1975 to 2050: And Now The Consequences Pile Up
This post is the last part of a five part series that tries to put our notions of retirement in an historical perspective. Part One may be found here. Links to the other parts are at the bottom of the page.
Suddenly Everyone Wants (And Expects) to Retire
By 1975, retirement had been completely internalized by the American public. In less than two generations, retirement had transmogrified from a business tool used to get rid of unwanted workers into every citizen’s Just Reward.
The exit of older American’s from the workforce represents one of the most dramatic changes in the America economy in the 20th century. In 1900, 65% of American males over 65 still worked. By 2000, that percentage had dropped to 17%. Corporate America had achieved its hundred-year-old goal: get those inefficient, decrepit, whining older workers out of the way.
Corporations no longer had to force older workers into retirement. Older employees marched happily into the sunset on their own. By the mid-1980s, mandatory retirement rules fell by the wayside, technically illegal for almost all occupations. Business leaders grumbled, but only a little. They really did not need the rules any longer.
Pensions and Social Security Take Center Stage
Now that nearly everyone was retiring at 65, the consequences began to pile up. Retirees needed money to live on! Having a pension became something of a necessity.
However, in 1970 less than half of working Americans were participating in an employer sponsored pension plan. (Even today, 36.5% of Americans aged 55-64 have never participated in an employer sponsored pension program.)
To make matters worse, pension eligibility requirements and weak survivorship rights in the 1970s meant that many people who expected to be eligible for pensions found they had next to nothing once they actually retired.
Most people relied on social security as their primary source of retirement income. But Social security only provided a bare minimum. A huge percentage of older Americans found themselves tottering on the brink of poverty.
Something had to be done. Legislative mandates in the mid 1980s changed pension survivorship rules so that widows were not left penniless if their husbands died. Changes in vesting rules also helped more workers become eligible for pensions. Social Security benefits were increased and cost of living adjustments were initiated. As a result, the percent of people over 65 living in poverty dropped significantly.
Retirement Benefits Get Too Expensive
But as older Americans saw their standard of living improve, corporations saw their employee retirement costs rising.
When the Employee Retirement Income Security Act of 1974 (ERISA) increased pension funding requirements, some very large companies found that they had to put even more money into their pension funds.
In 1983, a short term funding crisis developed that threatened the Social Security Administration’s ability to pay benefits. Amendments to the Social Security Act addressed these short term problems by changing some benefits and raising the retirement age slightly. More disturbing for businesses, the amendments also raised payroll taxes. Pension and retirement costs rose to over 5% of business revenues.
Businesses Look For Ways to Bail Out
Now something really had to be done. Corporate America decided to take action.
A big issue for businesses was predictability. Most pensions in the 1970s and 1980s were what are called defined benefit plans. A worker’s pension was usually tied to a retirement formula involving his length of service and final salary. This meant employers didn’t really know what a worker’s pension would be until the worker actually retired. They guessed, but they often found themselves with underfunded pensions.
To give themselves more predictability, businesses began to shift from traditional defined benefit pension plans to defined contribution plans. In a defined contribution plan, businesses do not promise a particular pension amount. They only promise to contribute a certain amount to each worker’s’ pension account.
The Government moved quickly to authorize these new types of pensions, which are now generally known as 401k plans, after the paragraph in the tax code that gives them tax deferred status.
The Burden Shifts Back to Workers
Corporate America achieved two key goals with this change-over. First, they reduced their administrative costs. Defined benefit plans are much cheaper for employers to manage than defined contribution plans. But more importantly, they shifted almost all of the market risk in their pension plans to their workers.
Workers were encouraged to invest their 401k assets in company stock or other equities. But as anyone with a 401k can tell you, the stock market can kill you when it heads south. Millions of Americans saw their retirement savings destroyed in the market collapse of 2008. Corporate America didn’t have to do anything except look sympathetic.
And The Baby Boomers Kept Getting Older
The Amendments to the Social Security Act in 1983 were suppose to protect the long term solvency of the social security system. But worries persist.
The problem was the baby boom generation. (The U. S. Census Bureau defines the baby boom generation as all people born from 1946 to 1964.)
In 1970, the baby boom demographic bubble was clearly visible in the country’s demographic profile. And it looked enormous. Policymakers fretted that as baby boomers aged, they would put a tremendous strain on social security. (The first baby boomers will reach regular retirement age in 2011.)
But the problem will persist even after the baby boomer generation is gone, because the issue is not just a matter of a single generation getting older. By 2010, the Baby Boom Generation will be a barely noticeable bump on the American Demographic profile. The generations coming behind the Boomers will be nearly as large as the boomers.
The real problem is how much longer people are living after they reach retirement age. (Damn these uncooperative old people!)
Over the next 40 years, people over 65 will come to account for over 20% of the U.S. population. The 85+ age group will be our fastest growing age segment. By 2050, people over 85 will be as large a percentage of the population (4.6%) as people over 65 were in 1930!
The question we have to ask ourselves is whether or not our economy can support this many retired people.
If we factor children into the mix, it turns out there will be 0.81 non-working people (children & people over 65) for every working age person in the US. That is a problem. There will be nearly as many retired people in the U.S. as there will be children! This level of economic inactivity will seriously deplete our country’s resources.
Time to Re-think Retirement
Of course, older Americans who retire and leave the workforce are simply doing what they have been programmed to do.
For over 100 years our economic and political elites have told older people to get out of the way. And when older people complained about it, they were sold a bill of goods.
Social Security was just part of a larger plan to control the size of the work force. It simply insured that the older people being forced out of the labor market at least had enough money to keep from starving.
But today, a lot of lazy economists and politicians actually blame the social security system for the problems we face. They say older people retire because their social security income lets them.
That is just true enough to not be a lie. A lot of people do retire because they can. But let’s face the real truth. Most people retire because their jobs suck, and because they know their employers don’t want them.
Given these economic realities, should people continue to retire at 65? Will Americans have to start working longer?
Corporate America is certainly doing its part to get older Americans back to work by wriggling out of as many of its pension responsibilities as it can. And many older Americans are working longer, often from necessity, but sometimes from choice.
I hope this represents a trend. People have a right to be productive. Pre-retirement Americans in the 1800s knew a fundamental truth: Work is Life. Ask anyone who has been out of work for a while.
Retirement separates potentially productive people from society, and our country loses a critical resource. It ought to be different.
But older workers are still pushed out of their jobs every day. Now they are culled from the herd at an even younger age with early retirement packages.
Yes, people often take those packages willingly. But mostly they take them because they fear that if they don’t, their employer will find a way to get rid of them later, and they will end up with less.
We need to stop truncating peoples’ lives. The right to life, liberty, and the pursuit of happiness is meaningless without the opportunity to work. We need to guarantee that opportunity for everyone, young and old. I’m not sure we can. But we should try.
It starts with us.
Note: My primary sources for this series of articles are:
W. Graebner. A History Of Retirement: The Meaning And Function Of An American Institution, 1885 to 1978, New Haven, Connecticut, USA:Yale University Press 1980. 293 pp. ISBN 0-300-03300-1
D. Costa. The Evolution of Retirement: An American Economic History, 1880-1990. Chicago, Illinois USA: University of Chicago Press, 1998. 234 pp. ISBN 978-0-226-11608-2.
The Graebner book is a great read and I highly recommend it to anyone wishing to learn more about this subject. It is 30 years old, but it is still the definitive historical account of Retirement in America. It is currently out of print, but used copies are readily available.
The Costa book is also excellent. It is an economic history and takes a more quantitative approach.