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interactive.wsj.com
September 6, 1999
A Big New Wrinkle
Millions of Boomers won't retire, and that will have a huge
impact on the economy and the markets
By Gene Epstein
The Doomsday Scenario goes like this: By the year 2020, the nation's Baby
Boomers will range in age from 56 to 74, and the Great Demographic Time
Bomb will be ready to explode. Barring medical breakthroughs, more than
seven million of this cohort will have departed the economic stage altogether,
but the nearly 69 million who remain will cause no end of trouble. In the
attempt to finance their early retirement, the Boomers will cause a crash in
asset prices, as they dump stocks and bonds on markets too thin to absorb
the flood of selling. At the same time, with more than half of them having
reached the age of eligibility, the Boomers will start straining Social Security
and Medicare to the breaking point.
This grim scenario is standard fare among many seers who've extrapolated the
relevant numbers. But there's a wild card: The Boomers may play a joke on
the pundits by refusing to retire when they're expected to; indeed, some may
never stop working.
Says Peter Francese, former president of American Demographics magazine:
"The vast majority of Boomers delayed work, delayed marriage, delayed
childbirth, and delayed growing up. They're now spending a fortune on
delaying the onset of old age. They've always done everything later, and you
can bet they'll delay retirement."
In fact, the demographer predicts, the number of working Boomers will
achieve such critical mass that age discrimination will go out of style. That old
refrain from the 'Sixties, "Don't trust anyone over 30," might be echoed in the
2020s by "Don't trust anyone under 60."
Many Boomers undoubtedly will stay on the payroll simply because they like
to work, but many more will have an additional reason to be gainfully
employed: They'll find they can't afford to retire.
Wall Street has long been warning aging Boomers that it's past time to
augment their portfolios with large infusions of cash, and the advice is quite
appropriate, even if the motives behind it are purely mercenary.
In any case, future retirees eventually will have to face the financial realities
and, for many, this will mean staying in the work force. And this should make
the demographic time bomb a lot less destructive.
Quantifying the potential impact is difficult because no one really knows how
many people will defer or forgo retirement or how many will work full-time or
"semi-retire" by working part-time. But let's say the Boomers are mostly
working in 2020, instead of mostly not working, as is currently anticipated. A
huge tax windfall would result, and assuming the levy on payrolls follows
current norms, much of the money would flow into the coffers of Social
Security and Medicare.
Based on conservative estimates for the number of people drawing
paychecks, and for what they might earn, a back-of-the-envelope calculation
shows that the Social Security Trust Fund might be about $1 trillion richer in
2030, the year the system is currently projected to first be unable to meet its
obligations. However, even a trillion bucks might buy only two years'
postponement of the day of reckoning.
But there could be better news: If America's seniors become infused with a
new work ethos, it might become politically feasible to push through some of
the ideas for saving Social Security that have been proposed by Blackstone
Group Chairman Peter G. Peterson, among others. All of the reformers'
proposals involve some sacrifice (see Peterson's recent book, Gray Dawn),
and sacrifice -- which would almost surely mean getting less from the Social
Security and Medicare systems -- might be more acceptable to people who
are bringing in a paycheck than to those on fixed incomes.
A rising stock market might also help. If they delay retirement, the Boomers
might also delay jettisoning their financial assets, or maybe opt not to sell at
all. The IRS already offers a huge incentive to senior citizens to avoid realizing
a capital gain (see Death and Taxes). And if they're able to buy more time to
add to their wealth, the Boomers will be better-positioned to live off the
income from bonds and dividend-paying stocks without eating into principal.
So the dreaded selling wave might never happen, and Americans' equity
holdings might even increase. In fact, the markets could remain healthy for
years, in part because the combined output of millions of experienced
workers could keep fueling economic growth.
Of course, predicting long-term
trends is hazardous. But if not
retiring means putting in at least
some part-time work, then
more than two-thirds of
America's Boomers already are
planning not to retire, according
to two recent studies.
The first was conducted for the
American Association of
Retired Persons by New
York-based Roper Starch.
Only 16% of the 2,000
respondents in Baby Boomer age brackets said they wouldn't work at all in
their retirement years, while 4% said they weren't sure. Of the 80% who did
plan to remain employed, about one-third said the main reason would be
financial, while the other two-thirds asserted that they'll labor for the love of it.
About three-fourths plan to work part-time, while the remainder expect either
to start up their own business or to pursue a new full-time career.
While the 1999 Retirement Confidence Survey, conducted by the
Washington-based Employee Benefits Research Institute, doesn't report
numbers quite this high, it did note that 68% of respondents expect to draw a
paycheck in retirement, up from 61% in 1998. Observes Roper Starch vice
president Holly Heline: "Many Boomers seem to be redefining 'retirement' to
mean 'work.' "
Some who expect to work won't, because of poor health or because they
become "downsized" (a trend unlikely to abate). And because older
employees often are finicky about the way they're treated, some who suffer a
job reversal may choose to drop out of the labor force altogether, rather than
suffer a loss of status in another kind of job.
But as Heline points out, some Boomers aren't financially prepared for
retirement and don't expect ever to be. Therefore, some of the people who
told Roper Starch they plan to retire will end up working, and many who said
they'll work only part-time probably will put in a full week, because they'll
need the cash.
In addition, a report this year from the Employee Benefits Research Institute
concluded that "many of the workers who say they are confident about having
enough money for retirement appear to be falsely confident." That's because
the sums respondents have set aside for retirement are "generally
unimpressive." Among the 49% of workers who've done the "needs
calculation," the survey finds that the median amount comes to $66,532.
Among the 51% that haven't done this calculation, the median nest egg equals
a paltry $14,054. Over 1,000 people 25 or older were interviewed for the
survey; about one quarter of the respondents were retirees.
While many Boomers are falsely confident about their ability to afford
retirement, they tend to lack faith that the Social Security System will be able
to make good on every dollar promised. Roper Starch reports that only a little
over half of this cohort think the nation will meet its obligations to future
retirees, compared with two-thirds among older generations.
To some extent, the trend toward delaying retirement is already evident.
Despite a recent cover story in Smart Money (a magazine which, like
Barron's, is published by Dow Jones & Co.) that calls retiring 10 years early
"America's newest obsession," the evidence says otherwise: Labor force
participation rates among older people already have halted their long-term
decline.
Cover Story, Part 2
The new reality was brought into focus by the findings of a survey released
last week by Civic Ventures, a nonprofit California group.
The organization, which attempts to foster greater contributions to society by
older Americans, polled 803 men and women in the 50-75 age group and
found that 40% already are either working for pay in retirement or plan to do
so when they do retire.
Civic Ventures' president, Marc Freedman, was quoted in a New York
Times article as saying: "The golden years are dead. These are people who
are demanding a more vital and engaged role in American life."
And that demand will only grow in the future.
As these charts show, labor force participation rates among older men have halted
their long-term decline, and for most older women, they've recently been on the
increase. The charts also show long-term projections which assume that by the
year 2020, participation rates for men will have climbed back to 1964 levels, and
that for women, rates will equal 1999 rates for men. These projections are actually
quite conservative, since they still fall well below the percentage of Baby Boomers
who say they plan to work in their retirement years.
The charts accompanying this article may provide some clues about what's to
come. An individual is counted as participating in the labor force if he or she is
actively seeking a job or is working at least part-time. Notice that by this
definition, participation rates for older men fell steadily through the 'Sixties and
'Seventies, but that by the mid-'Eighties, the trend began to turn.
For older women, the story prior to the mid-1980s was quite different. Rather
than declining, their participation rates were relatively stable. But their pattern
changed around the same time the male pattern altered course, and thus their
participation rates have risen substantially. Result: More older men and
women are working today than the earlier trends would have predicted.
Boston College economist Joseph F. Quinn maintains that, in addition to the
strong economy, which certainly made a big difference, some subtle forces
are driving the trend. For example, the earliest age of mandatory retirement
was first raised from 65 to 70 in 1978, and by 1986, the concept was
virtually outlawed altogether.
Moreover, says Quinn, Social Security is creating new incentives for older
people to keep working. The age at which recipients could earn any amount
without loss of benefits was reduced from 72 to 70 in 1983, and in 1990,
there was a major reduction in the benefit loss, from 50 to 33 cents, for each
dollar earned over the exempt amount among recipients over the customary
retirement age of 65.
The nature of employee pensions also began to shift, from defined-benefit
plans, which often encourage workers to leave a job at a particular age, to
defined-contribution plans, which are age-neutral. The Employee Benefits
Research Institute reports that, since 1983, the number of workers covered
by defined-benefit plans -- under which retirees receive a check every month
for life -- hasn't increased at all, while the number of defined-contribution
plans -- such as 401(ks), to which employers promise to kick in a certain
amount while the covered person is working but nothing afterward -- is
soaring. Today, there are more participants in defined-contribution plans than
in defined-benefit systems.
Quinn argues that incentives to delay retirement will only intensify.
Defined-benefit plans will continue to shrink as a factor. And various changes
planned in Social Security are already a matter of law.
For example, the age at which one may qualify for full benefits gradually will
be raised. Anyone born from 1943 to 1954 won't qualify until age 66, and for
anyone born in 1960 or later, the minimum age requirement will be 67. And
while 62 will still be the earliest age at which one may collect reduced
benefits, a 62-year-old eventually will receive only 70% of the full benefit,
rather than the current 80%.
Also, the delayed-retirement credit, which is the reward for deferring receipt
of benefits beyond the normal retirement age, is gradually rising. By 2005, the
credit will be close to actuarially fair for the average worker, no longer
penalizing those who delay. In addition, recipients aged 65-69 will be able to
earn up to $30,000 without losing any benefits. That in itself is a big incentive
to keep working.
Comments Quinn: "These changes in policy are both symbolic and real.
People who continue to work are less likely to be penalized financially, and
they send an important message to society that the right age to retire is not
necessarily 65."
While he acknowledges the importance of the tight labor market in motivating
older people to stay on the job, his statistical regressions show that these
other factors must also be operating. However, chances are that
economy-wide labor shortages will become a semi-permanent fact of life,
providing aging Boomers with another reason to stay on somebody's payroll.
Blame this on the birth dearth that followed the historic Baby Boom. By
2020, there will be several million fewer people aged 35-54 than there are
today, even though there almost surely will be many more jobs that need to be
filled. This will motivate companies to make accommodations to attract and
keep employees. For example, many are likely to offer the flexible scheduling
preferred by some older people (not to mention some younger working
parents).
How many Boomers will accept those offers? In the charts, we made a
conservative assumption for labor force participation by 2020. We assumed
that, for each age group shown, the rates for men will have climbed back to
where they were in 1964, while for women, they'll simply equal today's rates
for men. For all Boomer males aged 56-74, it means a participation rate of
60%; for females, 45%.
If these modest projections do come to pass, then nearly 36 million Boomers
will be working, compared with 26 million if cur rent participation rates for
these age groups persist. The impact of taking 10 million people from the
retirement side of the ledger, and placing them in the work column, to one
extent or another, will be enormous. What portion will be working full-time is
anybody's guess, but as one indication, nearly 52% of working men 65 or
over currently put in a full week, as do nearly 38% of the women.
A recently-published paper from Dora L. Costa, a Massachusetts Institute of
Technology economist and the author of The Evolution of Retirement -- An
American Economic History: 1880-1990, challenges the idea that the trend
toward early retirement has reversed. Among other things, she points out that
the 100-year decline in retirement age has turned around before, only to
resume again.
Well, Costa may be right, but she may be off by a few decades. By 2040,
when the youngest Boomers will be 76, early retirement may start becoming
chic again. But until then, the most talked-about cohort in history will be
staying on the job longer, with profound impacts on the economy, the financial
markets and their own lives. |
