Planning to retire?
Not long ago, many of us would have automatically answered “yes” to that question, and with good reason. In the 20th century, retirement became the norm–something most people did. Thanks to generous programs like Social Security (enacted in 1935) and Medicare (1965), millions of people who once might have worked till they dropped began to prepare for a time when they could give it a rest in their old age. Cue the bingo halls, gated Floridian communities, and restaurants opening at 4.30 p.m. Retirement became routine, something we could expect as a matter of right.
These days, many people aren’t so lucky. Lots of companies have been phasing out pension plans. Social Security and Medicare are proving extremely expensive to maintain as people live longer and health costs rise. And retirement accounts, like 401Ks, which are the supposed alternative, are only helping some people: 45% of working-age households don’t have them. Across the U.S., near-retirement households have an average of $12,000 in retirement savings, while working-age households have just $3,000, according to the National Institute on Retirement Security. Which isn’t much for 20 years of vacations with the grandkids, even with Social Security thrown in.
Increasing numbers of people aren’t sure they’ll be able to retire. Last year, 43% of Americans were “not too” or “not at all” confident of having enough money, according to the Employee Benefit Research Institute, up from 27% in 1995. And the young are particularly skeptical. Only one in five millennials think they’ll be able to claim Social Security when the time comes, a Gallup poll found. One quarter think they’ll have to work in their senior years–and it’s very likely that they’re right.
If traditional retirement looks unattainable today, it’s likely to become more unattainable in the future. At the moment, Social Security and Medicare pay out far more than its recipients put in, and, because of the way these programs are structured, Generations X, Y, and Z are likely to be left carrying the can as the national ratio of retirees to workers increases. Social Security is forecast to start running deficits as early as 2022 (see below).
The Urban Institute estimates that a couple with two average-wage earners would have paid $722,000 into Social Security and Medicare by the time they reached the age of 65 in 2010. In return, they can expect to receive $966,000 in benefits, or about a third more. A family with just one earner on average wages will do better. It would have paid $361,000 by the time that worker turned 65 in 2010, and could now expect $854,000–more than double the amount. (Benefits are calculated based on an average of 35 years of your highest earnings).
Who is going to pay to keep that money flowing at that rate? Taxpayers, probably. Social Security and Medicare work as trust funds that currently run surpluses. In 2010, the total surplus stood at $2.6 trillion. Which sounds like a lot, except that the federal government has been using the money in those funds for general spending, leaving I.O.U.s (in the form of irrevocable bonds) in its place. In 2022, to pay benefits, the government will have to begin using this surplus, because current payroll taxes will no longer be sufficient to keep paying retirees’ checks. Over time, as the surplus disappears, if we don’t do anything, it will mean a combination of higher taxes and less spending on other things, like schools and roads.
This arrangement has allowed us to pay lower taxes today, but it’s hugely unfair on young people–a form of “generational theft,” you might say. Though it sounds a little petulant to say it, we’re giving older people money to retire now at the expense of everyone else’s future going forward.
Think that’s hyperbole? Look at how the balance of the federal budget has changed since the 1960s. In 1962, not including interest payments, the federal government paid out 14 cents of every dollar it spends on “entitlements”–that is, Social Security, and so on. By 2030, entitlements could account for as much as 61 cents, according to a report from Third Way, a bipartisan think-tank.
At the same time, spending on “investments”–including infrastructure, education and research–has fallen steadily as a proportion. In the 1960s, we paid out three times more to investments as entitlements. But by 2022, we’ll need to spend six times as much for entitlements as investments, assuming normal growth in the overall budget. “This trend will only accelerate as the [Baby] Boomers retire, forcing us to spend less and less to educate kids, build roads, and cure disease,” the report says. “This fiscal path translates to a less-skilled workforce, lower rates of job creation, and an infrastructure unfit for a 21st-Century economy.”
There are plenty of ways we might reform entitlements, including raising the retirement age (it’s currently 65 for full benefits, but will rise to 67 starting in 2017), means-testing benefits (so people on higher incomes get proportionately less), and raising the threshold on income subject to Social Security taxes (so people earning more would pay more tax). Moreover, we could rein in health care spending, for instance by moving away from a fee-for-service model (which encourages waste) to a system where we pay based on the quality of people’s health. But these tweaks may only get us so far. Ultimately, we may need to rethink the whole concept of retirement, particularly the idea of non-working for long periods.
Nobody who thinks about the future of old age thinks it will be anything like what it is now. Many of us will likely have to work longer into our lives. “Whether they recognize it or not, people in their twenties and thirties now are seeing the social contract rewritten before their eyes,” says Joseph Coughlin, director of the AgeLab at M.I.T. “We’re living longer, but retirement is going to be shorter than we’ve ever seen before.”
“I think traditional retirement is ready to be retired,” says Paul Irving, chairman of the Center for the Future of Aging, at the Milken Institute.
But working longer may not be a wholly bad thing. There’s plenty of evidence that work, properly structured, is good for us. “Ongoing work is good for your health and it’s good for your wealth,” Irving adds. “It’s a good decision, and a decision people should be planning for now.”
So-called “bridge” jobs–part-time roles between full employment and full retirement–have been shown to reduce disease and improve mental health. At the same time, research shows that abrupt retirement can lead to less healthful consequences than we might imagine. One big long-range study, looking at retirees six years after they stopped working, found an average “5-16% increase in difficulties associated with mobility and daily activities, a 5-6% increase in illness conditions, and 6-9% decline in mental health.” Another study from Austria concluded that early retirement shortened lives: Each additional year away from work caused premature death risk to rise by 2.4%, or 1.8 months on average.
The sometimes negative aspects of retirement were brought home to me recently as I talked with an older friend. In her work, she’d encountered many retirees who’d gone into decline after leaving the workplace. She put it down to a certain impossible fantasy about retirement as a time to do everything that hadn’t been achieved up to now; that people have more time on their hands to consider long-running problems; and an under-appreciation of the positive aspects of work. In general, people seemed more prepared for retirement financially than they were psychologically.
These points are echoed by the likes of Robert Delamontagne, author of the Retiring Mind series. Successful people, in particular, seem to have a hard time adjusting to retirement, because non-working doesn’t provide the same opportunities for assertive behavior and mental intensity that the workplace does.
There are financial and emotional reasons for working longer, and, in fact, that’s something people are doing already. In 2013, 18.6% of those 65 and over were working or looking for work, according to Labor Department, up from 10.4% in 1985. Four-fifths of Baby Boomers expect to do some work during retirement, according to the American Association of Retired Persons. “The number one retirement strategy for people entering retirement in the next five to ten years is to work longer,” says Coughlin. The new retirement, in other words, is not to retire at all, or at least not fully.
Given the pace of technological change, we may need to prepare for three or four careers in our lifetimes, including, perhaps, a new career in our senior years. That means being prepared to go back to school at some point to retrain, and maintaining our health and wellness, so that we’re able to work. “Your individual competitive advantage is going to be based on your ability to work longer,” Coughlin says. “The cost of chronic disease that we talk about in terms of lost productivity and the cost to society are about to become profoundly personal.”
It also means that we need to redesign workplaces so seniors are more comfortable, ergonomically-speaking; change laws around benefits so that working part-time isn’t frowned upon; and rethink public education subsidies so they’re not just for the young.
Most importantly, says Irving, we need to rethink our attitudes to the elderly as people who are necessarily declining. There’s plenty of evidence of the value of +65s in the workplace, for instance in the complementarity of “inter-generational teams” where younger and older people work together. It’s true that older people are not as physically capable, generally. But they’re no less productive when it comes to knowledge and service roles, according to Laura Carstensen, director of Stanford University’s Center on Longevity. It’s just that we’ve got used to the idea that older people aren’t as able or enthusiastic as younger people.
The big question is probably not whether older people will have to work, but whether there will be enough work for older people to do. Advances in artificial intelligence and robots make it likely that there will be fewer positions for “working age” people, let alone seniors. And, it’s worth remembering that one of the major motivations for retirement, which was first invented in Germany in the late-19th century, was not so much to look after older people as to get rid of them, so that young people could take their place.
Irving says the idea of old people stealing young people’s work is wrong, though. Waves of previously discriminated groups–from African-Americans to women–have been brought into the economy at no loss to that economy, he points out. “Economies are elastic and by letting everyone participate, we’re likely to have a better economy that compounds opportunity.”
One area of the economy where there’s sure to be plenty of work is in providing products and services to older people. By 2050, if the projections are right, a fifth of the world will be 60-plus. There will be 10 times as many “old people” as in 1950, and many more really old people: it’s estimated that half of all people born today will live beyond 100. What’s more, aging will be a global phenomenon. Europe and Japan are set to have more plus-60 folk than America. “There is no opportunity in the world as exciting,” Irving says.
Persuading people in their 20s and 30s that retirement is dead may be easier than people who’ve invested longer in that dream. “The topic is both the third rail of politics and the third rail of dinners between friends,” says Coughlin. “The discussion of the changing social contract and the benefits you are due is probably going to be one of the major debating topics of the industrialized world. But it has to start today. It’s not equitable to turn off benefits immediately. Yet we can change the contract gradually while putting into place policies and services that enable people to work longer. It may not be as palatable as people like, but it is feasible.”