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LIKE A SLOW-MOTION train wreck, we’ve spent recent decades inching toward a world where we have too few workers and too many retirees dependent upon their labor. Have we finally reached the tipping point?
Consider today’s confluence of economic events: a labor shortage, sharply higher inflation, massive government budget deficits, and depressed stock and bond prices. To be sure, all this can be explained by the pandemic and what followed—excessive government stimulus, supply chain issues, frightened and exhausted workers retiring in droves, and the past year’s about-face by a Federal Reserve intent on squashing inflation.
But arguably, the pandemic was simply the crisis that brought our demographic problems into sharp relief, including the retirement of the baby boomers, our dependence on imported goods, and federal government spending that’s increasingly directed toward Social Security and Medicare. The fundamental issue: In 2000, we had 4.8 Americans age 20 to 64 for every one person age 65 and older. Today, that number is 3.4, and in 10 years it’ll be 2.7, according to United Nations data. This, of course, isn’t just a U.S. problem: The worker-retiree imbalance is an even bigger issue in Western Europe and Japan.
At the same time, the pandemic and its fallout are also highlighting how we’ll resolve these issues—by pressuring those in their 60s to stay in the workforce for longer or to return to work either fulltime or part-time, while also pressuring employers to make the workplace more appealing to older workers.
How are older Americans being pressured? This year, their portfolios are shrinking even as their cost of living is climbing. No doubt many retirees are feeling squeezed and many older workers don’t like the way their finances look, and at least some have concluded that a little extra time in the workforce wouldn’t be a bad idea.
Indeed, the Bureau of Labor Statistics (BLS) expects more older Americans to stay in the workforce over the decade ahead. Among those ages 60 to 64, the BLS predicts labor force participation will climb from 57.1% in 2020 to 62.5% in 2030. Over the same stretch, it’s also projecting a rise from 33% to 39.6% in labor force participation among those 65 to 69, and an increase from 18.9% to 23.8% among those 70 to 74.
Another sign that folks are worried about how to pay for an increasingly lengthy retirement: More retired workers are delaying Social Security so they collect a larger stream of inflation-adjusted lifetime income—arguably the best hedge against the risk of a surprisingly long life. In 2021, 16.3% of men claiming benefits were age 67 or older, up from 10.3% in 2016. For women, the figures were 16.2% in 2021 and 11.5% in 2016. (These figures ignore those on Social Security disability benefits who were automatically converted over to retirement benefits when they reached their full Social Security retirement age.)
But it isn’t just workers who are feeling pressured. So, too, are employers, who are struggling to fill open positions. Job vacancies—as a percent of all jobs, including those that remain unfilled—were at 6.3% in October, close to a 20-year high, according to the BLS. Meanwhile, the unemployment rate was near a 50-year low at 3.7% in November. I suspect, in the years ahead, we’ll see forward-thinking employers take steps to make older workers feel more welcome, such as designing jobs that are less physically demanding, while also offering greater flexibility to work part-time and from home.
If we do see a move toward retiring at a later age, there are all kinds of potential benefits, both for the individuals concerned and for the economy. For individuals, there isn’t just the additional earned income, but potentially also a greater sense of purpose. Even in retirement, we all need a reason to get out of bed in the morning, and working a few days each week might provide that.
Also think about the benefits for the economy. It isn’t just that we’ll keep workers with decades of wisdom in the workforce for longer. We’ll also start to rectify U.S. society’s imbalance between workers and those retirees who are effectively dependent on their labor. Make no mistake: This—more than anything—will go a long way to address many of the financial concerns that are voiced today.
Worried about the dwindling Social Security trust fund, the trade imbalance, inflation, the burgeoning federal government budget deficit and sluggish economic growth? These various issues—often blamed on things like insufficient tax receipts, excessive government spending and an over-reliance on foreign goods—are, in truth, driven by the fundamental problem of too few workers and too many retirees.
In other words, if workers can be enticed to stay in the workforce for longer, many of the financial problems we grouse about will potentially go away. This is a point that Robert Arnott and Anne Casscells emphasized in a 2003 article. More recently, Larry Siegel and Stephen Sexauer made a similar argument in an intriguing new paper.
As folks find themselves financially pressured to stay in the workforce for longer, there will no doubt be some hand-wringing in the media, as the pundits lament that 68-year-olds are compelled to work a few days each week. But for those who are in decent health and can find work they enjoy, is that really so terrible?
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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This dovetails nicely with comments that Mohamed El-Erian made this morning on CNBC. The Fed will be in an even worse position in 2023 and beyond to combat inflation shifting from Goods to Services. Sticky for a long time at around or above 4%…
https://twitter.com/SquawkCNBC/status/1602297226612678656?s=20&t=IaBHrZhkEE6mT72MhiHE-w
I am too close to retirement to be an objective observer of the debate about what will become of Social Security and how to fix our existing problems. I do know the current regime cannot possibly last more than 10 or 15 years without significantly disrupting the lives of our children and grandchildren. I also know that when I look at the benefits we allegedly will receive, they are a very significant part of an enjoyable, secure retirement. So, what do I do? Assume nothing will change and take my benefits at age 70 which, based on the current numbers, clearly is the way to go? Or assume 10 or 15 years from now there will be significant changes and benefits will be capped and/or reduced, and I should just take Social Security now and be done with it? There are, in fact, relatively easy fixes — except that each fix affects some group differently than others. Eliminate the cap on earnings subject to the tax? That’s an increase of 16% in those workers’ marginal tax rates (someone pays the employer portion and it’s usually the worker), which is huge. For many, taking their combined federal, FICA, and state tax rate to 50% to 66% of everything they earn above the current maximum. And the way benefits are currently calculated (payments are heavily weighted to the first dollars of income to be replaced and there is a maximum benefit that can be paid no matter how much one pays in taxes when working), they would not receive a dime more in Social Security benefits when they retire. Move back the age at which one can begin to claim benefits to 67 and the full retirement age to 70? Makes perfect sense from a work force perspective, as we have too many people dropping out of the work force too young, expecting someone else will work and pay taxes to fund their retirement. Good luck getting that passed, as too many people want very much to believe they can drop out of the work force at 62 or 65 and have someone else pay for their life thereafter. Slow down the growth in benefits to the growth in wages instead of the CPI? That would be a big help. But look how much pressure Congress was under from the left wing of the Democratic Party to add a “supplemental” increase to Social Security when the CPI was low enough that benefits didn’t increase. Clearly, something needs to be done, and I am expecting Social Security will morph into the welfare program for the elderly it always was intended to be. Not the middle-class pension plan that people wrongly assume it is and should be.