Back to Future Implications of the Era of AgingFrom Planning for the Future
p. 7-18, published 2002
For many years, the trend in the United States was one of increasingly early retirements, resulting in fewer contributions to Social Security and public coffers in general. The age at which a person plans to and actually retires from the labor force has a cascading economic effect. At the individual level, it affects the savings and investments individuals make to prepare for retirement. If those plans prove to be inadequate or early retirement becomes necessary, the individual’s well-being as well as his or her family’s can be adversely affected.
When increasing longevity is added to the mix of early retirement and declining public revenues, the concerns of demographers and social scientists about the future well-being of seniors and the solvency of public programs become clear. Recent data suggest that older citizens have begun to work longer nationally. Here in Kentucky, we find that Baby Boomers expect to stay in the labor force longer. If the trend continues and grows, their contributions to public programs could offset some of the anticipated costs of an aging population. Increases in longevity, however, could counter the savings realized from prolonged labor force participation.
Current workers expect to retire later than current retirees actually did retire.
Retirement Age, Expectations vs. Actual Experiences
Nationally, the mean age at which persons began collecting Social Security declined steadily into the mid-1980s, then remained at 63.7 years through 1999, according to the Bureau of Labor Statistics.
In Kentucky, we found a marked difference in the age at which current workers expect to retire and the age at which current retirees actually retired.
Approximately 50 percent of survey respondents who are currently working report that they plan to retire at age 65 or older.
In contrast, only 19 percent of current retirees actually retired at age 65 or older. Instead, nearly half, about 46 percent of current retirees in Kentucky, retired before the age of 60.
Among retirees, the median retirement age is 60 while the average is 59; among workers, the median expected retirement age is 65 while the average is 63.
We found no differences in planned or actual retirement ages based on gender or marital status. On average, women expected to retire and retired about a year earlier than men.
Even the best laid plans can go awry. Plans for retirement are no different. Certainly, the retirement landscape has changed significantly, from the problems that depressed stock values pose for many current and coming retirees to the gradual shift away from employer-sponsored, defined-benefit pension plans to 401(k) plans, which are less likely to be secure, dependable sources of retirement income. Moreover, borrowing from these plans more than doubled between 1992 and 1998, according to the Center for Retirement Research at Boston College. Early retirement, whether planned or unplanned, merely compounds the uncertainty that attends individual retirement plans, as well as the broader consequences of population aging.
To gauge the level of preparedness and financial security among older Kentuckians, we asked current retirees if they had retired when they had planned.
More than two thirds of current retirees retired earlier than they had planned.
Did you retire when you planned?
As shown, most Kentucky retirees did not retire at the time they expected, which helps explain the differences we found in the actual and expected retirement ages reported by respondents.
About a third (34 percent) of current retirees actually retired when they planned, but more than half (60 percent) retired earlier than expected.
Only 6 percent of respondents reported having worked longer than they had anticipated.
If the current workers from our survey—Baby Boomer Kentuckians—follow this trend and retire earlier than expected, it could undermine the viability of Kentucky’s future workforce, as well as the fiscal capacity of the state to meet the needs of citizens of all ages.
We found a slight gender difference in that approximately 57 percent of women retired earlier than expected compared to 63 percent of men.
With a majority of retirees sampled reporting that they retired earlier than they had planned, the natural follow-up question is “Why?” Survey respondents were asked to select all responses that applied from five possible options, including that they could afford to do so or that they were faced with health problems or a disability, the downsizing or closure of their workplace, other work-related reasons, or family reasons. Additionally, they were given the option of specifying any other reasons that may have contributed to their decision to retire early.
Using data from a national survey conducted by the Employee Benefit Research Institute, we compared the experiences of Kentucky retirees to those of the rest of the nation.
Health problems were cited most often by current retirees as the reason why they retired earlier than planned.
Why did you retire earlier than planned?
Generally, the early retirement experiences of Kentuckians follow the same pattern of those of early U.S. retirees, with noteworthy exceptions.
As seen nationally, the most frequently cited reason for retiring earlier than planned is a health problem or disability; however, Kentucky’s current retirees were more likely to cite this reason, 46 percent compared with 40 percent nationally, a finding that is consistent with the generally poor health status of Kentuckians.
Proportionately fewer Kentuckians reported retiring early because they could afford to do so, again a finding that is consistent with the relative poverty of older citizens here.
Retired Kentuckians were also slightly more likely to say that the downsizing or closure of their workplace had, at least in part, prompted their early retirement, a possible reflection of the significant layoffs in the apparel industry that preceded this survey.
Proportionately more women, 15 percent, retired early due to family reasons than men, 5 percent.
As the now-obsolete three-pronged retirement income strategy and AARP’s more current four-pronged model for retirement planning clearly illustrate, Social Security was never intended to serve as the sole source of income for older Americans. Rather, Social Security was intended to be an important foundation or complement to savings and other income sources. However, national data show that since the early 1960s, Social Security has increased in its importance as a source of income for older Americans. As people age, its importance rises as financial resources are depleted and health care costs become more burdensome. In turn, poverty rates increase with age, according to an analysis by the Federal Interagency Forum on Aging Related Statistics.
We asked current and coming Kentucky retirees to tell us what their most important source of income in retirement is now and is expected to be. They were given a variety of responses from which to choose, including the option of specifying sources that were not listed.
As older citizens rely more heavily on Social Security for retirement income, its inadequacies and its future viability become issues of greater concern.
What source of retirement income is or will be most important?
As shown, current workers expect to rely far less heavily on Social Security than current retirees do, suggesting a lack of confidence about the future of Social Security among Baby Boomers.
Likewise, Baby Boomers are less likely to expect an employer-funded pension plan to be their most important source of income in retirement.
Perhaps out of necessity, current workers have more diverse plans for retirement income than do workers of the past; approximately 25 percent say they intend to rely primarily on other personal savings and retirement plans at work, such as 401(k) plans, compared with only 6 percent of retirees.
Given recent trends in the stock market, the increasing reliance on both 401(k) plans and personal savings among coming retirees point to considerable vulnerability among this group. Thus, they too may find themselves relying more on Social Security than expected.
At approximately 49 percent, single women are or intend to be most reliant on Social Security for retirement income compared to 38 percent of single men and 33 percent of both married men and women.
Retirement usually marks lower levels of participation in the labor force and thus lower levels of wage and salary income. In short, the principal source of support on which most people rely dwindles and ultimately disappears—hence, the challenge of income replacement. While retirees have traditionally stopped working altogether at the time of retirement, changes in the architecture of retirement planning are compelling more older people to return to the labor force, if their health permits. Still others continue to work because they are vigorous and engaged and wish to remain so. Among the “oldest old,” those 85 and older, labor force participation rates are very low. Thus, we see increasing reliance on Social Security with advancing age.
To determine how living standards are affected by reliance on replacement income in retirement, we asked Kentucky retirees how their current living standards compare to those of their pre-retirement years. We also compared Kentucky responses to those of U.S. retirees who were asked the same question in 1999 by the Employee Benefit Research Institute.
Compared to their national counterparts, far fewer Kentucky retirees report enjoying a higher standard of living in retirement.
Kentucky retirees report having a lower standard of living in retirement than the average U.S. retiree. More report being about the same or worse off in retirement than U.S. retirees, and a greater proportion of U.S. retirees report being better off in retirement than Kentucky retirees.
More than a quarter (27 percent) of Kentucky’s current retirees say their standard of living is worse now than before their retirement, as compared with only about 19 percent nationally.
Among Kentucky retirees, 7 percent report that their standard of living is much worse now that they have retired.
A majority report that they are living at least as well as they were before retirement; 58 percent report that their standard of living is about the same.
No differences were found between the experiences of men and women.
However, 42 percent of retirees nationally report a better standard of living in retirement compared with only 16 percent in Kentucky, suggesting that, in the absence of significant economic growth, the needs of older Kentuckians are likely to remain greater than most nationally.
National trends show that Social Security has grown in importance as a source of income for retirees, the likely result of a combination of factors, including increased longevity, the resultant depletion of retirement savings over time, declining access to employer-sponsored pension plans, and unanticipated health care costs. As Americans age, Social Security becomes increasingly important; among those 85 and older, Social Security provided 52 percent of 1998 income. Yet the average 2000 Social Security benefit was a modest $804 a month.
We developed a multivariate regression model to predict the likelihood of a retiree reporting a worse standard of living in retirement based on whether he or she reports that Social Security is the most important source of retirement income, holding other factors constant. Our analysis reveals a statistically significant relationship between retirement living standards and the level of dependence on Social Security among Kentucky retirees.
Here, as well as nationally, when Social Security is the most important source of income for elders, their standard of living is likely to be poor.
Not surprisingly, we found that those Kentuckians who report that Social Security is their most important source of income are almost twice as likely to report that their postretirement standard of living is worse or much worse.
The results of the model show a 30 percent likelihood of being worse off in retirement if Social Security is the most important source of retirement income as opposed to a 17 percent likelihood for those reporting another source of retirement income as the most important source.
We found a nearly equal likelihood that these two groups report a standard of living in retirement that is about the same as before retirement.
Those who are not relying on Social Security as their most important source of retirement income are twice as likely to report being better off in retirement as their counterparts who rely on Social Security as their most important source of retirement income.
Pensions and savings are a cornerstone of financial security in retirement. Given that the original intention of Social Security was to supplement other sources of income rather than fully replace them, the preparations that current and coming retirees have made for retirement offer a good indicator of how well we might expect them to fare in retirement.
To learn more about the financial preparedness of Kentucky Baby Boomers and contrast their experiences with those of current retirees, we asked both current and coming retirees about their personal savings for retirement, including the estimated value of retirement accounts. If applicable, respondents were asked to include the combined value of savings and retirement accounts held by them and their spouses.
Compared to current retirees, more of Kentucky’s Baby Boomers are saving for their retirement.
Did you or are you saving for retirement?
Current workers are more likely to be making financial preparations for retirement: about three quarters of current workers report saving for retirement, compared with a little over half of current retirees.
While reported savings rates are encouraging, about a quarter of Kentucky’s coming retirees still report that they are not saving at all for retirement, increasing the likelihood that they will face a lower standard of living in retirement if Social Security is their primary source of retirement income.
Proportionately more single working women are saving for retirement than their retired counterparts did, but they lag considerably behind other demographic groups that are saving for retirement.
Savings rates reflect the relative economic disadvantage of single women; only 39 percent of single retired women saved for retirement compared to 61 percent of single working women. By contrast, about 70 percent of single working men, 78 percent of working married men, and 76 percent of working married women are saving for retirement.
Given that workers will likely need between two thirds to three quarters of their current income to maintain their current standard of living when they retire, adequate savings are critical. Otherwise, retirees face the lower standard of living that so many Kentuckians report experiencing since they entered retirement. The level of savings current workers have accumulated clearly presages the standard of living they are likely to enjoy in their retirement years.
To that end, we asked Kentucky workers aged 45 and older to estimate how much personal savings they have accumulated for retirement, including any personal savings the respondent and his or her spouse have and the estimated value of any retirement accounts they may have, including those maintained by their employer or employers. Respondents were asked specifically to exclude Social Security.
Many current workers have accumulated only modest savings for retirement or none at all.
How much have current workers saved for retirement?
While 82 percent of current workers report that they are saving for their retirement, our findings suggest that Kentucky Baby Boomers may be financially ill-prepared for their retirements.
As shown, 18 percent of respondents report having no savings at all for retirement.
About 44 percent of current workers report having saved less than $25,000.
Approximately 60 percent of the workers who have no savings for retirement are between the ages of 45 and 54.
While Social Security may help supplement the lack of savings, our findings show that the less retirees rely on Social Security as a source of income, the better off they are in retirement.
Many workers may be setting themselves up for a lower standard of living in retirement if they plan to rely heavily or solely on Social Security as their primary source of income.
Improvements in health care and the health status of older Americans as well as changing perceptions about the nature of aging have enabled and inspired many older citizens to work beyond the traditional retirement age of 65. On the other hand, many of today’s seniors are finding the financial preparations they made for a leisurely retirement inadequate.
Baby Boomers appear to be forming altogether different perspectives on aging and work. In response to a 1998 AARP survey, 80 percent of Boomers said they planned to work past the age of 65. During the booming growth of the 1990s, older workers began paving this new ground. The percentage of workers aged 70 to 74 rose more than 2 percentage points, and even the percentage of those 75 and older rose by 1 point. The rising age at which many Boomers will become eligible for Social Security will provide further impetus for work after retirement.
Research suggests that the functional capabilities of older citizens are improving with each successive cohort, suggesting that additional gains in labor force participation are likely.
Those who have not yet retired are nearly three times as likely to see themselves working part-time in retirement.
Labor force participation rates typically decline sharply with advanced age, and the health problems that contribute to early retirement likely keep many current retirees out of the labor force. Still, about 15 percent of those respondents who reported working are over the age of 60, and about 8 percent are over the age of 65.
Our survey results also show that two thirds (67 percent) of Kentuckians who are approaching retirement say they plan to work at least part time. By contrast, slightly more than a quarter (28 percent) of retirees are employed.
As with current retirees, the economic and the health status of Baby Boomers will strongly influence levels of postretirement employment. If their intentions are enabled by an improving physical condition or their needs exceed retirement incomes, Boomers may stay in the labor force for an increasing number of years. At a minimum, they are likely to create a substantial part-time labor force from which to draw in the coming years.
We found little differences between the experiences and intentions of men and women.
Today, earned income is regarded as an essential pillar of a financially secure retirement. Yet, as we have seen, only a small percentage of retired Kentuckians work. Health problems may figure prominently in this situation. To learn more about the work experience of current retirees and the plans of coming retirees, we asked respondents about their reasons for working. Here, we present the major reasons current and coming retirees cite for working after retirement.
As shown, nonretirees perceive financial need as the primary reason why they will have to work in retirement. Underlying that perception are dramatic changes that have occurred over the work lives of Baby Boomers, including high rates of job mobility without portable pension plans; declining access to employer-sponsored pension plans and health care benefits; changes in existent employer-sponsored plans that have left these funds more vulnerable to fluctuating economic conditions; the accelerating cost of health care; and, some suggest, high divorce rates that have left women in particular ill-prepared for retirement. Nationally, a recent study by Dwyer found that access to health insurance is the single most important predictor of retirement.
Tomorrow's retirees most often cite financial need as a major reason for continuing to work.
Major Reasons for Working in Retirement
As shown, more than half of coming retirees believe it will be financially necessary for them to work in retirement just to have money to make ends meet compared with 35 percent of current retirees.
About 53 percent of all women and 64 percent of single women say they will work to make ends meet, compared with 45 percent of all men.
Reflecting the importance of health care provisions in retirement planning, 43 percent of workers believe it will be necessary to keep working to maintain health insurance and other benefits, more than twice the percentage of current retirees (21 percent). These findings reflect the waning availability of health care as a cost-free or low-cost retirement benefit.
More positively, nearly half of workers and more than 40 percent of retirees say they enjoy work and want to stay engaged.
These findings suggest low levels of confidence in their financial futures among workers, a perspective not shared by retirees whose work lives and expectations were far different.
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