When Should We Retire? Two Views

Early Retirement as a Fix for Unemployment

By James K. Galbraith

Debate over the future of Social Security and Medicare usually takes place in a timeless cocoon, insulated from other programs and economic forces, an economic neverland in which the Great Crisis either did not happen or has safely passed without lasting effect. This is explicit in the forecasts of the Congressional Budget Office, which habitually foresee full employment returning within five years, whatever the starting point. The CBO approach is like that of a doctor with only one patient: On observing that the patient has always recovered in the past, the doctor infers that the patient must, therefore, be immortal.

In the real world, we have suffered an economic calamity, and whether we recover from it fully or at all depends on the steps we take -- or fail to take -- right now. Social Security and Medicare can be part of that solution -- but not by cutting them to reduce the deficit. Rather, we should expand their eligibility to help those who suffered most from the calamity -- while also improving opportunities for other people looking for jobs.

Many jobs created in homebuilding, retail trade, finance, and other sectors servicing the great American debt-fueled household-consumption boom of the late 20th and early 21st centuries have been lost and will not return. Many jobs already lost in goods production and information processing have emigrated and will not return. There is no good reason to assume that in these sectors, the employment patterns of the future will resemble those of the recent past.

Therefore, when planning for future employment, we should ask: What is it, exactly, that we most need for people to do?

Parts of the answer are obvious. We face the challenges of energy security and climate change. Some of the work required involves scientific, engineering, design, and planning talent. Much does not. Large parts of the conservation and mitigation task are matters of weatherizing buildings, tuning engines, reforesting land, constructing seawalls and levees, and similar semiskilled (though often technically demanding) tasks. Much will be in construction and reconstruction of infrastructure, engineered for energy saving and reducing greenhouse-gas emissions. All of this could provide jobs if the right institutions for planning, funding, and execution can be built.

Another area of clear need relates to our aging population. As people get older, they need care, and the proportion of the working population employed in providing it must rise. Further, training is necessary, and standards must be imposed, maintained, and enforced. This is the opportunity to create a large, labor-intensive, mainly not-for-profit sector, that would employ workers with relatively nontechnical backgrounds and help the elderly live in independence and comfort for as long as possible. Again, realizing this goal will require new institutions or stronger versions of institutions that already exist.

However, when these and other good ideas have been used up, a basic reality will remain: The recession cost us 8 million jobs. Add to that the 3.6 million that should have been created for new entrants into the labor force but were not, and you have a jobs deficit of 11 million and rising. Many of those who lost their jobs were older workers; they are physically past their peak and accustomed by habit and training to their occupations. They like being near home and are not likely to move. For many of them, another decent job is never going to appear, as employers prefer younger, cheaper applicants. Subjecting these older workers to the requirement that they search for jobs that don't exist in order to qualify for unemployment insurance is a debilitating waste of their time and effort.

Further, many older people are still working, despite the fact that their work is physically uncomfortable or even painful. They work because they need the income. They work because they want to hold out to get their full Social Security benefit, which may be their only source of retirement income, and because they need health insurance before they reach the Medicare eligibility age. Meanwhile, younger workers, with fresh skills and ambitions, wait for positions to open. And they wait. It's a bad bargain for both groups.

The obvious solution to this problem is retirement.

Social Security allows workers to retire at age 62, with benefits that are about 25 percent lower than at the current full-benefit age of 66. Early retirement has a bad reputation now. As the baby boomers grow old, the media is full of worries about rising dependency ratios (the number of retirees compared to the number of people in the labor force), and the supposed financial difficulties of Social Security. It seems natural to ask the boomers to work longer. At the same time, further increases in the retirement age are a cynical way to cut benefits for those who for good reasons can't work past the early-retirement eligibility age of 62 -- because the work is physically too hard or in many cases, because they are already unemployed at that age. In addition, some argue that older workers are a resource and should not be put out to pasture too soon.

Thinking of this kind would have its place in a full-employment world -- but that world doesn't exist. While it's all very well to call for more stimulus programs in the short run, the reality is that stimulus proposals, too, have a bad reputation and some obvious limits. They provide jobs mainly in construction -- a young person's game -- and in state and local public services, which serve mainly to keep civil servants employed who would otherwise have been laid off due to state and local budget cuts. No stimulus package -- not even a large one -- would improve the bleak outlook and job-search disadvantages facing older workers. What they need is a game-changing transformation of their life prospects. What the country needs is a massive shift in the labor market, to better match the workforce that we actually have to the diminished pool of jobs.

This is what a temporary change in the rules governing early retirement would provide.

When universities wish to get rid of a declining cohort of elderly professors, they offer an incentive in the form of extra contributions to the pension plan. The same principle can be applied to Social Security. Let Congress enact a three-year window during which full (or nearly full) Social Security benefits could be obtained by anyone retiring at the age of 62. Let Medicare be fully available to those who take this option. The ages, dates, and precise structure of the incentive can be tinkered with as conditions and response rates dictate; for now, it's the principle that matters.

The principle is: Those for whom earlier retirement is attractive, but not quite financially viable, should get a strong incentive to take it now. The decision to do so would be voluntary; no one who wanted to work would be forced out. Employers could, of course, offer counterincentives to workers they'd like to keep on. The policy would invite departures from the labor force. Those who wanted out could get out. It would thus open positions for those workers -- mostly younger -- who have the greatest need for jobs and who have suffered the gravest harm, early in their work lives, from being unable to find steady work. The unemployment rate would fall.

The Social Security component of this proposal would not be permanent. It would be a response to the present facts. The reality is that we are never going to create all the jobs needed for all of the people the crisis has hit. Our task right now is to balance the need for work with the actual supply of jobs to reduce futility and frustration at both ends of working life. It's just plain common sense to pull those for whom work is least rewarding into a decent and comfortable retirement while opening up the jobs we have for people who want and need them more.

Once workers are retired and receiving steady pensions, they will become sources of effective demand and not weak petitioners for jobs. As a result, the private sector will grow around the provision of food, shelter, care, and services to this population. Thus, a dual effect helps to cut joblessness. Wage rates would also rise -- a third benefit, as workers become a bit scarce. And older people, of course, need not remain idle. Freed from wage toil, they can devote themselves to whatever pursuit they choose, including participation in civic and cultural life.

Would this proposal cost money? There would be some offsets, from higher payroll taxes on higher wages, from reduced unemployment-insurance payments, and from reduced (private sector) medical bills. In general, though, of course it would cost money. (The exact amount would depend on how many took up the offer -- something we can't easily predict.) There is no cost-free solution to our jobs crisis. It would also make us a happier people, which is something worth spending money on. Indeed, I can think of no other proposal that might so effectively deal with our present miseries as quickly and fully as this one.

The Progressive Case Against Subsidizing Middle-Age Retirement

By Eugene Steuerle

The idea of changing the retirement age, or the age of eligibility for Social Security benefits, has long been part of a narrow debate about how to ensure the long-term fiscal sustainability of that program. But we should really confront the retirement age as part of the much broader debate about societal progressivity: Who in our society has the ability to give more, who needs more support, and when do they need it?

The income tax, for example, is progressive in that households with higher incomes are expected to contribute a higher share of it, while lower-income households pay little or no tax. In the case of the retirement age, we should be asking whether we really intended to create what Social Security has become -- increasingly a retirement system for people in middle age, most of whom report good or excellent health. For over half of beneficiaries retiring in their early 60s today, the result is that one member of a couple with average life expectancy spends well more than a quarter century retired. We need to ask whether such a system leaves Americans adequately prepared for old age and, more broadly, allows society to take advantage of older citizens' tremendous potential. That is, does the typical 62-year-old have more ability to give and less need for support than the typical 90-year-old?

It is true that many people in late middle age need help, for reasons of health or the economy. But let's be honest: Most of the benefits from expanding years of retirement support have gone to relatively healthy middle-income and affluent people, who still have much to contribute. It's not just that we and everyone else get these extra years of benefits but that those of us with above-average income get higher levels of benefits, often twice as much or more than those with lower lifetime incomes.


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Think of it this way: Social Security has expanded years of support universally, resulting in both lower revenues and a lost opportunity to target resources progressively to the disabled, those with low- and moderate-lifetime incomes, and older individuals with greater health needs and fewer capabilities to care for themselves. Such a program, whether chosen or arising by accident, is akin to an across-the-board cut in tax rates that seems fair on the surface but happens to give thousands of dollars in cuts to higher-income taxpayers as a way of giving much less to middle- and low-income taxpayers.

***

Long-term unemployment and disability are real issues, but they don't really depend on whether one is 62 or 65. Many workers in their 50s and younger also find themselves unable to handle the physical demands of their jobs or adjust to the fact that the job in which they've invested no longer exists anywhere, and no other position currently matches their skills. Nor, despite claims to the contrary, do more years in retirement disproportionately benefit low-income minorities. Yes, some have lower life expectancies, but many of those people die before age 62 or receive disability payments that don't change with the retirement age. If we really wanted to help disadvantaged minorities and other workers with lower lifetime earnings, we could use the money more progressively by targeting benefits directly to them, through devices like minimum benefits and removal of the discrimination against parents -- minority women particularly -- who were not married and therefore get nothing out of the current spousal and survivor benefits, although they pay for them.

Unfortunately, in negotiations with the several commissions and task forces on the budget deficit in 2010, many liberals focused so intently on protecting the current benefit system that they overlooked real opportunities to improve the equity and progressivity of our retirement system. The consequence is to endanger a once-in-a-generation chance to improve benefits and security for those in old age, including reductions in poverty and near poverty among the elderly.

***

The question we should be asking is a simple one: For how many years should people who are not disabled receive benefits to support their retirement?

A single person retiring at the earliest retirement age (65) in 1940 was likely to receive close to 14 years of benefits. By 1975, this person could retire at 62 and would likely receive benefits for 19 years, and today that number has risen to almost 22 years. When it comes to couples retiring at the earliest retirement age, by 2030, at least one partner is expected to receive benefits for nearly 30 years.

Is the decision to provide benefits for an ever increasing number of years one that we, as a society, have made thoughtfully? Is it one that we would have made independent of other societal needs, such as children's programs?

Put another way, if you define old age by, say, the last 15, 18, or even 20 years of life, then Social Security has become, almost by definition, a middle-age retirement system.

Arguments about the retirement age often center on a chronological age like 65, the normal (and early) retirement age when Social Security was first created in 1935. However, the number of years spent in this undifferentiated period known as retirement is all the more dramatic when we look to both actual retirement ages and life expectancy. Americans on average retired at age 68 in both 1940 and 1950. If they were to retire for the same number of years on average today as they did in 1940, they would be retiring at age 75. In 2070, they'd quit working at about age 80. Instead, they retire on average at about age 64.

At the same time that people are retiring earlier and living longer, Americans have been having fewer children. Unlike increases in life expectancy, which doesn't really increase the proportion of the population in the last years of life, fewer births do create fewer younger people (say, in the first three-quarters of their lives) per older person (say, in the last quarter of her life).

These demographic effects -- longer lives, more years of support, and lower birth rates -- can be combined. Rather than four workers per Social Security beneficiary in 1965, or the current ratio of 3-to-1, we are projected to move to 2.1 workers for every Social Security recipient by 2035. Social Security costs, as a share of gross domestic product, in 2030 will be about twice as high as they were in 1970, mainly because of these demographic effects.

These demographic pressures stretch well beyond Social Security. But so would the benefits of encouraging people to spend fewer years in retirement and more time in the labor force. To the extent we can improve employment rates, we can also increase national income and personal income and in turn, raise income-tax revenues and therefore the level of benefits that government can provide to the truly needy.

Within the Social Security system, reducing the incentives for early retirement would boost payroll-tax revenues. This could allow the system either to provide a higher level of benefits for all or to concentrate benefits progressively on those who are older and who, in our current middle-age retirement system, receive increasingly smaller shares of total benefits over time. Less than 35 percent of benefits to men go to those expected to live 10 or fewer years; in 1968 these older recipients received more than half of all benefits.

Here's one way this shift toward a more progressive system could work: Suppose reform gradually increases the earliest retirement age, which today is 62. For an average couple retiring at that age, at least one of the two (more often the woman) is likely to make it to about age 90, and that life expectancy is rising.

Under current practices, Social Security balances would change little because that loss of any one year of benefits for some workers is offset by higher benefits they receive later. If people would work one year longer, however, personal incomes would rise by about 8 percent for every year of life thereafter. And as people earn more and delay drawing benefits, they receive higher annual Social Security benefits, draw down their private retirement balances for fewer years, and save longer. The individual or family is likely to be far better off and so, too, is the government -- but mostly through higher income-tax revenues. In fact, at any tax rate, the additional revenues to Social Security would support higher average lifetime Social Security benefits as well.

***

The phenomenon of continually expanded years of retirement, however, is not just a question for Social Security or government policy more generally. It is a question about how we decide to live our lives and best use our nation's pool of human capital in the 21st century. In the next few decades, older workers will be seen as women were in the last half of the 20th century: the largest pool of underutilized talent in the economy. If we modernize the signals and symbols around the idea of when old age begins -- not just in Social Security but in the private sector as well -- labor demand is likely to shift toward this pool of talent.

This argument is supported by evidence from history. Over the last half of the 20th century, the entry of women and baby boomers into the workforce made it easy to meet labor demand and allow other workers to retire for ever more years. The employment rate of adults, measured as a percentage of all adults, has increased in almost every non-recession year. That suggests that it's a mistake to project the future work of those aged 62 to 68 by their recent employment rates, just as it was wrong to project the labor supply of women in 2000 by what they were doing in 1950. And increasing employment for older Americans need not come at the expense of younger workers, because the income older workers earn translates to more demand and more jobs for all. Put another way, by inefficiently pushing people into retirement, we're reducing their output and personal income in ways that reverberate throughout the economy in the same way as an increase in unemployment does.

We are at a time when we need to look at all the elements of our nation's social contract -- those we created deliberately and those that arose by accident -- and question whether they are achieving the goals of social justice and progressivity as well as making the best use of our most valuable resource -- our people. The unintended transformation of Social Security into a middle-age retirement system has proved to be a poor way of promoting progressivity and dealing with larger macroeconomic questions, and a gradual shift in the other direction would have countless benefits for older Americans, those with greater needs among old and young alike, and the economy as a whole.

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