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If we want to shrink the federal government budget deficit, lower inflation and fix Social Security, there’s a simple solution: We need to nudge folks to stay in the workforce for longer.
The more people who work, the more goods and services the economy will produce. That means demand is less likely to outstrip supply, pushing consumer prices higher. It should also mean more income and payroll taxes, helping to fund government programs.
By contrast, the solutions for inflation and government deficits that are usually discussed—raising income taxes, cutting government spending, trimming Social Security benefits, increasing payroll taxes—all involve taking money away from Americans. This too could “fix” inflation and government deficits. But the result would be that some folks will be forced to cut their standard of living and that, in turn, will likely slow economic growth.
Wouldn’t it be a whole lot less painful to grow our way out of our economic problems?
The price, of course, is that some folks will need to stay in the workforce for longer. But one way or another, that’s likely where we’re headed. If inflation spikes, or Social Security gets cut, or tax rates rise, some folks will decide they can’t afford to retire and others will conclude they need to return to the workforce.
That brings me to a point I’ve made before: A lot of problems that are seen as financial problems—rising consumer prices, the dwindling Social Security trust fund, ballooning government deficits—are really demographic problems. We’re reaching the point where there are too few workers and too many Americans dependent on their labor, and we need to rectify the balance.
We could do this the hard way by, say, slashing Social Security and forcing retirees back into the workforce. Or we could do it the smart way, which is to create incentives for folks to keep working and for employers to retain these employees. That way, the seniors who want to keep working will continue to do so—and those who want to retire, or who are no longer able to work, can quit.
So, here’s my question for HumbleDollar readers: What should Washington do to make it more appealing for older Americans to keep working and for employers to keep these folks on their payroll? Should there be, say, tax cuts aimed at those age 60 and up with earned income? Should there be special tax breaks for employers who have older Americans on their books? Let’s hear your best ideas.
A great premise, and yes, a challenge to implement with intent. Agreed that cutting SS benefits is essentially a political non-starter, so let’s start by taking that off the table. Seniors are to some degree already being “forced” to continue working as a consequence of the current economy and inflation; I can only think this continues further as the downstream impacts of the transition from defined benefit programs such as pensions are replaced by retirees with underfunded 401(k) plans. But government can aid that momentum by incentivizing expanding the demand for workers, and further restricting the ability of companies to bypass hiring of American workers. While obvious, the rising tide of a growing economy powered by workers, vs. the capital gains from tech and intellectual property, will not only help the SS situation but put the US on a sturdier economic footing.
It seems, that living in the USA of 330M individuals we want a simple answer to a complicated problem. I admit I planned to work until 70 and could have easily accomplished that except I was let go in a downsizing at the age of 66. Not a good time to start looking for a 6 figure job. So I retired and fortunately like most of us here that was financially viable. But when it comes to working longer I would like to discuss two individuals that arguably have the most important and stressful jobs ever imagined. I will call them Joe Biden and Donald Trump. Both were in their 70’s on taking on that very important job and we do not need to discuss their capabilities to do so but rather I would like to see what other job I would have liked to see them employed at. Would anyone here be thrilled to see either one in the cockpit on a flight you were about to take? How about showing up at a robbery with a gun in hand yelling Stop! Police? I shutter at the thought of running out of my burning house to have them show up with water hose in hand. Not sure what the thought would be if they showed up to start a roof replacement on my two-story house. We could raise the mandatory retirement age of the military to 65 and force them to stay that long to earn retirement. I suspect most of us lived lives in cushy mid-management or executive jobs sitting at our desks all day long in an air-conditioned building.
I do think whatever Medicare or Social Security we have it should be very clear at the start of ones career to lay out the rules of the game and then never allow them to make changes for those that are in the game but only for new entrants into the game. Not a fan of any rules being changed once I am a player in that game. Once you know the rules and start the game – I would fully expect winners and losers. It is hard to make everyone a winner so not surprised there are whiners.
Incentives to work longer will help, but does not address the total issue. We need improved financial literacy. An education of reading, writing and arithmetic is a starting point. We also have various ways to learn marketable skills, such as coding, the construction trades, or teaching. But we do not teach financial literacy.
Working longer does not mean you will have better financial success. The concept of living within your means is difficult without tools and training. Working longer will not improve savings rates, retirement planning, risk management and basic financial transactions.
Loosen the restrictions on Health Savings Accounts.
It is all very well for people who are paid to use their brains to talk about working longer and phased retirement. What about people who are paid to use brawn?
The notion that we have to keep growing the economy could also use some rethinking. The earth’s resources are not infinite, and mindless consumption is not a pretty picture.
I agree Kathy. What is good for the economy ain’t always good for the environment.
First of all, anyone interested in the topic of working longer in retirement as a solution to these issues really needs to read Work, Retire, Repeat by Teresa Ghilarducci. I’d argue it’s a definitive text on this subject matter.
I know that we like to valorize work in this country, but I really think that working longer and trimming social security benefits are both very negative solutions, and that one is not clearly better than the other. Many older workers are not there by choice, but by necessity. Relatively few people have the privilege of being both able to work in old age, while not necessarily needing to. I’m sure many readers of this blog fall into that category, so we don’t really have a representative view of this issue. In reality many older workers have no choice, and their additional time in the work force is highly correlated to negative health and life expectancy outcomes. Retiring is better than working more, and retiring on your own terms is best of all. However, as DC plans replaced DB plans the advantages all skewed to the upper-middle class and above, while everyone else saw their retirement security decline. Workers are often let go as they get older, and if they still need to work it’s mainly in roles that are low-paying and unhealthy. So yes it would be nice not to have to cut social security, but on whose backs are we then placing the financial burden? Why aren’t we eliminating the caps on FICA taxation first? Why aren’t we instituting a surtax on investment income? Why aren’t we requiring employers to chip in more, since they already have unreasonably low (federal) tax rates in the first place? These problems have good, workable solutions, but we’re still talking about things that aren’t going to work, like drastically reducing benefits or forcing vulnerable people to work even longer in a country that already makes its citizens work more hours and years than any other developed nations on the planet.
Thank you for the book reference. From the Amazon blurb:
“Many argue that the solution to the financial straits of American retirement is simple: people need to just work longer. Yet this call to work longer is misleading in a multitude of ways, including its endangering of the health of workers and its discrimination against people who work in lower-wage occupations. In Work, Retire, Repeat, Teresa Ghilarducci tells the stories of elders locked into jobs—not because they love to work but because they must.”
I disagree about working longer. I promote going into a “phased” gradual retirement.
How about let people who stay in the workforce over age 65 put money into Roth IRAs without income restrictions, maybe let them gift double the annual federal gift limit?
I will be a contrarian on this subject.
During my software engineering career I worked in industrial automation and then in automotive. I witnessed first-hand how technology and automation greatly increases both productivity and quality. I do not think that the aging population demographic is the limiting factor in the production of economic wealth. I am quite optimistic that our ingenuity will continue to provide the growth we need to support an aging population and do so without the need to increase the amount of available labor. And yes, my long-term growth investments are over-weighted toward technology.
I am concerned about a possible lack of consumption growth. Being able to produce ever more stuff with increasing efficiency assumes that there will be sufficient demand for that stuff. This demand is limited by population and income. I think the real demographic problem will be a lack of younger consumers who also have sufficient income to keep pulling the economy along. Birthrate and immigration are the population parameters. But the real structural issue is the slowing growth of income in the lower and middle income demographics where almost everyone begins their productive contributions to our society.
Good luck fixing age discrimination.
Yes indeed.
Here’s a start at solving this: companies can stop kicking their older employees to the curb in their 50s and 60s. Why go back to a workplace where we seem less wanted, less appreciated, and likely less rewarded? No thanks. There’s more to life. Governments will — like many in retirement — learn to make do with less.
The only way I would work again would be for myself.
I absolutely agree, and an even more challenging for “most” people, if you’ve lost your job, and there’s a 5 or 6 as the first digit of your age, you have a significant issue trying to secure employment. Ageism is incredibility real, and very sad.
If you are an employer who provides health insurance, and many do, the older your average employee age, the higher your cost for health insurance. This is just one of many reasons why many employers commonly discriminate against older workers.
One way this effect could be diminished would be to expand Medicare eligibility to age 55 for those who are employed and their 55 or older family members. This would, in effect, transfer the cost of health insurance for these employees to Medicare and away from the employer. Actuaries could come up with changes in the Part B deductible/premium to be paid by the employee. Such a change would bring a younger healthier cohort into Medicare.
I’m not a fan of your idea. We already have many companies that pay their employees so poorly they qualify for food stamps and Medicaid. Thus the companies’ profits increase while their “benefits” are being paid for by taxpayers,
I am not sure if you are serious, but WHEN has the government ever been the answer to a problem?
You are aware, I hope, that Medicare is in an even more precarious position currently, than is Social Security? And you think adding millions to the system is a solution?
I am certain employers would love to offload their health insurance costs but you are naive if you think that would result in continued employment for “older” employees. Off loading the costs of health insurance will do nothing about agism, sexism, and all the other “isms’ older workers face currently.
Do you remember what happened when Congress created IRAs and Roth IRAs? Do you remember that old thing called a Pension? Employers thought IRAs were great…and they used them to do away with pensions.
I repeat..to paraphrase Ronald Regan, “Government is never the solution, but they are frequently, if not always, the problem.”
The free market can create the best solutions to many situations. However, try to imagine how a free market solution to health insurance for senior citizens would work. What private company would cover a group guaranteed to consume large percentages of total health care costs? Like flood insurance, from which the commercial insurance market(for good reasons) totally abstains, prior to the passage of Medicare, when Lyndon Johnson was President, older Americans could not purchase coverage.
There are many studies about the distribution of health care expenses by age in the US. As people age, average spending goes up and those in the last years of their lives consume an extraordinary % of the total.
Capitalism directs resources in the economy to areas which produce the most wealth. Health insurance for the elderly doesn’t offer these opportunities. Hence,the creation of a program like Medicare to deal with something that the free market would not.
The history of business in the US is replete with situations caused by business operations which forced government to create programs such as Worker Compensation plans because business did not want to deal with workplace injuries. Would you like to back to a time when an injured worker had to sue his/her employer to deal with medical bills and loss of wages?
How many more planes would crash without the FAA? Would you like to fly in an unregulated aviation world?
When I was in elementary school in the 1950s several of my classmates died when two airliners collided over the Grand Canyon in an area of the country not covered by FAA radar.
It is likely more expensive for business to have to deal with regulations than not to have to. But, the regulators don’t create the problems.
I have personally benefitted from living in a nation with capitalism and free markets. However, this is a useful rebuttal to some politicians who think the free market can “solve” any problem. Intelligent regulations are indeed necessary.
In my time as a union thug, health insurance was arguably the most difficult part of contract negotiations. It was a cost that the employers could not predict or control, so it was natural for them to attempt shifting the risk to employees via premium caps, requiring employees to pay the excess.
Your idea to lower Medicare eligibility would help a great deal.
I read an interesting book by Peter Zeihan, The End Of The World Is Just The Beginning, Mapping the Collapse of Globalization. He talks about demographics and the importance of a growing workforce. Lots of good stuff here, even if I didn’t agree with some of his predictions.
I agree that working longer could be of benefit to solving the solvency issue with social security. Recent changes in the full retirement age are a step in the right direction. There is also the current bump-up in benefits as we delay retirement as an incentive. But it seems this isn’t enough. But of course, if work is perceived as torture, then it Is expected that individuals will leave the work force as quickly as possible and by any means possible.
Slashing benefits for those contemplating early retirement might seem draconian, but it does get to the root of the problem.
Incentivizing employees to work longer is only half the solution. Employers must also be included. At present there is no government incentive for employers to retain older workers. I suppose it would be radical if employer share of SS taxes were reduced as employees aged.
There are good reasons to enter phased retirement and gradually reduce working hours per year. For example, this approach provides an opportunity to spend that free time doing the things one might do in retirement. I chose such an approach. I’d add it allows for gradual decompression from a working life. My business was pretty intense and rewarding; it can be difficult to find that kind of fulfillment in retirement. It would be helpful if government promoted this approach. However, as with financial education this needs to occur early and we have all seen how inept many Americans are when it comes to finances.
When I was an employer I designated certain jobs as “part time”. These were jobs which were stand-alone and duties could be handed off to others. I had several employees who worked about 3 days a week. I didn’t age discriminate, so anyone could apply for these positions if they had the appropriate skills and work ethic. I also had a flexible hours policy, but that is not applicable here. This approach might appeal to those interested in a phased retirement.
Incentivizing individuals to get a questionable education would seem to be going in the wrong direction. However, education will ultimately be a significant part of any solution. Our society seems to have strayed from the precept that an education has a purpose to prepare one to make a meaningful contribution to society and become self-sufficient. Paying people not to work and that includes providing free college is not a solution. Developing a work ethic begins early in life. For example, I began working at age 16. One child worked part time in college and the other got a nuclear engineering degree via a co-op program in which he worked part time. I incentivized him to do this by allowing him to keep his earnings. His leaning was to go to California and become a video game designer. Suffice it to say he is very happy in his engineering work and very, very well paid. Work is a meaningful part of life and should be promoted as such by the government.
Raise the retirment age for Social Security in phases to whatever age is actuarially sound.
Fascinating question. The previous 2 comments point to 2 important components – productivity and immigration. I also believe that people respond to incentives, and I think we could come up with some clever nudges to encourage people to stay in the work force longer. The current rules concerning Social Security’s full retirement age, earnings test for working while collecting, and taxability are confusing to many (I spent 30 minutes on Tuesday trying to explain this to a retiree while doing her taxes). I’ve come across a number of retirees who are collecting their SS benefit who were interested in working, but were concerned that they would lose their benefits or it would all be taxed away. We’ve had several clients this tax season who were convinced that all taxation of SS benefits had been ended, and were upset when they found out that wasn’t the case.
Totally agree Rick. We ought to co-author a book.
I’m in. We can ask Jonathan to edit it.
We are not going to grow our way out of deficits if we keep adding to them with new unfunded spending.
I don’t think incentives are going to keep people who want to retire from doing so. If they did, what might the impact be on the part of the economy that relies on retirees and their leisure spending?
I doubt we have the time to fix SS and Medicare with only a long demographic change approach.
Your demographic point is relevant though, but how about a rational, workable immigration policy and system that allows us to add the workers we need along with the new taxes they generate?
I had a conversation a few weeks ago with a man who ran through the evolution of sources of workers to hire for his construction business over several decades. Today, he depends on foreign workers, and yearns for a reasonable, legal system to supply them.
And so he should. Illegal immigrants are essential in house building.
It’s not just a problem in the US but most Western nations as the boomer time bomb detonate.
I don’t think taxing people into work is a great idea for productivity but the reality is when individuals feel they are done and they can afford it – why would they continue working?