The stock market’s fall, it seems, has created a new social crisis. People in their late 50s and 60s are postponing retirement or, if already retired, returning to work. Their savings have been devastated. They can’t afford not to work. But this “crisis” may be a blessing in disguise if people step back and consider the larger implications. It’s pushing Americans toward working longer and saving earlier–exactly what they ought to do.
Only the heartless don’t sympathize with market victims. Time magazine (cover story: “Will you ever be able to retire?”) finds Martha Parry, 65, a retired executive who has lost a third of her savings and “is cruising the want ads instead of the golf course.” From USA Today (Page 1 story: “Retirement crisis looms as many come up short”), there’s P.J. Palombo, a 61-year-old truck driver who has lost $50,000 and jokes he’ll work until he’s 137.
Sounds alarming. But these and other stories ignore the broader social context. For decades, Americans have been encouraged to retire ever-earlier, even though they’re healthier and live longer. Social Security, Medicare (federal health insurance for those 65 and over) and private pensions have made retirement the ultimate middle-class entitlement. People have wanted more “golden years” and less “grind.” In 1963, 80 percent of men from 60 to 64 worked, says the Bureau of Labor Statistics. By 2001, only 57 percent did.
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The trouble is that, as Baby Boomers approach their 60s, the country cannot afford to have so many fit people become economic dropouts. As medical advances continue, life expectancy will rise even further. Already, a typical 60-year-old American can expect to live another 22 years.
For society, this creates two problems.
The first is well-known: Government spending on the elderly, mainly through Social Security and Medicare, will explode. This will threaten tomorrow’s workers–today’s young–with higher taxes, reduced government services or bigger budget deficits. The second problem is less discussed: The economy’s productive base will weaken. There will be proportionally fewer teachers, engineers, doctors, janitors, nurses and retail clerks.
Congress should have treated both problems years ago by slowly raising eligibility ages for Social Security and Medicare, prodding people to work longer. Similarly, Congress should have trimmed some benefits for wealthier retirees. What’s happening now is simple. Lower stock prices are doing what Congress hasn’t.
Even before the market’s decline, the trend toward ever-earlier retirement had slightly reversed. In 1994, only 53 percent of men from 60 to 64 worked, lower than the present 57 percent. For women, the comparable figures are 38 percent and 42 percent. Americans are staying at their jobs longer or, if “downsized” through early-retirement buyouts, are finding new jobs. On the whole, this is good.
Retirement shouldn’t have to be a sudden shift from full-time work to full-time leisure. People can develop second careers, take part-time jobs or become “consultants” to old employers.
One force encouraging work is the growth of “defined contribution” pensions, such as 401(k) plans. Under these, workers handle their own investments. If their investments drop, there’s more pressure to offset losses through work. By contrast, “defined benefit” plans commit companies to making fixed monthly pension payments. The expansion of defined contribution plans shifts more risk to individual retirees, as today’s retirement crisis suggests.
Given this, it’s tempting to think that a move back to defined benefit plans would be better. Not so. Although this would protect some retirees, other retirees and workers would lose. Many workers move from job to job so often that they wouldn’t build up enough pension credits to receive a substantial benefit, says Dallas Salisbury of the Employee Benefit Research Institute. Even among workers 55 to 64, only 18 percent had been with one employer for 25 or more years in 2000.
The other problem is that a shift to more defined benefit pensions might hurt younger workers. If pension reserves are too low–because, for example, stocks drop–companies will have to make up the shortfalls. The money has to come from somewhere. The likeliest place would be workers’ wages, which would be squeezed.
America needs to have people pay for more of their own retirement. No doubt, the stock market’s decline has decimated the savings of some retirees and near-retirees. But their misfortune suggests precautionary lessons. Saving earlier and working later are ways to cushion the risks. Nudging us in that direction, the market slump has performed a painful favor.