15 May 2016

Why More Americans Over 65 Are Still Working

Nearly 20% of Americans over 65 are working, which is the highest it has been since the early 1960s.

Meanwhile, job participation rate is at its lowest since the early 1970s.

This seems contradictory on the surface. As more people work longer, you would expect labor participation rate to rise.

What if these two facts are related by a common cause?

The 1960s and 1970s saw the beginning of Johnson's Great Society, the introduction of medicare and the strengthening of social security that made retirement easier and more certain for more people. Before FDR introduced social security, the population of retired people was low in part because life expectancy was lower and in part because many people could not afford to stop working. Starting in the late 1960s, people could afford to retire even if they were working class. The percentage of people over 65 who were still working steadily declined from that time. Until, that is, about the 1980s when it leveled off and then in the early 2000s when it began to rise again.

(As a separate factor, it's worth noting that participation rates rose in the 1960s as more women entered the workforce. Their participation rate doubled from 1950 to 2000.)

In the 1960s, two things happened that made retirement possible and smoothed out some of the variation in retirement income. Social security and medicare, obviously, helped in this regard. Additionally, more Americans were retiring from corporations that offered pension plans. So many Americans had access to two retirement streams - social security and pension payments - that saved them from poverty but could not make them rich.

In the 1980s, the model shifted from pensions to 401(k) accounts. Given a 401(k) can be managed by an individual and given that returns can vary so much from one investor to another, retirees were suddenly dependent on a sum of money that could make them rich or leave them poor. If your average return is 2%, you might struggle to save enough to retire. If your average annual return is 20%, you might be rich. Pensions didn't make anyone rich but lowered the chance someone might be poor; by contrast, 401(k)s could make you rich or leave you poor. 

And then of course in the 2000s, investments took a huge hit. Not just stocks but even homes which some people used as retirement backup. (It's not unusual for people to own a home where jobs are and then sell that at retirement to move to where jobs are not and where home prices are lower, making equity in a home another source of retirement money.)

If so, reliance on 401(k)s would lead to two things: more people retiring early, which would lower labor participation rates, and more people having to work past the age of 65, which would raise the percentage of folks over 65. And of course both of these things have happened.

[Before someone points out that the Great Recession and a slow recovery from it have greatly contributed to the lower labor participation rate, let me say that they're right. The Great Recession did knock labor participation rates for a loop from which they haven't fully recovered. But studies suggest that the Great Recession doesn't account for the entirety of the drop. Between a third to a half of the drop seems to be the result of something else going on, something that could be attributed to more people retiring sooner.]

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