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Thoughts on Working Longer and Retirement john b. shoven Let me start by questioning whether people really are working to older ages today than they were twenty years ago or that properly computed agespecific labor force participation rates have gone up over the same period. To return to an old theme of mine,1 it depends on how you measure age. The remaining life expectancy of the average retiree has not gone down over the past twenty years. The mortality of people at retirement has not gone up. The average duration of retirement has increased, not fallen. So, in a very real sense people are not working to “older ages.” I recognize when people say that people are working to older ages, they mean that the average retiree is older using the conventional years-since-birth measure. But while retirees today are further from birth than they were twenty years ago, they are also further from death. If you are further from death, you could legitimately be considered to be younger. This perspective calls for a reexamination of how we measure age. It also calls into question the premise that people are working to older ages. The issue of adjusting policies for longer lifetimes is one of the biggest tasks for public policy over the next twenty to thirty years. Let us review a couple facts about demographics and real interest rates. A recent study shows that the average retirement age for men has risen to 64 and the average retirement age for women has risen to 62.2 What is the remaining life expectancy of a 64-year-old man married to a 62-year-old woman? Rather than report their individual life expectancies, I will report the expected time until both spouses have died: that is, how long a second -to-die annuity would have to make payments. Based on the Social Security 121 5 1. Shoven (2004, 2010). 2. Munnell (2011). cohort life tables with intermediate assumptions from the Social Security Administration ’s 2012 Trustees Report,3 the answer is 27.38 years for the average couple. If they were at the 75th percentile of the time until the second death, then the second death would occur after 31.5 years; at the 90th percentile, after 35 years. Insurance companies are well aware that life annuity purchasers have better-thanaverage life expectancy. They would price a joint life annuity with the expectation of at least 30 years of payouts. What were the corresponding numbers in 1961, the first year that workers were given a choice as to when to commence Social Security? At that time, the average retirement age for men was 66, not 64. Although the retirement age has crept up lately, it still is two years below where it was fifty years ago. A 66- and 64year -old couple (preserving the assumed two-year age difference) retiring in 1961 had an expected time to second death of 21.05 years, 6.33 years less than now. The remaining life expectancy of the average retiring couple has increased by 30 percent since 1961. My guess is that people underestimate how long their retirement resources need to last and that many of us underestimate how much longer retirements have gotten. Let’s assume that the couple wants a retirement income of 75 percent of their preretirement income. Abstracting from Social Security (that is, assuming that they were going to have to come up with all of the funds privately), how much wealth would they need to have accumulated? Today, a reasonable real (safe) discount rate is zero (using Treasury Inflation-Protected Securities [TIPS] rates for reference), so to keep their real income constant, they need 75 percent of 27.38 years, or 20.53 times their annual preretirement earnings. In 1961 it would have been reasonable to use the 2.9 percent real interest rate assumed by the Social Security Trustees, so the wealth multiple would have been 21.05 times 75 percent times an annuity factor reflecting the real interest earnings on the unspent balance during the annuity period. Doing the simple mathematics gives a required balance that is 11.69 times preretirement income. Rounding off, the retirement wealth needed today is 20.5 times annual earnings. In 1961 it was 11.7 times earnings. Today’s figure is 75.6 percent higher! About half of the higher cost of providing for retirement is due to longer retirements and half is due to lower interest rates...

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