A Nation Working Longer… Perhaps Doing Better

GUEST: Dr. Richard W. Johnson
VTR: 05/12/2011

I’m Richard Heffner, your host on The Open Mind.

And this is one of an occasional series of broadcast conversations … prepared in cooperation with the Alfred P. Sloan Foundation … on the subject of Americans working longer and our nation perhaps doing better as a result.

Joining me today in pursuing this theme of such profound personal significance to so many of us is Richard W. Johnson, Senior Fellow and Director of the Program on Retirement Policy of the prestigious Urban Institute in Washington, DC.

Now, Dr. Johnson is an expert on income and health security at older ages. Indeed, much of his research focuses on older Americans’ employment and retirement decisions.

So that he’s written extensively about retirement preparedness, including the financial and health risks we face as we approach this crucial turning point in our lives.

And I would begin by asking Dr. Johnson if we should actually accept as a first principle of our discussion today that America might well be better off if Old Fogies like me do retire later, rather than sooner. In short, I guess I’m asking my guest to assuage my guilt for staying around so long. What is the situation.

JOHNSON: Well, it’s nothing to feel guilty about at all. And, in fact, working longer helps workers who, who are able to work longer and it helps society over all.

So, so one of the things we see is that people are actually working less now than they did 50 years ago. So … today about 22% of men 65 and older are in the labor force.

Back in the late, or let’s say the mid-forties, it was about 47%. So there’s been a real decline in, in the number of people who are working into their mid-to-late sixties and beyond.

HEFFNER: Would it be good social policy then to do those things that would reverse that process?

JOHNSON: Yeah. Because … indeed, because what it would do is it would reduce the pressure of the aging society. What we see now is that … today there are about three workers for every Social Security beneficiary.

In 20 years if current trends continue there’s only going to be two. And so that means that all of the workers are going to have to either contribute more to support these additional retirees or retirees are going to have to get less.

We could make that balance a little better … we could, we could reduce the stress of these additional retirees if people worked longer.

That means there’d be both more workers and fewer retirees.

So that by working longer people are going to pay more taxes, they’re going to create more goods and services. The economic pie is going to grow.

That means that there’s going to be more money that’s going to go into the public sector. So, so more taxes to cover all kinds of things, including retiree’s benefits. So, so it really is, is a win-win if people work longer.

HEFFNER: A win-win, but it’s so difficult today to think in those terms when there’s such a large group of joblessness … of jobless.

JOHNSON: That’s right. So, so the story is a little hard to believe when we’re in a deficit …

HEFFNER: Right.

JOHNSON: … or recession, or in it’s aftermath. So unemployment rate is about 9%. It’s not as high for older people, but it’s still pretty high … about 7% for people 65 and older … people 55 and older.

That is an issue. But looking long term … you know eventually we’re going to get out of this recession and really going to need older workers.

Over the next 10 years the number of adults 25 to 49 is going to increase only 4%. While the number of adults 50 to 74 is going to increase 20%.

So there just aren’t going to be enough younger workers to meet the demands of employers. We’re going to need more older workers to step in to work longer. So that the economy can continue to grow. And so that everyone’s standard of living can continue to rise.

HEFFNER: Well, what are the factors that keep people from working longer … indeed, making the trend what you consider to be a rather negative one.

JOHNSON: Well, and, and I, I did say that the, the … people are working less now than in 1940, 1950, 1960. There has been some good news or has been an up-tick over the past 15 years. So this long term decline has reversed. That’s the good news.

HEFFNER: I see.

JOHNSON: But what’s behind this long term decline is, is really good, good news in, in some ways, because people are dropping out of the labor force earlier … or they had been dropping out earlier … because they just had more money.

So incomes were higher, retirement benefits were more generous, people found that they could afford to spend 20 years in retirement.

Now, though, as people are living longer, as these traditional types of pensions are fading away … other changes, there’s growing concern that people really can’t spend as long in retirement as they once did.

And so we’re seeing people being more interested in, in working longer.

But there’s still a lot more we can do to encourage work at older ages. And there’s still some aspects to our public policy that tends to discourage work at older ages.

HEFFNER: What could we do? You say there are things we could do?

JOHNSON: Let me tell you some things we have done … that’s positive …

HEFFNER: Please.

JOHNSON: … and then I’ll, I’ll talk about what more could be done.

Social Security policy has really changed dramatically. And I don’t think this gets as much attention as perhaps it should

So back in 1983 we made a bunch of changes to Social Security because it was going bankrupt … much like today.

The situation was a little more dire then, then it is now. More immediate.

One of the things we did was Congress decided they would slowly raise the retirement age … beginning in 2000.

So, before people who turned 62 before 2000 would get their full retirement benefits beginning at age 65.

Today it’s 66 and it’s going up to 67. Now people can still collect benefits at age 62, but if they collect benefits at age 62, they get more of a penalty now than they used. And you’ll get more of a penalty in the future … even than they do today.

So that today if you retire at age 62, you’ll get 75% of your full benefits, for the rest of your life. It used to be the case … I’m sorry … it used to be the case …

HEFFNER: Yes.

JOHNSON: … you’d get 80% … you used to get 80% … today you get 75%. Once the full retirement age is 67 … you’ll only get 70%. So …

HEFFNER: Discouraging people.

JOHNSON: That discourages people from working … from retiring early …

An even bigger change, perhaps is that we eliminated what’s called the retirement earnings test for people who were above this full retirement age. Today about 66. So beginning in 2000 what we did … what Congress said was that if you continue to work after the full retirement age, which then was 65 … you could keep all of your Social Security benefits.

Before that half of those benefits would be taxed away. Now you’d kind of get them back later on in life … people didn’t realize that, and they’d just say, “Well, if I work and earn more than a certain amount, I’m losing a big chuck of my Social Security benefits … why should I do that?

And so that really discouraged people from working passed the full retirement age.

Now, that, that tax … that the perceived tax is gone. So that’s good news.

And then the other thing we did is that we really increased the, the benefit to working beyond age … the full retirement age … beyond 66.

Back in the seventies if you did that … your … and you delayed taking Social Security benefits then your benefits would go up only 1%.

So you’re giving up a year of benefits and then in the future you’re going to get a little bit more, but not, not much. It wasn’t enough of an increase to encourage people to delay.

Today if you delay retirement by a year, your future benefits increase 8%. So, so that’s a big incentive to working past age 66. Or at least to delaying retirement past … to delaying Social Security “take-up” past age 66.

HEFFNER: Now do you think that those changes led to the shift in the process and to what people are doing more than the changed economic climate?

JOHNSON: Well, you know, I, I think … I think that’s part of it. I, I do think the changed economic climate had a bigger effect.

I think the biggest effect, actually, was the erosion of traditional defined benefit plans. You know these are those pensions that most people would get from, from large employers … so most large employers provided them, though only about half of workers had them.

But if you worked for a large employer in the private sector, you would, you would get them and it would pay you a, a fixed benefit once you began retirement until you died, as a function of years of service and final average pay.

Those plans are really disappearing. They’re still very common in the public sector. And there is a lot of debate in the public sector about how expensive these are and maybe we should get rid of them.

Less debate about how they affect retirement incentives, though I think that’s very important.

But as these plans disappeared … and now, you know, about 20% of private sector workers have them, so they’re not completely gone.

But, but they’re much less common in the private sector than they once were.

As they disappeared, two things happened. First it raised some concerns about retirement security. So they have been replaced, by and large, by 401(k) plans. And people can accumulate a lot of money in a 401(k) plan, but it requires a lot from people.

They have to sign up for the plan, in most cases … though that’s starting to change a little bit, because a lot of employers are starting to automatically enroll their employees. That’s, that’s a new and important trend. But it’s fairly recently. It used to be the case that a lot of workers just never bothered to sign up. Then they didn’t contribute the maximum amount. Maybe they didn’t invest the funds wisely and maybe they invested it too much in company stocks and that’s really risky because then if your company goes out of business, not only do you lose your job, you lose your retirement benefits. There’s a lot of risk to 401(k) plans.

And so that created some retirement insecurity. But another thing that this erosion in the traditional defined benefit plan did … was it eliminated this tremendous incentive to retire early.

Because if you’re … if you have a traditional plan, once you qualify, once you reach the retirement age and you say I’m going to work an extra year, you’re giving up a year of benefits. And you don’t really get that money back.

Now your future benefits might increase a little bit. So you’re going to get, you know, when you finally do retire, you’re going to get a little extra per month. But it’s not usually enough to make up for the fact that you’re giving up an entire month of benefits for each month you continue on the job.

In a 401(k) plan you’re going to get that pot of money no matter when you retire. You’re going to get that full pot.

And in fact if you keep working, you’re going to continue to contribute to that pot, you’re going to … your employer’s going to continue to contribute and so as long as you invest it wisely, that pot should be bigger when you eventually retire.

HEFFNER: That’s quite a “so long as … so long as you invest it wisely”.

JOHNSON: Well, that’s right. And, and so .. that’s something that we, we learned in, in 2000. It’s something we re-learned in 2008. The importance of diversifying the portfolio, you know.

And we were … I think a lot of professionals, a lot of people who watch money management … were surprised at how much risk older workers were exposed to.

In other words that they weren’t shifting out of these, these risky kinds of stocks as they approached retirement.

You know, if your stock takes a hit when you are in your thirties, you have thirty years to recover.

But, you know, if, if it happens in your late sixties and all of a sudden your portfolio … your balance is a lot smaller than you expected, there’s not a whole lot you can do.

You can work longer and working longer is a great way of improving your retirement security. But there’s only so long you can work.

HEFFNER: What are the other factors that work against workers choosing to push back the retirement age? And to go on working. We must be healthier now. We must be better able to work.

JOHNSON: Yeah, I mean we, we are healthier. One of the concerns is that we might not continue to be healthier. So what we’ve seen … let’s say, over the past 30 years is that the proportion of, of people in their late fifties and early sixties who report health problems, report their health is being only fair or poor … which is highly correlated with retiring early.

That’s declined by a third. And it’s declined by about a third among people 65 to 74.

But all of that decline took place between the mid-eighties and the late nineties and over the past ten years it’s really been flat. And so there’s growing concern that … with the rise of diabetes, for example, the rise of obesity that, that this improvement in health among people in mid-life and older ages might stop, might actually reverse. That’s one fo the big uncertainties that we have going forward.

HEFFNER: Doesn’t that work two ways … that if there is an increase in illness, there is an increase in the need for workers to take care of others … to retire, to leave the job market …

JOHNSON: And that is …

HEFFNER: … to take care of the sickly.

JOHNSON: … yeah … that, that’s right. And certainly that creates a lot of pressures on, on families and older workers when they have a spouse in particular, but also perhaps an aging parent who needs care.

Caregiving is, particularly for women is an impediment to work at older ages.

But, you know, on the other hand, I think it’s important to realize that most young women have children and women’s employment rates have really increased dramatically.

The, the increase has really stopped, maybe started to decline a little bit in the women in their thirties with children. But young, working women have been able to make these child care arrangements.

Now it, it’s perhaps a little more difficult if you have an aging parent. First, I think the culture does not quite appreciate those types of caregiving needs the same way as we do with child care.

There’s not the same support or infrastructure in place. So, while we’re starting to adult day care centers, they’re still not nearly as common as child care arrangements.

And so, so certainly that, that is an impediment that, that some people face as they try to work longer.

HEFFNER: What are things, the other things that you feel that government could do to bring about this social good, this greater social good of pushing back retirement.

JOHNSON: One thing I think we should do is, is change Social Security some more.

So I mentioned earlier about you know how Social Security has changed and how it’s really worked to encourage and incentivize work more at older ages. But there’s a lot more it could do.

HEFFNER: For instance.

JOHNSON: So this eight percent that I mentioned … it stops at 8.70% … so there’s no incentive to delaying retirement past age 70. And as we’re … as we … so, so now, you know, or soon … when the full retirement age is 67 … there’s not much difference between that full retirement age at 67 and when the, the bump-up stops at age 70. So maybe we could increase that to 75. That, that could help.

Certainly changing the early entitlement age … now this is very controversial, but it’s still the case that you can get benefits at age 62.

And a lot of people … 40% or so of people continue to start collecting at age 62. And when they do that, they, they can keep working, but if they work … earn too much more … you know, they’re going to lose some benefits …

HEFFNER: And be taxed.

JOHNSON: They’re going to be taxed. Most people don’t work and when … by doing so, then, they’re getting only a fraction of their full Social Security benefits.

Today only 75% … in the future only 70% of their full benefits. And, and when the government says … but, but by having this 62 age … it kind of sends a signal that it’s okay to retire at 62. That’s sort of an appropriate age.

It’s unclear that people even know … sort of what is the full retirement age. “Oh, I can start collecting at 62, that’s kind of the Social Security age”.

We really have a whole string of Social Security ages. And if we had … if we bumped up that age to 64 … we would encourage more people to work longer. It certainly would be a lot harder to retire at 62, if you didn’t get benefits.

That raises the question, though, what about the people who can’t work?

HEFFNER: MmmHmm.

JOHNSON: And that’s, that’s really an important, important question. We have disability. Disability is supposed to fill that gap.

HEFFNER: Does it?

JOHNSON: No. And that, that’s really the problem. Disability doesn’t fill this gap. So only about half of people who retire at age 62 with health problems … only about half of them were receiving disability before 62. You look at people who develop disabilities in their late fifties, early sixties … they’re three times as likely to become impoverished then people who don’t develop disabilities.

It’s … the, the problem with our disability … our Social Security disability insurance system is, is … I think a moral outrage. There’s really not attention to this.

There’s a million people who are waiting to have their benefit applications adjudicated. It, it can take a year to get benefits. It, it … it’s a difficult and time consuming process.

It’s expensive, you have to hire lawyers. And, and, you know, and part of that … I don’t want to blame the Social Security system … or the people who work hard …

HEFFNER: Everybody else does.

JOHNSON: (Laugh) Well, you know, it, it’s hard. It’s hard to sort through to try to, to figure out who, who’s needy and who isn’t.

It’s expensive and but, but certainly if we increase the budget, and, and I think just put more attention on this issue … that we, we maybe could improve the, the financial condition of people with disabilities.

I mean it, it’s a problem today … right now … and, and so many people say if we raise the Social Security … let’s not raise the Social Security age because you would make the problem worse. And that’s true.

But, even without that … even without raising the retirement age, I think we need to address this issue immediately.

HEFFNER: What is the attitude of employers, as you can discern it?

JOHNSON: Yeah. That, that’s the key because, you know, working, working longer is great. You know you can raise your annual retirement incomes by about 9%, by working an additional year. It’s maybe the best thing you can do to improve retirement security. It’s not investing more, it’s just working longer. That, that’s maybe the best thing you can do.

But you can’t do it unless you have a job. And that’s, that’s the real conumdrum. So …

HEFFNER: You’re answering my question by saying … by giving me all the problems. Meaning that employers are not …

JOHNSON: Well …

HEFFNER: … looking forward to the notion of older employees.

JOHNSON: What, what the data show is that … employers do not … I mean … older workers, rather, do not tend to get laid off. So they’re only about a third as likely … during this, this recession … one of the biggest downturns, by any measure, since the Great Depression.

Terrible, terrible economic experience. It’s still going on. But older workers were only a third as likely as workers between the ages of 25 and 35 to be laid off. So they were protected. That’s not to say that their unemployment rates didn’t go up. It did, but the unemployment rates were quite a bit lower than for younger people. That’s the good news.

But when an older worker is out of work, that’s when the trouble begins. Employers really don’t want to hire an older worker. They’ll keep an older worker on. And they say that they appreciate older workers experience, they appreciate their maturity, their reliability, their loyalty. They have a lot of, of accumulated knowledge. All of those things employers value and they’re willing to pay for.

But then when they think about bringing on some new person. You know that new person maybe doesn’t have the same kinds of connections that, that the employer wants. Or, or you know, expects from their incumbent employees. So, so … you know, the loyalty may be less important because you haven’t, you haven’t built up that loyalty.

And then they’re concerned about other things … like, “well, this person might be set in his ways”. So when taking on a new person who’s sort of used to … whose older and used to doing things in a certain way … do I want to re-train that person at age 60 and age 55? That, that’s really the challenges that older workers face.

HEFFNER: You look at trends. Do you see any trend in that area? Are employers becoming more entrenched in that point of view? Less entrenched?

JOHNSON: Yeah … we … we’re starting to see some change in those industries, before the recession, that were already starting to feel a little tightness in the labor market …

HEFFNER: Ah, ha …

JOHNSON: In other words … we look at hospitals. There are often nursing shortages that seems almost endemic, there always seems to be a nursing shortage.

And so before the recession a lot of hospitals were starting to go out of their way to recruit and retain older nurses, so promoting more flexible work arrangements.

Working out different kinds of work procedures so that someone who’s … maybe whose back isn’t quite what it used to be, could still lift a patient.

Really, really trying to work and, and retain and recruit older, older nurses.

We’re seeing it, we’re seeing it a little bit in, in energy where there’s also some, some shortages of skilled workers. So, I … what I take from that is that in the future when the availability … the pool of younger workers really starts to stagnate, and we’re not seeing any growth in those people … I think employers are going to be increasingly willing to, to recruit and, and focus on, on older workers.

And you’re starting to see that in, you know, things like HR magazine … human resources magazine. Human resource professionals are really starting to focus on this idea of, you know, what’s going to happen when all of our, our … our Baby Boom employees start reaching retirement age and what are we going to do?

HEFFNER: Dr. Johnson, are there other … in just a few minutes we have left … are there things that government could do to encourage employers to take this newer attitude?

JOHNSON: You know, we, we still see evidence of age discrimination and I, I think we need to be vigilant about age discrimination … enforcing the rules that are on the books. It, it’s hard to measure, but it, it really does seem to exist. So I, I do think that is, is something that they can do.

The other thing that we, we can do … what the government can do, is try to lower the cost of hiring and employing older workers. And one thing we can do … is under current rules if you’re 65 and older and your employer offers health insurance than the employer’s plan would be the primary payer … not Medicare.

So that means that the employer is bearing a large share of older workers health care. If we switched that and made Medicare the primary payer, whether you worked or not … now it’s the primary payer if you don’t work, but if, if you have an employer sponsored health plan, it’s the secondary payer … we change that rule … that could lower costs for employers … it could sort of balance the playing field a little bit for older workers.

HEFFNER: That likely to happen in our times?

JOHNSON: Well, Medicare is facing tremendous financial pressures. You know, I, I don’t know.

But on, on the other hand there is a, a pay-off to this. Which is if we can get people to work longer and we cover a little bit more of their health care … they are going to be paying taxes … they’re going to be contributing to economic growth … I do think it would end up paying for itself.

You know, often when we look at things like Social Security trust fund and the Medicare trust fund … what is the return for … how much does the government get from working … when people work a little bit longer.

We ignore the fact that not only are they paying these payroll taxes, but they’re also paying income taxes.

And that can really have, have a big impact on the fiscal situation.

HEFFNER: Dr. Johnson it is obviously a very complicated situation and I’m glad you’ve come here today to help us start to consider what all the issues are. And I appreciate your joining me on The Open Mind.

JOHNSON: It’s my pleasure, thanks for having me.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time. Meanwhile, as an old friend used to say, “Good night and good luck.”

And do visit the Open Mind website at www.thirteen.org/openmind

N.B. Every effort has been made to ensure the accuracy of this transcript. It may not, however, be a verbatim copy of the program.