Closing the Deficit: How Much Can Later Retirement Help?

Introduction

Introduction gary burtless and henry aaron Americans past the age of 60 are delaying their withdrawal from the labor force. This trend is relatively recent and only became detectable in the 1990s. It reverses a century-long trend toward earlier retirement that began in the late nineteenth century. Along with gradually increasing life-expectancy, the historical trend toward early retirement meant that, during the first nine decades of the twentieth century, successive generations of workers spent a growing portion of their lives in retirement. Since the introduction of Social Security in the 1930s and Medicare and Medicaid in the 1960s, the government has assumed a growing role in providing income and health insurance to the retired elderly. The trend toward earlier retirement increased the budget burden of supporting the aged for two reasons. It reduced the tax payments of the elderly, because retirement income, including social security, is more lightly taxed than earned income. And it increased current government outlays on the aged, because retirees are more likely to need and qualify for public transfers and health insurance than people who continue to work. The reversal of the trend toward earlier retirement almost certainly lessens the budget burden of supporting the aged, but by how much? This volume summarizes the findings of a project that investigated this question . The researchers did so by answering a related question: How would the budget outlook change if the trend toward later retirement accelerated? How much would government revenues grow and how much would outlays shrink if workers on average retired later? Public and private decision makers have a shared interest in the answer to this question. Although the long-term budget outlook is uncertain, it seems likely the cost of programs for the aged will outpace tax revenues available to pay for them. In view of this budgetary challenge, policymakers and voters should be interested 1 in assessing policies that increase the portion of adult life that people spend in paid employment. The benefits for taxpayers of such an extension should be clear. If Americans spend an increased fraction of their adult lives earning incomes and supporting themselves, they will need less support in the form of retirement pensions and health benefits. The cost of public provision for old-age income security would be reduced. Past low birth rates and rising longevity, which push up the percentage of the population that is older than the traditional retirement age, raise the budgetary consequences of such a shift. The impending retirement of the baby boom generation, which will boost the fraction of retirees in the population, makes it more urgent to understand the potential impacts of a higher average retirement age on the revenues, outlays, and net budget balance of the government. The essays in this volume address four kinds of questions about past and future retirement trends and public policies to influence them. —What kinds of workers have delayed their retirement in the past two decades, and in what way have they extended their work lives? —How would an increase in the average retirement age, absent any change in public policy, affect the federal budget? —Can and should public policy be changed to encourage Americans to retire later? What would such measures look like? Whom would they help, and whom would they hurt? —What companion policies could protect older or impaired workers who find it difficult or impossible to remain employed? The studies in this book address these questions. They were carried out with generous support from the Alfred P. Sloan Foundation’s Working Longer program. The book begins with two chapters by Gary Burtless. The first describes past trends in labor force participation among older workers. In brief, retirement ages fell throughout most of the twentieth century. That trend stopped in the late 1980s and early 1990s. Over the next two decades, labor force participation rates among older workers rose substantially. Several forces contributed to the increase. The relative importance of each of those forces is difficult to gauge. Better educated workers tend to remain economically active until later ages than do lesswell -educated workers; and average education levels of the aged and near-aged increased. In addition, male retirement ages within each education group have also increased. Among women, labor force participation increased among all groups, and this shift reinforced the effect of improved education. The move from defined-benefit pensions, which tend to encourage early retirement, to definedcontribution plans, which are generally neutral in their retirement incentives, also promoted later retirement...