipate that many older Americans will continue to work beyond the traditional ages of retirement (62 and 65), and will continue to retire in stages, utilizing bridge jobs on the way out.
CHALLENGES FOR GOVERNMENT AND THE PRIVATE SECTOR
AARP has entered into a partnership with Home Depot that involves every Home Depot store. They will hire several low-income seniors and train them to counsel customers in how to modify homes to promote independent living. AARP will provide the job candidates and also material for the public. Home Depot gets positive community relations, and also hopes to sell materials for home retrofits. It's a good example of a firm doing well by doing good.
We are working with employer groups and individual employers to promote jobs for older workers (those 40 and over, according to age discrimination law). We know what our members say they most want -- job flexibility. We highlight the "Best Employers for 50+ Workers" every year, to promote best practices as well as the business case for older workers. We are active in the courts to promote fair enforcement of age discrimination laws.
AARP is also focused on a broad range of retirement security issues at both the state and federal levels. In addition to Social Security and Medicare reform issues, we push Congress and the states to lower pharmaceutical costs and to reform other aspects of our expensive health care system, such as the quality improvement and the need for health information systems. We want more Americans to be financially prepared for retirement, and so we advocate for pension security -- Congress is currently considering a pension bill that would require higher funding from companies -- as well as for mechanisms to make tax-favored retirement savings more available and more attractive to workers.
We favor, as part of the pension reform legislation, changes to make the "saver's credit" in the tax code permanent. We also are supporting "automatic IRA" proposals that would require employers to provide a payroll deduction mechanism for their employees to voluntarily save for their future on a regular basis. As we know, without payroll deduction, very few of us will save at all.
University of Notre Dame
Right now the government should pay more attention to the ghastly state of 401(k) plans. The 401(k) plan is the most widely available retirement plan system, but it acts more like a national severance pay plan because most people spend down their accounts, especially when they change jobs.
Some say the lack of incentives for pharmaceutical companies to reduce their drug costs is going to triple the cost of the new Medicare benefit. Congress should pass a law to let the government negotiate for lower drug prices. Many financial advisers are suggesting that people will need to have more income in retirement than when they were working because of health care cost uncertainty. But according to NYU Professor Edward Wolff's studies on retirement readiness, less than 25 percent of people 47 and older are projected to have that much.
I propose that the government provide a way that people could save for their retirement through a not-for-profit 401(k) administrator. Michigan Governor Jennifer Granholm is offering services of the Michigan state pension system for small businesses to do just that. There is a similar proposal in Washington State. Perhaps individuals could use the federal retirement system.
Federal law should change so that workers could contribute to their traditional pension. There are even ideas for letting people buy more Social Security credits if they want to. That is one of the best ideas I have heard lately; it comes from Professor Zvi Bodie at Boston University.
My concern is that the minimally prepared group (middle class Americans with no lifetime pension and inadequate savings) will arrive at retirement age with no protection against longevity and no retiree health protection. They will be at risk of seeing their standard of living decline with advancing years. They will be ever more dependent upon Social Security and Medicare benefits. They will be forced to be quite frugal, and this could indeed have an impact on consumer spending.
We are a rich country, and we certainly have the resources to address these and other important social issues. But so far we have not had the political will. One consequence of these trends is that there will be a growing constituency to expand social insurance benefits. There will also be growing interest in flexible job opportunities. Finally, we will have to confront the moral dilemma of a substantial number of older persons (the bottom 25 percent) who have no resources and little ability to adapt to this more harsh environment.