Economics of Retirement

This is a repost from Forbes.

After all these years of giving retirement advice and advising policy makers on retirement policy, I have come to realize the best financial advice is to delay claiming Social Security.

I am not saying that Congress should end people’s ability to collect reduced benefits at age 62. If you have no choice, then claim early. But for most of the 28 million older workers with the privilege of choice, I’d say that delaying is the best choice.

Convincing someone to delay claiming is difficult. People like lump sums. Cold hard cash. And when pressed about waiting, they may say they have a higher chance of never collecting.

Most people think they will die sooner than experts predict. On average, retired women think they will die a full 2.5 years sooner than the actuarial tables. This miscalculation will make you think delaying claiming Social Security is less valuable than it is. Because of this, the average claim age is around 63, even though benefits go up each year you wait until 70.

Many of us in the field have stories of trying to convince friends and loved ones to delay. Here is one of mine:

“Wanda, don’t collect at 62! Use the $100,000 in your 401(k) for living expenses over the next several years and then collect more in Social Security later.”

“No, I am keeping that. What if I need a heart transplant?”

For Wanda, spending down her $100,000 to delay claiming makes sense. I am assuming Wanda doesn’t have a fatal disease and doesn’t stick her head in a lion’s mouth for a living.

Now assume Wanda is making the same as the average worker. Wanda can keep her $100,000 and claim Social Security at age 62, but she will only get $1,125 a month. Or, she could delay claiming Social Security until age 70 and get a much larger monthly $1,993 from Social Security.

How would she get by in those eight years? She could spend down her $100,000 to get over $1,010 a month, just a little less than the $1,125, for eight years. But when she needs it the most, when she is older and more fragile, she will benefit from that monthly $1,993 if she can just delay.

For people born after 1960, the Social Security system boosts benefits by about 7.41% per year between ages 62-70. If you were born before 1960, it’s more generous. In 2018, a price-indexed annuity of $1,125 at age 62 is worth about $291,000. But a $1,993 monthly annuity one had to wait for to collect in 2026 is worth $307,000 today! Social Security is worth a lot, and the value should be considered when calculating how much you need.

Economists puzzle over why people don’t buy annuities even though they say they like them, especially if they think they will have a longish retirement. A 2018 study shows that 73% of respondents consider guaranteed income as a highly-valuable addition to Social Security (up from 61% in 2017) and people are less depressed and anxious if they have an annuity from a defined benefit plan rather than a lump sum to manage in a 401(k)-type plan or Individual Retirement Account (IRA).

People want simple annuities. But, the annuity product is complex with a dizzying array of details and fees, like surrender charges, expense fees, death benefit fees, etc. Vendors also price them sky-high due to adverse selection. It is no surprise people don’t buy annuities on the open market.

In short, delay claiming and get extra annuities from your valuable Social Security.

The blog was assisted by Andrew Minister who will attend MIT for graduate school next Fall.

This is a repost from Forbes.

Something’s gotta give. 10,000 people are turning 65 every day for the next few decades and a little more than half can’t afford to retire. Most of them retire anyway.

One solution: work longer and get more money! Paul Davidson of USA Today detailed cheerful profiles of older people who fired themselves from retirement and came back to work, commanding their employers to adjust their work schedules. I don’t blame Paul for the hopeful solution to the retirement crisis, but the numbers don’t support the hope. In the same week as Paul’s article, Actuary Elizabeth Bauer, a fellow Forbes contributor, cautioned many may not be healthy enough to work longer.

I estimate that of the 12 million men between the ages of 65 and 70, 4.7 million have retired but can’t support a lifestyle anywhere near what they achieved while working. Maybe they have a spouse who can support them. Maybe they became hippies and live off the grid. But they probably eat less and do less. Medical research finds that financial stress causes health to get worse, so they likely will die sooner than if they had maintained their economic status.

My research team at The New School’s Retirement Equity Lab (ReLab) estimates about 2.7 million men continue working because they can’t afford to retire. Since they are less likely to be college educated, their pay is likely to be low. Even with the recent red-hot economy and tight labor markets, wages for workers over 55 are practically frozen. The average weekly wage for full-time older workers has slowed, declining from $936 in 2016 to $811 this year.

I am worried about older Americans seeking work to avoid financial hardship in old age. The ones who need to work because of inadequate pensions and retirement wealth are more likely to have less education and be less desirable for employers. Prudential Insurance research cautions, sadly, that employees who stay past their time may be too expensive, especially when comparing the benefits of hiring a younger worker.

If we keep believing that more work will solve the retirement crisis, we are doomed to be global standouts among the community of rich nations. If we do nothing, the future of this country is high rates of both old people working and old-age poverty. The United States is one of few nations to have more than 30% of their older people working.

Even though people might think that working longer is the solution to old-age poverty, working longer could be a cause! How does that work? The hope of working longer creates a comfortable fantasy that lets us all off the hook to do something, like create a workable national pension system. A Reagan administration officer was prophetic. He saw the link between old-age work and poverty. Reagan’s Deputy Labor Secretary Malcolm Lovell told Congress in the 1980s that older Americans will need to work because Social Security was slowly being cut and employers were eroding their workplace pension plans.

I worry that we will cling to the idea that if people don’t have enough retirement income, they can just work. That hope – lifted up by the cheerful USA Today article and thousands like it – does nothing to help people save for retirement. On the other hand, a new book called Rescuing Retirement outlines steps we can take to help us all accumulate retirement savings.

Ever since the 1980s, Americans have been expected to save, work, or make do. This won’t do anymore. If we do nothing, millions more older Americans will be stranded.

Andrew Minster assisted with this blog.

May 2018 Unemployment Report for Workers Over 55

The Bureau of Labor Statistics (BLS) today reported a 2.8% unemployment rate for workers age 55 and older in May, a decrease of 0.2 percentage points from April.

The economy is expanding, unemployment is low, and wages are growing. But wage growth for workers over 55 is slower than wage growth for younger workers. Why? Older workers are more likely to get stranded in stagnant regions earning low wages - they are only 17% as likely to move for a job compared to younger workers. 

Economic growth varies by region due primarily to differences in types of industries. If their local economy slows down, older workers face higher costs of moving for a better job; they are more likely to own homes and have deeper family networks and community connections than younger workers. Older workers also have fewer working years to recoup the costs of moving. Immobility is a source of a labor market condition called monopsony power, which leaves older workers with less bargaining power and allows employers to suppress wages.

The nation needs to offer older workers trapped in bad jobs a path to a secure retirement. Strengthening Social Security and creating universal, secure retirement accounts will allow all Americans access to dignified retirements after a lifetime of work. Guaranteed Retirements Accounts (GRAs) are a proposal for individual retirement accounts funded by employer and employee contributions throughout a worker’s career paired with a refundable tax credit. Better pensions help older workers gain bargaining power in the labor market.

*Arrows next to "Older Workers at a Glance" statistics reflect the change from the previous month's data for the U-3 and U-7 unemployment rate and the last quarter's data for the median real weekly earnings and low-paying jobs.

We all know the Econ 101 lyrics: the economy strengthens, labor markets tighten, wages rise. But we often miss the music: Solidarity Forever. Wages do not raise themselves. It’s when workers won’t take it anymore that employers feel the need to boost wages, when capital is willing to take less, and when prosperity is shared.

In 2018, workers are rising up, and the protests are having an effect. Teachers in Arizona (see over 50,000 people protested teacher pay and low education spending in Phoenix in April), Oklahoma, and West Virginia all got raises through protest. (It’s no surprise that these states have had healthy economic growth.)

Don’t forget another protest: there were “Occupy” movements in 70 cities and in as many nations. The grievance was plain, the remedies diffuse, the aggrieved self-identified. “We are the 99%” buttons and placards drove people to the internet. How much annual income did you need to be in the 1% in 2009? I did the work for you. In 2009, the answer was $983,734. In 2015, the answer was $1,483,596 according to the IRS.

Income inequality will not fall without sustained growth and protest. Our research shows that without real wage growth, it will be hard to save for retirement. The economy at the time of the Occupy movement was not hot. In 2011, we had just been through the worst economic recession since the 1930s, and the recovery was anemic. Many families were devastated. But government policy focused on strengthening banks and bank executive bonuses, and profits snapped back quickly. The 2010 bonuses in the financial sector – a total of $144 billion - could have lifted almost all full-time minimum wage workers out of poverty that year.

Another stanza from Econ 101 is that economic growth helps everyone. This is the well-known mantra that rising tides – or hot economies - lift all boats. This means that economic growth shrinks income, economic, and opportunity gaps between classes.

Even with the hot economy we’ve had since 2016, there is no evidence that the bottom is coming up or the top is falling. In 2018, signs are that the distance has only grown wider between the middle class, or the 40% of Americans with annual incomes between $12,943 and $34,504, and the top 5% who earn more than $375,088.

In the mid-90s, the middle 40% had 30% of all annual income, and the top 5% had 15%. In 2016, the share going to the middle class fell and the share going to the top 5% increased.

The growing gap between the middle class and the very wealthy is caused by stagnant wages and rising profits. Since income for the middle class comes from work (earnings) and income for the top 5% from owning (stocks, bonds, businesses), workers did worse than owners in the last 20 years.

          Calculations based on CPS data

Government rules and corporate power have made unions weaker, while laws have made owning more rewarding. Trump’s 2017 GOP tax reform law (almost all Republicans voted for it, and no Democrats, out of 240, voted for it) rested on the belief that raising corporate after-tax profits would give corporations wiggle room to raise wages and keep profits steady. Forgone government revenue – under this belief system – would be shifted to workers. Instead, the tax breaks allowed managers to buy stocks back from investors, causing stocks to go higher and wages to languish.

In the economics textbooks, hot economies and tight labor markets cause wages to rise. Nothing in this hot economy signals that the middle 40% will benefit from this boom. Are we inviting another Occupy? Time to change the textbooks or time to change the rules?

Thanks To Martha Susana Jaimes for research assistance for this post.