Redefining Retirement: Options for Older Americans
Published: 2005-04-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In the 21st century our nation faces a growing fiscal imbalance. A demographic shift will begin to affect the federal budget in 2008 as the first baby boomers become eligible for Social Security benefits. This shift will increase as spending for federal health and retirement programs swells. Long-term commitments for these and other federal programs will drive a massive imbalance between spending and revenues that cannot be eliminated without tough choices and significant policy changes. Continued economic growth is critical and will help to ease the burden, but the projected fiscal gap is so great that it is unrealistic to expect that we will grow our way out of the problem. Early action to change existing programs and policies would yield the highest fiscal dividends and provide a longer period for prospective beneficiaries to make adjustments in their own planning. One of the potential policy changes is assisting older workers who want to stay in the workforce past retirement age. The Chairman and Ranking Member of the Senate Special Committee on Aging asked GAO to discuss demographic and labor force trends and the economic and fiscal need to increase labor force participation among older workers. This testimony will address those factors making it important to encourage those who want to work to continue doing so, as well as factors affecting older Americans' employment decisions.
section_title: What GAO Found
paragraphs: The aging of the baby boom generation (those born between 1946 and 1964), increased life expectancy, and falling fertility rates pose serious challenges for our nation. These trends will affect the size and productivity of the U.S. labor force and its output and will have real and important impacts on employers and the economy. With the impending retirement of the baby boom generation, employers face the loss of many experienced workers and possibly skill gaps in certain occupations. This could have adverse effects on productivity and economic growth. Furthermore, the expected increasing ratio of the elderly to those of working ages will place added pressure on Social Security and Medicare, both of which face long-term financial problems. Increasing the labor force by encouraging Americans to work longer may be one part of solutions to these problems. Although some people can benefit by remaining in the labor force at later ages, others may be unable or unwilling to do so. For those who are able, there are many factors that influence their choices. These include the eligibility rules of both employer pension plans and Social Security, an individual's health status, the need for health insurance, personal preference, and the employment status of a spouse. The availability of suitable employment, including part-time work or flexible work arrangements, may also affect the retirement and employment choices of older workers.

section_title: Letter
paragraphs: Slow labor force growth coupled with an aging population pose serious  economic and fiscal challenges to America in the 21st century. Policies  that encourage those older workers who want to work to continue doing  so or that remove work disincentives for this age group could help  mitigate the problem. I am pleased to be here today to discuss the  importance of older workers to the labor force, the economy, and the  future health of U.S. retirement programs.
Today I would like to look at older workers from two perspectives,  considering first those factors making it important to encourage those who  want to work to continue doing so and second factors affecting older  Americans’ employment decisions. GAO has conducted several studies  related to older worker issues, including demographic trends and their  effects on employers, older workers, the federal budget, and the economy.  My statement is based on some of this prior GAO work. We are currently  working on a study in greater depth of older workers’ perspectives  concerning employment and retirement options. We expect to publish a  report in the fall.
In summary, the aging of the baby boom generation (those born between  1946 and 1964), increased life expectancy, and falling fertility rates pose  serious challenges for our nation. These trends will affect the size and  productivity of the U.S. labor force and its output and will have real and  important impacts on employers and the economy. With the impending  retirement of the baby boom generation, employers face the loss of many  experienced workers and possibly skill gaps in certain occupations. This  could have adverse effects on productivity and economic growth.  Furthermore, the expected increasing ratio of the elderly to those of  working ages will place added pressure on Social Security and Medicare,  both of which face long-term financial problems. Increasing the labor  force by encouraging Americans to work longer may be one part of  solutions to these problems.
Encouraging Americans to work longer, if they are able to, requires first  understanding the factors influencing that decision. These include  retirement income, the availability of health insurance, an individual’s  health status, and the employment status of a spouse. The availability of  suitable employment, including part-time work or flexible work  arrangements, also may affect older workers’ choices regarding retirement  and employment. Given these options, federal policymakers may want to  consider creating incentives for older Americans who are able to work to  remain in the workforce and ensuring that federal policies do not  discourage the choice to work longer. Doing so could enhance future  supplies of skilled workers, bolster economic growth, and help many  people secure adequate retirement income.
subsections: section_title: Background
paragraphs: In the 21st century the nation faces a growing fiscal imbalance.  A  demographic shift will begin to affect the federal budget in 2008 as the first  baby boomers become eligible for Social Security benefits.  This shift will  increase as spending for federal health and retirement programs swells.   Long-term commitments for these and other federal programs will drive a  massive imbalance between spending and revenues that cannot be  eliminated without tough choices and significant policy changes.  Over the  past several years, GAO has called attention to this problem.  Long-term  budget simulations by GAO, the Congressional Budget Office (CBO), and  others illustrate the growing fiscal imbalance.  (See fig. 1.)
Continued economic growth is critical to addressing this challenge and  will help to ease the burden, but the projected fiscal gap is so great that it  is unrealistic to expect that the United States will grow its way out of the  problem. Early action to change existing programs and policies would  yield the highest fiscal dividends and provide a longer period for  prospective beneficiaries to make adjustments in their own planning. One  of the potential policy changes that could address both the demographic  shift and the need for robust economic growth is assisting older workers  who want to stay in the workforce past retirement age.
These demographic problems are not unique to the United States. Other  countries are also confronting the economic and labor force consequences  of aging populations. In fact, the challenges arising from these  demographic shifts alone will be less pronounced in the United States than  in several other high-income nations. In prior work that we conducted for  this committee, we found that Sweden, Japan, and the United Kingdom  had enacted retirement policy reforms that included incentives for older  workers to extend their working lives. At the same time, these countries  were also seeking policies that would reduce barriers to employment for  older workers.
section_title: Economic and Demographic Trends Call For Policies Encouraging Longer Working Lives
paragraphs: In the 21st century, older Americans are expected to represent a growing  share of the population, have a longer life expectancy than previous  generations and spend more years in retirement. The baby boom  generation is fast approaching retirement age; the oldest baby boomers  will start to turn 65 in 2011, just 6 years from now. In addition, life  expectancy is increasing. The average life expectancy at age 65 for men  has increased from just over 13 years in 1970 to 16 years in 2005, and is  projected to increase to 17 years by 2020.  Women have experienced a  similar rise--from 17 years in 1970 to over 19 years in 2005.  Women’s life  expectancy at age 65 is projected to be 20 years by 2020. (See fig. 2.)
As a consequence of life expectancy increases, individuals are generally  spending more years in retirement. The average male worker spent 18  years in retirement in 2003, up from less than 12 years in 1950.
A lower fertility rate is the other principal factor underlying the growth in  the elderly’s share of the population. In the 1960s, the fertility rate was an  average of three children per woman. Since the 1970s, the fertility rate has  hovered around two children per woman. This decline in the fertility rate  is a major factor in the slowing growth of the labor force over the last  decade, a trend that is expected to continue. By 2025 labor force growth is  expected to be less than a fifth of what it is today, as shown in figure 3.
As a result of these trends, the share of the population aged 65 and older is  projected to increase from 12 percent in 2000 to almost 20 percent in 2030.  These developments will lead to significant changes in the elderly  dependency ratio--the estimated proportion of people aged 65 and over to  those of working age. In 1950, there was one elderly person for every 7  workers.  The ratio increased to 1 to 5 in 2000 and is projected to rise to 1  to 3 by 2050. (See fig. 4.)
These demographic developments have real implications for the nation’s  economy. If labor force growth continues to decline as projected,  relatively fewer workers will be available to produce goods and services.  Without a major increase in productivity or higher than projected  immigration, low labor force growth will lead to slower growth in the  economy and to slower growth of federal revenues. This in turn will  accentuate the overall pressure on the federal budget. Another concern is  the possible loss of many experienced workers as the baby boomers retire.  This could create gaps in skilled worker and managerial occupations,  leading to further adverse effects on productivity and economic growth.
Though long-term trends in labor force growth present significant  challenges, there is some reason for optimism. In recent years, the labor  force participation rate of men over age 55 has increased, and it is  projected to continue to increase in the future. After hitting a low point of  approximately 65 percent in 1994, the rate for this group rose to more than  69 percent in 2002, and the Bureau of Labor Statistics (BLS) projects it will  be almost 70 percent in 2012. For men 65 and older, the rate also  increased, to about 19 percent, and is projected to rise to nearly 21 percent  by 2012. Similarly, the labor force participation rate of women over 55 has  continued to increase. For women 55 to 64, the rate rose to more than 56  percent by 2004 and is projected to grow to over 60 percent by 2012. (See  fig. 5.)
These recent increases in labor force participation by older workers are  encouraging. If Americans increase the number of years they work it could  ease pressure on government retirement programs by increasing revenues  to the Social Security and Medicare trust funds. In addition, individuals  can significantly improve their standard of living in retirement. By  remaining in the labor force, workers continue to earn income and delay  drawing down assets such as pensions and personal savings, resulting in a  shorter period over which they have to budget their resources. Some  researchers have found that delaying retirement can substantially increase  annual income in retirement. For example, they found that postponing  retirement from age 55 to age 65 could nearly double real annual income at  age 75.
section_title: Many Factors Influence Workers’ Retirement and Employment Decisions
paragraphs: Although some people can benefit by remaining in the labor force at later  ages, others may be unable or unwilling to do so. For those who are able,  there are many factors that influence their choices. These include the  eligibility rules of both employer pension plans and Social Security, an  individual’s health status, the need for health insurance, personal  preference, and the employment status of a spouse. The availability of  suitable employment, including part-time work or flexible work  arrangements, may also affect the retirement and employment choices of  older workers.
subsections: section_title: Eligibility Rules
paragraphs: Depending on the eligibility rules and schedule of benefits, it can  sometimes be more advantageous for workers to retire than to continue  employment. The eligibility age for full Social Security benefits is currently  65 years and 6 months and rising, with reduced benefits available at age  62. Data from 2002 show that a majority of people (56.1 percent) elect to  start benefits at age 62. Another important retirement incentive is  eligibility for employer-provided pension benefits. In the United States,  less than half of the labor force has some type of employer-provided  pension coverage. In some cases the rules governing these plans create  incentives to retire, even for those who may prefer to continue working.
section_title: Health Status
paragraphs: Health status and occupation are other key factors that influence the  decision to work at older ages. As people age, they tend to encounter more  health problems that make it more difficult to continue working or to  work full-time. Thus, jobs that are physically demanding, usually found in  the blue-collar and service sectors of the economy, can be difficult for  many people to perform at older ages. Moreover, health status and  occupation are often interrelated since health can be affected by work  environment. Although blue-collar and service sector workers may  continue to face significant health problems, there is evidence that the  health of older persons generally is improving. Research has shown that  the majority of workers aged 62 to 67 do not appear to have health  limitations that would prevent them from extending their careers,  although some could face severe challenges in attempting to remain in the  workforce. In general, however, today’s older population may have an  increased capacity to work compared with that of previous generations.
section_title: Health Insurance
paragraphs: Rising health care costs have made the availability of health insurance and  anticipated medical expenditures important factors in the decision to  retire. As health care costs continue to rise, many employers have decided  to discontinue their retiree health benefits. A recent study estimated that  the percentage of after-tax income spent on health care will approximately  double for older married couples and singles by 2030. People at the lower  end of the income distribution will be the most adversely affected. The  study projected that by 2030 those in the bottom 20 percent of the income  distribution would spend more than 50 percent of their after-tax income  on insurance premiums and health care expenses, an increase of 30  percentage points from 2000.  Continued employment could provide older  workers with more income to help finance health care and in some cases  could provide them with employer-sponsored health insurance.  However,  those least able to work at older ages may also be those with higher health  care expenses.
section_title: Personal Preference
paragraphs: Researchers have also found that some older workers choose to remain in  the labor force for reasons of physical and mental well-being. In recent  surveys by AARP, Watson Wyatt, and the Employee Benefit Research  Institute (EBRI), older workers and retirees indicated that, in addition to  financial considerations, enjoyment of work and a desire to stay active  were important reasons to decide to work in retirement. For example, in  the 2004 Retirement Confidence Survey done by EBRI, retirees most often  said they worked for pay because they enjoyed working and wanted to  stay involved (66 percent); yet a large majority also identify at least one  financial reason for having worked (81 percent).
section_title: Spouse
paragraphs: In addition, the labor force status of a spouse affects the retirement  decision of an older worker. A recent study found that older married  couples tend to retire at the same time. Another study which analyzed the  retirement behavior of married men and women separately found that men  were more likely to retire if their wife was also retired, but women were  not significantly affected by the labor force status of their husbands.
section_title: Alternative Work Arrangements
paragraphs: The labor force decisions of older persons are also influenced by the  availability of alternatives to full-time employment. In the United States,  there has been interest among older workers who wish to work longer in  seeking employment arrangements that allow them to work part-time in  retirement. We define partial retirement as a reduction in hours from  full-time to part-time work. A partial retiree may have transitioned directly  from full- to part-time work at either a current or a new job, or may have  returned to work after full retirement. Although surveys indicate that  many older workers would like to partially retire, prior GAO work found  that offering such options is not a widespread practice among private  employers and does not involve large numbers of workers at individual  firms.
section_title: Employment Opportunities
paragraphs: Labor force participation is not solely the workers’ decision—there must  also be an effective demand for their labor. Employers’ perceptions or  biases against older workers may form potential barriers to older workers’  retaining their current jobs, finding new jobs, or reentering the work force  after retiring. For example, employers may feel that it is more difficult to  recoup the costs of hiring and training older workers. All other things  being equal, older workers can also raise an employer’s cost of providing  health insurance. Older workers may also face an obstacle because of a  negative perception among employers about their productivity.  Although  the Age Discrimination in Employment Act protects those age 40 and over  from age-based discrimination in the workplace, complaints to the Equal  Employment Opportunity Commission suggest that such discrimination  does still occur.
section_title: Conclusions
paragraphs: To the extent that people choose to work longer as they live longer, the  increase in the amount of time spent in retirement could be diminished. By  staying in the workforce, older workers could ease financial pressures on  Social Security and Medicare, as well as mitigate the expected slowdown  in labor force growth. The additional income from earnings also could  provide older Americans with greater resources in retirement and improve  their financial security.
Many older Americans are both willing and able to continue working at  older ages. As described above, increased labor force participation of  older workers would benefit both the economy and individuals. Thus, it is  important to (1) encourage more widespread availability of flexible  employment arrangements, such as partial retirement, which would make  it easier for older workers to continue working, and (2) remove incentives  that may induce older workers, who would otherwise choose to continue  working, to retire.
For those older Americans who are able to work, policies, programs, and  alternative employment arrangements that help to extend their working  life can enhance future supplies of skilled workers, bolster economic  growth, and help many people secure adequate retirement income. We at  GAO look forward to continuing to work with this Committee and the  Congress in addressing this and other important issues facing our nation.
Mr. Chairman, Mr. Kohl, members of the Committee, that concludes my  statement. I’d be happy to answer any questions you may have.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: For further information regarding this testimony, please contact Barbara  D. Bovbjerg, Director,or Alicia Puente Cackley, Assistant Director, at (202)  512-7215. Other individuals making key contributions to this testimony  included Mindy Bowman, Sharon Hermes, and Kristy Kennedy.
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