Aging and Retirement: The Elephants in the Room

Posted Wednesday, March 19th, 2014  | Comments (9) rule
There is a retirement crisis in the United States. Or is there?

Philip Moeller

Author, book on Social Security, under contract with Simon & Schuster
Speaker, on retirement and successful aging
Journalist and Editor, American History of Business Journalism
Research Fellow, Sloan Center on Aging & Work, Boston College

Millions and millions and, for emphasis, even more millions of middle-aged Americans are moving closer to retirement these days. We don’t know exactly when all of them will retire or exactly what retirement will look like. Surveys find many people expect to keep working well past age 65. Yet Social Security shows a preponderance of claimants continue to file for retirement at age 62 or 63.

If we don’t know exactly what retirement looks like, we do know the financial condition of our aging nation filled with Baby Boomers—shaky at best. Even with the resounding comeback of the stock market since the Great Recession, and a slow but steady recovery in most housing markets around the country, retirements for many if not most will not be pretty.

Yet, even if this statement is true (and there are good reasons to challenge just about any absolute statement about retirement security), it’s hardly clear that it amounts to a crisis, or what we should do about it that we’re not already trying to do.

Private employers with 401(k)s and 403(b)s have taken a lot of heat in recent years for not doing more to help employees achieve better retirement outcomes. While employers have been struggling themselves to recover from the recession, they nevertheless have stepped up support for their plans (yes, often after pointed prodding), helped by better federal laws and innovative solutions provided by behavioral economists.

Retirement plans generally now offer better investment choices, lower fees, improved consumer disclosures and a range of participation rules that have raised employee contributions and participation. Retirement-plan balances are rising and projected outcomes portray satisfactory retirement solutions for the overwhelming percentage of plan participants.

The lack of tax-advantaged retirement accounts at smaller employers is widely cited as a major problem here. Roughly half of the nation’s private-sector employees do not even participate in a retirement plan and most of them work for smaller employers. President Obama and members of Congress have repeatedly proposed new retirement plans targeted to this population. There is also support for relaxing ostensibly pro-consumer safeguards for investment plans that have had the unintended consequence of making it harder for smaller employers to create and manage such plans.

We can argue about the pace and degree of change here. But it’s not as if anyone is turning a blind eye to the problem. And we should hardly be surprised that reallocating federal budget dollars to help improve retirement outcomes is not likely to happen these days. It is true that government budget deficits are declining. But they are still large, and government costs for helping our aging population—primarily through Social Security, Medicare and Medicaid—are set to soar in future decades.

Academic researchers have long identified Americans’ financial illiteracy as a primary cause of poor retirement planning and outcomes. And they have further urged schools and community colleges to greatly expand financial education courses. This is happening, albeit too slowly. But such efforts are more likely to help turn things around for future generations than for boomers whose financial realities for retirement already are largely determined.

Today’s reality, then, is that we have limited dollars and not much time to improve retirement outcomes, especially for people within 10 years of retirement. To move ahead, we must target our efforts where they will do the most good. To do this, we first have to recognize some unpleasant realities that have long been elephants in the room when it comes to retirement policy discussions.

  • Longevity gains are putting unforeseen pressures on retirement prospects. We are living longer, meaning we need to save more money for longer retirements, and we will have less to spend during retirement. Expecting employers or governments to “fix” this problem is naïve.

  • Social Security is the only source of retirement income for half of all American seniors and even the dominant source for another 25 percent. If you really want to improve retirement prospects for most Americans, you can do so by boosting Social Security payouts. If you don’t want to increase government spending in the process, you will need to boost taxes on the top tier of wage-earners.
  • Expecting any voluntary savings program to make a difference in the retirement prospects of lower-earning Americans is not realistic. They either don’t have or are unlikely to set aside extra funds, even with attractive tax incentives (which, of course, could add to federal deficits).
  • Citing the decline of traditional pensions as the cause of our retirement crisis is a popular theme among 401(k) critics. But it’s not accurate. Even during the prime of traditional pensions, fewer than 30 percent of employees actually qualified for and received payouts. Pensions improved retirement prospects mostly for the same types of employees who are now being helped by 401(k) plans. The difference, of course, is that pensions were funded and invested by employers; they took all the risks. Today, employees take on all the risk.
  • The notion that Social Security simply pays people back for what they put into the system in taxes is false. So is the prevalent attitude toward Social Security that “I paid for it; it’s mine.” The program’s progressive payout rules provide retirement benefits that replace much larger percentages of people’s incomes for people who don’t earn much money. For people who earn only 25 percent of the nation’s average wages, for example, Social Security benefits replace 77 percent of their income. People who earn the top amount of wages subject to payroll taxes qualify for benefits that replace only 28 percent of their incomes.

In reality, Social Security is a massive income redistribution program. You may think this is a good thing or a bad thing, but at least we should recognize the program for what it is. In terms of retirement, Social Security has evolved into the only game in town for most of us.

Among the top 50 percent, there is no retirement crisis for people aged 65 and older in the top quartile of income. They make enough money and also are big beneficiaries of tax breaks provided to holders of 401(k)s and IRAs. The next quartile is the sweet spot for retirement plans, and the evidence is clear that these savers are increasingly on track toward decent retirements.

Comments (9) for "Aging and Retirement: The Elephants in the Room"

Self-employment: The Answer for an Aging Workforce and a Sluggish Economy?

Posted Wednesday, March 5th, 2014  | Comments (4) rule
For some older Americans, the answer is maybe;
for most, the answer is no.
Kevin E. Cahill's photo Michael D. Giandrea's photo Gene J. Kovacs' photo
Kevin E. Cahill, PhD
Research Economist
Sloan Center on Aging & Work
Michael D. Giandrea, PhD
Research Economist
U.S. Bureau of Labor Statistics
Gene J. Kovacs, PhD
Vice President
Analysis Group, Inc.

With diminished prospects for wage-and-salary work in recent years and projections of sluggish growth for at least the near term, as documented in the Congressional Budget Office’s February report on the economy, it’s natural to look for alternative forms of employment as a way for older Americans to cope with the current macroeconomic climate. Self-employment–either incorporated or unincorporated–seems like one potentially fruitful option.

Many older workers already transition into self-employment later in life. Research based on the Health and Retirement Study (HRS)—a large, nationally representative dataset of older Americans—reveals that more than one in ten career wage-and-salary workers transition into self-employment prior to exiting the labor force completely. Further, the number of career wage-and-salary workers transitioning into self-employment later in life is much higher than the number of self-employed workers transitioning into wage-and-salary jobs. It gets better. Career self-employed workers are much more likely than their wage-and-salary counterparts to remain working at later ages—a key objective for many policymakers considering ways to mitigate the financial strains of an aging population.

As a result of these two trends (net positive transitions into self-employment and the longer working lives of the self-employed), the fraction of older workers who are self-employed increases dramatically with age. Among a group of career workers aged 51 to 61 in 1992, for example, the percentage who were self-employed as a fraction of those still working rose monotonically between 1992 to 2010 from roughly 20 percent to 40 percent for men and from roughly 10 percent to 20 percent for women. Moreover, evidence suggests that the Great Recession has not discouraged these transitions into self-employment.

Self-employment and risk

These data suggest that self-employment is already an attractive option for a large segment of the older population. The big question is whether older Americans who are not self-employed should be encouraged to try it.

One reason for self-employment’s appeal in recent years is the outlook for older Americans who are among the long-term unemployed. The length of the average spell of unemployment for Americans who are 55 and older has gone down recently, but remains high, at 46 weeks. In comparison, the average unemployment spell for younger workers is approximately 34 weeks. For these long-term unemployed older Americans, could self-employment be the solution to the lack of opportunities in wage-and-salary employment?

Consider the positives first. Self-employment offers the scheduling flexibility that older Americans rank high on national surveys. A recent AARP study revealed that older Americans value such flexibility even more highly than pension benefits. Indeed, all else equal, self-employed older Americans work fewer hours than wage-and-salary older workers do, presumably by choice.

Older Americans may also be in a better position than younger ones to become self-employed, in part because they are more likely to have the financial resources necessary to overcome a formidable barrier: access to capital. They can overcome this barrier because they’ve had more time to accumulate personal savings and more time to establish good credit. Older workers also have the advantage of decades of work experience: intangible skills and knowledge upon which they can draw when facing the inevitable challenges of self-employment. In fact, research by the Kauffman Foundation finds that the survival rate of new businesses increases with the owner’s age.

While all of these incentives are valid, any evaluation of policies to encourage self-employment must consider the role of self-selection. Transitions into self-employment are not exogenously bestowed upon people; rather, they are the calculated decisions of risk-takers who have concluded that the expected benefits of self-employment outweigh the expected costs. Perhaps more important, people who reach the opposite conclusion—that the expected costs outweigh the expected benefits—choose not to become self-employed. Policymakers should be cognizant of the often unobservable qualities that drive older Americans to make the leap from wage-and-salary employment to self-employment, and of the unobservable qualities that prevent others from taking a chance.

The financial security of older Americans is another concern. According to the Employee Benefit Research Institute’s latest annual Retirement Confidence Survey, the typical older worker has less than $25,000 in nonhousing, nondefined-benefit pension wealth. Does it make sense for these workers to bet what little they’ve saved? Making that bet even more daunting is the uncertain payoff of employer-provided pensions. A 30-year transformation in the world of employer—provided pensions is now more or less complete, with defined-contribution plans such as 401(k)s dominating defined-benefit plans in the private sector. This shift leaves older Americans today much more exposed to market forces than prior cohorts were. The long-term outlook for Social Security currently shows a sizable deficit as well, leaving little room for some kind of program expansion that might cover retirement income shortfalls.

Back to our initial question: Is self-employment the answer for an aging workforce and a sluggish economy? Self-employment may be an attractive and viable option for some older workers, and the jobs, goods, and services these people create will help the economy. For most people, however, the benefits of risking their security don’t outweigh the potential losses, especially given that time is short for many older workers to acquire the assets they’ll need for their retirement, let alone to recover from a failed business venture.


Kevin Cahill will present a more in-depth view of self-employment transitions among older Americans at the Eastern Economics Association meetings in Boston on March 8th. The views expressed in this article are those of the authors and do not necessarily reflect the views of the U.S. Bureau of Labor Statistics, Analysis Group, or ECONorthwest.

Comments (4) for "Self-employment: The Answer for an Aging Workforce and a Sluggish Economy?"

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