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%…
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.
“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”
Uh no. The fundamental issue is to much corporate power. Technology means that less people can support more non-workers. But corporations
have stolen workers wages.
In the past, workers gained a much higher % of corporate revenues. That has reversed. In the past, worker pay rose as productivity increased.
That stopped, and worker pay is basically flat in the last few decades, even
through productivity increased. CEO pay has exploded, even as it became
increasingly divorced from any performance. A CEO does a lousy job and
walks off with a multi-million dollar golden parachute.
“sluggish economic growth”
An ideology of a cancer cell is the only way that is a problem. Endless growth is having catastrophic environmental impacts.
” Even in retirement, we all need a reason to get out of bed in the morning “
My reason is to read HumbleDollar.
Sounds good except the number one reason workers retire early is health problems
While the basic information on investing for retirement, such as waiting until one is 70 to collect social security, is always good at HumbleDollar, it is disappointment that you have not mentioned the changing political landscape in which since the days of Reagan, the wealth imbalance has grown beyond anything we’ve ever seen in this country. Laws are now made that enable the already super rich to pump money continually upward. We’re at the point where a very small wealth tax could easily close the social security gap you mention without the associated changes in work habits. Packing the Supreme court with reactionaries who’ve made money into free speech all but prevents the needed political change that might bring this about.
Good article! People in good health should have no problem working with white collar jobs. Physically demanding jobs like manufacturing and construction jobs would be an issue for many.
I retired at 66 as an IT Director, but have done lots of volunteer work in past 12 years. The only difference was I did not get a paycheck for my volunteer work. No complaints as I have enjoyed serving in volunteer work.
While it may be the case that it “might” be easier for people in their 60s to find jobs in the current low unemployment rate environment, ageism still exists. Also, automated applicant screening processes can be used to screen out older applicants on the basis of job history and/or education credentialing dates. It’s hard to find sympathy for those companies that complain that they can’t find workers, when part of the problem is of the company’s own creation.
Be that as it may, in a more normal hiring environment, it becomes increasingly harder to secure a job once the applicant is in their late 50s. While increasing the full retirement age might increase the potential supply of available (older) workers, it does nothing to solve the demand-side problem.
Women and minorities are particularly disadvantaged. Not only will it become harder to find a job as one gets older, but lifetime earnings on average are lower due to past discriminatory employment practices. Lower income equates to less income available for savings, and results in lower earnings driving subsequent Social Security benefits.
Ah, therein is the rub. Will a former office worker enjoy working as shelf stocker or cashier? Is that a good use of their knowledge and skills? Will a financially-pressured former tradesperson or factory worker enjoy working as an unpaid volunteer for a nonprofit when they really need a job that pays a livable wage?
Yes, that is a problem. But the fundamental problem is the funding mechanism for Social Security. One idea to consider would be to raise or eliminate the income cap for the social security portion of FICA. The cap is currently $147k. Sixty to seventy percent of the shortfall could be eliminated if FICA were applied to all wages.
Agree about the FICA wage cap on SS – at least the creators of Medicare foresaw that conundrum and left it out of the equation, but the success of both programs would be helped immensely if Congress didn’t continue to expand the types of recipients in the pool.
FICA-Med had the same cap on compensation subject to taxation until 1993. Eliminating the cap didn’t resolve the funding issue – and it won’t for Social Security, either (in part because if you remove the cap on taxation, you would likely have to remove the cap on wages in determining benefits as well). Else, it becomes just another welfare plan.
Keep in mind that even after the FICA-Med cap on wages subject to taxation was removed, and even after other funding was created by the Patient Protection and Affordable Care Act of 2010 (Health Reform), the Medicare/Hospital Insurance trust fund is still projected to be exhausted by 2026. Just as important, in terms of who funds this stuff, is that 3/4ths of Medicare Part B and Medicare Part D are paid by the ~50% of Americans who pay income taxes (general revenue funding). So, the funding is already very progressive, especially, when you consider the benefit structure.
A great article and very timely. For the first time in my life as an employee it feels good to have a bit of leverage in the workforce. And options if you had to find work.
No doubt legal immigration would help. But unfortunately, I’ve given up hope in our leaders ability to solve difficult problems that require long term thinking, short term investment, and compromise. Even our highly skilled foreign born engineers at the plant are challenged by our slow, expensive and bureaucratic system.
For those that fear non english speakers, I think we’ll be ok. My sister and my wonderfull brother in law made a concerted effort to speak Spanish around their children regularly. It was important to them and a priority. The best they got was kids who understood Spanish, barely, but struggled to speak it. English and this great country are so powerfully embedded in pop culture and around us. The mother tongue, German, Spanish, Italian, doesn’t matter. They don’t stand a chance against Americas great music, television, your school buddies and Hollywood.
As you say Jonathan the fundamental problem with SS is the worker to retiree ratio, but it goes beyond that paying for the promised benefits.
Increasing Retirement Age from 67 to 68 closes 13% of the funding gap. Indexing FRA Age to longevity after it reaches 67 closes 20% and raising the age to 69 then index to longevity closes 39% according to the Committee For a Responsible Federal Budget modeling tool.
Presumably these measure would encourage longer work years. If revenue adjustments had been made gradually and modestly on a regular basis even with a shrinking work base we would not face a funding crisis.
Even as we discuss this there are calls in Congress and from senior groups for increasing SS benefits BEFORE fixing to long term issues.
Yes Rich, I think perhaps hooking the Congress retirement benefit to how well S.S. does could fix everything.
My mother did cross-stitch and gave me one that read:
Yard by Yard, Life is Hard
Inch by Inch, It’s a Cinch
Your comment about “gradual and modest” adjustments reminded me of this. I hope the eventual retirement/social security “fix” goes well, but I am having my doubts.
Jonathan, you make a convincing case for older workers to continue working rather than seek early retirement. You also indicate that the decision by retirees to return to the workforce is made easier by employers finding it difficult to hire enough workers.
But one trend that concerns me is the increased incentive for employers to automate. Technologies like artificial intelligence and machine learning appear to provide the ability to conceive and build machines that can perform many tasks that humans do today, sometimes better. Not only can robots eliminate jobs, but they don’t require sick days, health care benefits, or 401k plans. Also, robots don’t go on strike demanding higher wages or more time off. And as more employers automate, the cost of automation should decline as well.
Won’t we have to contend with automation eventually reducing the demand for workers? And if this comes to pass, won’t we be right back where we are now with too many retirees dependent on a shrinking workforce? I have read that automation threatens not only blue-collar jobs, but white-collar jobs as well.
In the future, will we have to accept the blessings of increased longevity accompanied by the steep price of diminished retirement lifestyles? Maybe government will attempt to tax machine “labor” like human labor is taxed today so we can maintain an adequate level of retirement benefits and achieve some degree of social harmony.
If machines can greatly improve productivity, that could go a long way toward eliminating the need to rectify the worker-retiree imbalance. The resulting faster growth would presumably also potentially fatten government coffers and help pay for Social Security and Medicare, though to do so we might need to raise the corporate tax rate.
Thank-you for the excellent and timely article Jonathan!
Not mentioned but something I hope employers are open to and employees are beginning to think about is semi-retirement. The American model of working long hours until age 65 and then keeling over from a heart attack on the golf course gold watch from the company in hand has needed a re-do for a very long time.
As you and others have pointed out, a cold turkey withdrawal from work one loves and colleagues who in many cases comprise most of one’s circle of meaningful friendships is devastating, unnatural and unnecessary. Bob Clyatt wrote about “lifetime semi-retirement” two decades ago in his book “Work Less, Live More” (he still maintains a lovely website under that name) encouraging people, as they achieve a modicum of financial independence, to keep working but increasingly favor work (such as artistic or altruistic passions) whose rewards aren’t solely monetary. A national (indeed, international) discussion about how to facilitate this and keep older folks contributing not just consuming would be so beneficial.
The Next 100 Years: A Forecast for the Next Century was published in 2010. Author George Friedman was hired by Fortune 1000 companies to predict future trends in the “short term,” i.e., the next 5 – 10 years. One client asked him to predict what the world would be like in 100 years.
Friedman initially rejected the possibility of answering the question, because just one slight change in the many geopolitical trends that he analyzed could skew the end result greatly over a 100-year period. But as he thought about the question, he realized assumptions based on reasonable continuity of ongoing geopolitical trends would result in predictable outcomes.
One chapter of the book focused on Mexico and what trends would influence it in 100 years. Based on Mexico’s enhanced econonic growth created by free trade with the U.S. and elsewhere, in 2110 the median standard of living for Mexicans will rise to the top 25% (if I recall correctly) worldwide. Therefore, our neighbors to the south will have less reason to leave their native country in 2110 — looking for better economic conditions — than they did in 2010.
Why do I mention this book? Based on the population trends mentioned by Jonathan in today’s article, Friedman predicted that instead of turning away immigrants at the border, U.S. policy would shift by 2110 and we would offer Mexicans (and other Central and South American immigrants) a “signing bonus” to come to the U.S. — even temporarily, since human nature is to remain in the country of your birth unless economic conditions force the upheaval of moving to a new country, learning a new language and culture, etc.
Why will the U.S. offer this “moving bonus”? Based on a shrinking number of children born to families in the U.S., and an already aging population as noted by Jonathan, the U.S. will need more workers to care for our aging seniors — and to clean and cook and pay income and Social Security taxes that the senior population of the U.S. had largely stopped paying. In fact, Friendman thought we would see trend occur by 2060, 50 years into the future when his book was written in 2010.
The “ring of truth” of this prediction stuck with me. I can only hope I’m around in the year 2060, to see if it actually came true.
Did you read Paul Kennedy’s Preparing for the Twenty-First Century? It came out in 1993. Kennedy is a brilliant historian, author of The Rise and Fall of the Great Powers.
Despite his background, he missed nearly everything that was about to happen. Reading the book now, you can see that the predictions are based on what had happened in the recent past, and didn’t see the dramatic changes in technology and culture that were about to explode. Even when he was warm, like predicting that India would take over computer programming and that China would become a manufacturing powerhouse, he dismissed as too extreme the predictions that actually understated the real growth in India and China.
I suspect most of our issues are self-inflicted i.e. lack of energy independence, illegal immigration, soaring inflation, increasing deficits, rising crime and labor shortages…we as a country can and should make better choices…and so the definition of insanity continues.
While I don’t favor illegal immigration, the facts are that even illegal immigrants help our economy, pay taxes, including SS taxes and generally put much more into the economy than they take out.
If your “facts” are correct then why are most sanctuary cities and states fiscally in the red ?
Hi, Jonathan, this is Chris. Great article and comments today. I agree with what you said about the retirement of the baby boomers and its implications for our country. Too bad the mainstream media doesn’t talk about it when writing about what is going on in our economy these days. The peak of the baby boom turned 65 in 2022, how could it not affect things?
I’ve read many articles in the media about baby boomer retirement and its implications. Google it. Maybe you haven’t been reading the mainstream media
Thanks Jonathan for a very intriguing article. Twenty years ago I attended a lecture by Prof. Jeremy Siegel from the Wharton School. He spoke at length on the demographics that you discuss. His analysis indicated an imbalance not only in future workers, and their ability to support retirees, but also in their ability to purchase the assets that my generation has accumulated. His analysis indicated that, if you accounted for global investors, the equation balanced. It was an interesting and thought-provoking presentation. It aligns with the immigration discussions. The difference – Siegel says you need to look at them not one as workers, but investors who will purchase the assets from retirees so they can fund their retirement.
I like doing some consulting work in retirement. As the article suggests, I enjoy the extra cash, but I really like knowing my brain still works (somewhat) and I can still provide value to a company or project. During the pandemic there has also been a small part of me that wonders what I/we owe society. If there are big needs out there, do those of us with experience, knowledge, and skills have a duty to help in some way, even if we don’t need the money. It’s something I’ve thought a lot about. If there were better and easier ways to engage that would help.
There are many, many volunteer opportunities for all skills and interests in all parts of our communities, many of which go unfilled because people either don’t know of them or “only work if I get paid, by God”. Join a service club such as Lions, Intl. and you can be as busy as you wish. For those in need of more income, the networking contacts made in voluntarism can often lead to paycheck jobs.
Like Siegel, others have also suggested that the sale of financial assets by retiring baby boomers could depress long-run stock and bond returns. I didn’t bother to mention that in the article because the cause of this year’s slump is clearer and more immediate — sharply higher rates.
If you have really saved and invested all your life, it may not make sense to work after 60 or 65, and certainly after 72 when you have to take RMDs. You are facing huge tax cliffs in IRMAA and NII, and you’re not paying FICA on your retirement income. If you picked up earned income, you might find you’re paying 70% of it in the various taxes that start to kick in.
This problem comes as no surprise. The federal government has been projecting this problem for decades before the onset of the COVID epidemic. One simple solution? Rather than having more workers that are working because they have to rather than wanting to, simply increase immigration. Per the UN in 1998 the US immigration rate was 6.48 per 1,000, has decreased every year since, and is now down to 2.78. Per the November Bureau of Labor Statistics there were over 10 million open jobs. Surely the need is for both skilled and unskilled labor both of which immigrants can provide. Per the US Census Bureau in 2015 and 16 the US welcomed more than 1 million immigrants, last year just over 200,000. Give me your tired, your poor, Your huddled masses yearning to breathe free (and work?)
What about the the estimated 5 million illegal southern border crossers since 2021 – they don’t figure into the equation? Is that enough to solve the unemployment/tax receipts problem, or do we need more – say another 5 million or more by 2024? Sounds like a good campaign slogan, eh?
Illegal immigrants contribute billions in taxes each year to local and federal government even billions to Social Security which they can’t collect a benefit.
Believe you missed my point…”tax receipts”.
I seem to have missed your point, too. Does your point jibe or disagree with that of R. Quinn? Where America would be with all the “southern border crossers,” I don’t like to think. But America has labored under this anti-constructive ideology since the Reagan years. Many of us pray that the counter-productive disincentives will be adjusted soon.
(Yes, I do make excess rent income because of that ideology. Republicans are my portfolios benefactors. But the excess is more than my family needs, and is undermining the economic fabric of our exceptional republic.)
Good points, Jonathan. It seems we have too many people wanting to be waited upon, and too few willing/able to do the waiting upon them, in multiple fields.
Some politicians are implying the answer is to bring in more immigrants, but we do not benefit in a 21st Century economy from adding people who speak little English and often cannot read or write in any language. We can target some trained immigrants, but in a way that is stealing them from their home countries that need them even more.
I think your solutions seem to be the best of some imperfect options.
Another critique of calls to increase immigration is accusations they primarily come from elites frustrated they can’t find servants.
As someone on the brink of retirement, I don’t need or really want to work, but can imagine a wee-bit of part-time if the people and job were fun. Doesn’t seem too implausible…
As an immigrant myself, I’m all in favor of greater immigration. I also couldn’t read or write when I got here, and my English wasn’t very good — but, then again, I was three years old! I agree, more skilled immigrants would be great. But there also appears to be plenty of work for the unskilled. I wish we could settle on a strategy that allowed a greater controlled influx of legal immigrants.