Continued Work—the Good News

For some time, age 65 has more or less been the “normal” retirement age for American workers. Some individuals prefer to work past age 65. Some, not having saved enough, continue to work because they have to.

Channeling Voltaire, work keeps at bay three great evils: boredom, vice, and need. It also powerfully improves retirement outcomes, in three ways. During continued work the individual has a chance to save more. During this extended period, amounts saved (generally) will earn additional returns. And continued work, in effect, shortens the period over which the retirement benefit has to be paid.

To illustrate this, let’s go back to our example individual with $100,000 at age 65 and a (in our example, guaranteed) life expectancy of 20 years. Let’s assume a rate of return of 5% (with a 30/70 equity/fixed income portfolio). On these assumptions, this individual can take out $660 a month and run out of money in exactly 20 years, when, under our assumptions, they die.

Now, let’s have that same individual work to age 70. Even if they make no more contributions to their retirement savings, at a rate of return of 5%, they have $28,000 more (for a total of $128,000) when they retire at age 70. And because they only have to pay it out over 15 years, they can pay out around $1,000 a month. That is a big increase in their monthly benefit.

And, if they contribute just $3,000 a year more during their 5 years of continued work, they’ll have around $144,000 at retirement and can pay out $1,140 a month.

The point of this somewhat artificial example is simply to illustrate how much continued work can improve an individual’s retirement outlook.

The Bad News: This Only “Works” for Some

There are, of course, a variety of problems with work as a Plan B. The biggest of these are that the 65-year-old who wants to continue working must (a) have a job (or some income producing activity) and (b) be able to do it.

Over the last 10 years, the number of individuals employed in the workforce who are age 65 or older has increased from around 5.7 million (in January 2008) to around 9.2 million (in January 2018).51 And, it turns out, the unemployment rate among individuals 65 and over is generally less than the civilian unemployment rate—3.4% vs. 3.9% as of the end of 2017.52

Nevertheless, EBRI has found that, while a lot of individuals express a desire to work to age 70 (38% of those surveyed), only 10% work past age 65 and only 4% work to age 70 or later.53

There are a variety of reasons why many individuals—probably the majority of 65 year olds—are either unable or at least very reluctant to work past age 65. Those of us who are aging are familiar with them. EBRI cites as significant factors health problems, disability, employer downsizing or closure and having to care for a family member.

Working Longer Is Not for Everybody

Let’s note that some jobs, particularly physically demanding ones, are much harder to do as one ages. Indeed, there are cognitively demanding jobs that are similarly harder to do. Thus, the opportunity to compensate for under-saving for retirement through continued work is unevenly distributed.

And that fact—and those who are vulnerable because they work in jobs with (as it were) an age-65 expiration date—should probably be taken into account in our policymaking. One might go so far as to say that for those jobs/careers/professions that are harder to continue past age 65 some sort of defined benefit plan solution—with its guarantee of a retirement income—may be more suitable.

The Other Plan B: Moving In with the Kids

Statistics on how many retirees live with their children are a little hard to come by, but as a general matter it seems clear that in the United States the number of retirees who do so is not significant. The 2013 US Census Paper America’s Families and Living Arrangements: 2012 (U.S. Department of Commerce Economics and Statistics Administration) reports that the number of “householder with parent” families is 2.4 million—around 2.8% of total families.

Of course, there are other ways that children may support their parents than having them move in with them. Pew Research reports that, while “[m]ost older adults in the U.S. … report that they are living independently,” 28% of Americans say they have provided financial help to their aging parents. Interestingly, Pew reports that: “In the U.S., those with incomes below the national median are considerably more likely than those with higher incomes to say they have done this (36% vs. 21%).”54 Does this reflect more significant retirement “shortfalls” in the lower income group?

And children can also provide, in effect, in-kind help, most obviously and significantly by caring for parents as they become more physically dependent.

The most obvious problem with this Plan B is that a meaningful number of Americans have no children to move in with/help them. In this regard, however, the trend is improving: Pew also reports that childlessness has in fact gone down in recent years, from a high of 20% in women ages 40–44 in 2006 to only 15% in 2015.55

We should not disregard these elements of “retirement security” (these Plans B) in our analysis. For some, they may make the difference between a comfortable and a very uncomfortable old age. And, at the risk of overstating the case, they provide reasons why we do not have to depend on the 401(k) system to solve every retirement security problem. And can allow individuals some latitude in the retirement savings choices they make.

The Worst Case

When Plans A and B fail, some American retirees will, ultimately, have to fall back on the safety net—specifically, Social Security, Medicare, and Medicaid (which may be particularly important for long term care). As we noted in Chapter 15, Social Security replaces a significant percentage of pre-retirement income for the lowest paid Americans—75.6%. And a quarter of older Americans are in families that get 90% of their income from Social Security.

This is not a book about our retirement safety net. It’s about how we can and do use our current system to enable American workers to retire with incomes above safety net minimums.

Our savings system is, however, currently built on top of this safety net. In retirement planning, individuals will typically take into account Social Security and Medicare benefits in determining whether they have enough to retire on. And in that regard they often wonder whether those benefits will in fact “be there” when they retire.

We’re not experts on entitlement policy, but let us consider, briefly, the worst that may happen to Social Security.

For years Social Security ran surpluses that were (theoretically) contributed to a “trust fund.” In real life, Social Security taxes were (and are) counted as revenues in the same way that income taxes were (and are), and this money was simply spent—along with a lot of borrowed money. The “assets” in the “trust fund” are simply IOUs from the federal government that will have to be paid out of other federal revenues, or borrowing.

Thus (in my view), the issue is not that the Social Security trust fund will run out of money in 2031. It’s that the cost of funding Social Security is taking up a bigger and bigger chunk of federal revenues, with less and less left over for whatever government programs might otherwise be undertaken. According to the Congressional Budget Office (CBO): “By 2047, under current law, federal spending for people age 65 or older who receive benefits from Social Security, Medicare, and Medicaid (the federal health care program for people with limited income and resources) would account for about half of all federal noninterest spending, compared with about two-fifths today.”56

The reason that Social Security is in this fix is primarily demographics. As we will discuss in detail in Part III, as a result of declining birth rates and lengthening life expectancies we have a (rapidly) aging population. That has changed the Social Security cost versus revenues equation significantly for the worse.

The most obvious solutions to this fiscal problem are to (1) raise taxes or (2) cut benefits or (3) raise taxes and cut benefits. For current and future retirees, the biggest concern is benefit cuts. There are different proposals about how to do that, including means-testing and tinkering with the inflation-adjustment formula. But the most likely cut is to extend the retirement age, in effect making individuals wait longer to get their benefits.

For individuals who are not able to work longer, this sort of change could (if there are not exceptions available for them) result in a crisis. Most proposals made thus far have tried to address that issue by “grandfathering” workers “at or near” retirement.

In considering possible changes to the Social Security “deal,” it’s instructive to consider the proposals put forward by the Simpson-Bowles Commission in their “Moment of Truth” Report (December 2010). They include:

The message here is pretty clear: think about Social Security as a safety net only, with limited benefits for those who do not have very low incomes. The sorts of changes Simpson-Bowles proposed would reduce Social Security’s role in (for lack of a better word) “middle class” retirement planning. If they are (at some future date) implemented, then, especially for younger workers, anything like a “comfortable” retirement will for the most part have to be financed out of the worker’s own savings. One way to think about the book you are reading is as part of a dialogue about (to quote Simpson-Bowles) “the importance of personal retirement savings.”

For the Most Part, a First World Problem

This is not the place to provide a comprehensive survey of what people do when they have not saved enough to retire comfortably. That would make its own very fascinating book. For purposes of this book, we have taken it as axiomatic that people will generally want to (financially) provide adequately (as they define it) for their retirement, subject to compelling competing preferences.

Our observation would simply be that, for the most part, and with exceptions, we are as a people generally fortunate. We have an economy that can (without any observable stress) employ individuals who want to continue working past age 65 (witness the lower than average over-65 unemployment rate).

We have a safety net (Social Security, Medicare, and Medicaid (which is significant for long-term care costs)) that, while not as robust as that in some European countries, provides meaningful benefits to those who have worked a full career.

People make tradeoffs and make do.