Cori E. Uccello
©1998 AARP: This report is reprinted with the permission of the American Association of Retired Persons.
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
Table of Contents: Background | Purpose | Methodology | Principal Findings
The age of eligibility for full Social Security benefits, commonly referred to as the "normal retirement age," will increase gradually over the next 25 years, from age 65 to 67. To help reduce the long-term deficit in the Social Security trust fund, further and/or more rapid increases in the normal retirement age have been proposed. Proposals to increase early retirement age, which is currently 62, have also been advanced. Either of these options would have an impact on older Americans, since the majority of workers begin to collect Social Security benefits prior to the normal retirement age.
This study attempts to shed light on the impact on workers of a higher normal retirement age. Using data from the 1990 panel of the Survey of Income and Program Participation (SIPP) and the 1994 wave of the Health and Retirement Study (HRS), the study addresses the following questions:
How do workers who continue to work at and after age 62 differ from those who are retired by age 62? How do workers who continue to work at and after age 65 differ from those who are retired by age 65? How much of retirement at various ages might be considered "involuntary" retirement? How important are health status, employment characteristics, income, age, and other demographic characteristics in the decision to retire?
The study analyzes data from the 1990 panel of the Survey of Income and Program Participation (SIPP) and the 1994 wave of the Health and Retirement Study (HRS). The SIPP is a nationally representative longitudinal data set. The 1990 panel, which is the most recently available longitudinal panel with sufficient sample size to perform the required analyses, surveyed 26,000 households every four months for a period of 32 months. Each four-month interview period is referred to as a wave. The core of the SIPP—those survey questions repeated in each wave of the interviewing process—is built around labor force participation, public program participation (e.g., Medicaid), and income questions designed to measure the economic circumstances of persons in the United States. Topical modules on subjects of special interest are conducted during certain waves of the survey and include information on work history, pension plan availability, assets, and health and disability status. Although the SIPP includes data for persons of all ages, this paper limits its analysis to men and women at or near retirement age, defined here as persons aged 55 to 70. The SIPP-based tables in the report use the longitudinal panel weights to produce nationally representative estimates.
Data from the Health and Retirement Study, a rich source of information regarding retirement and early labor force withdrawals, supplements the analysis using the SIPP. Conducted by the University of Michigan for the National Institute on Aging, the HRS interviewed over 9,700 persons between the ages of 51 and 61 and their spouses in 1992 and every two years thereafter. The HRS contains detailed information on current employment status, job history, health and disability status, and income and assets. It also includes detailed questions regarding the decision to retire, including pension plan availability and early retirement incentives. The present study uses Wave 2 of the HRS, which was conducted in 1994 and contains information on persons aged 53 to 63 and their spouses. Because the HRS will not contain information on persons aged 64 and older until future waves are released, the HRS analysis in this paper is limited to persons aged 55 to 63, including both primary respondents and spouses within this age range. The HRS-based tables in this report use the Wave 2 population-based weights to produce nationally representative estimates.
To assess differences among workers by age and retirement status, this paper first compares workers and retirees by health status to gauge the relative ability of workers and retirees to extend their working lives. Second, a comparison of workers and retirees by family income and wealth provides insight into their relative ability to absorb a reduction in Social Security income. Third, workers and retirees are compared by gender and marital status and by race and ethnicity to identify whether certain groups would be affected disproportionately by an increase in the Social Security retirement age. To assess the extent to which retirement is voluntary and how that might vary by age, the paper next examines the reasons given for labor force departure. Finally, to address the impact of health status, employment characteristics, income, age, and other demographic characteristics on workforce departure, a multivariate model is used to determine the relative effects of the various demographic and employment factors on the decision to retire.
The comparisons by health status in this study reveal that retirees are in poorer health than workers of the same age and are more likely to have a condition that limits or prevents work. In addition, the findings suggest that workers in physically demanding jobs retire earlier than those in less physically demanding jobs. The comparisons by family income and wealth reveal that unmarried retirees have lower levels of family income and wealth than married retirees and both married and unmarried workers. Thus, they may find it harder to adapt to a delay or a reduction in Social Security benefits. Furthermore, although workers with pension coverage (through a defined benefit plan and/or a defined contribution plan) retire earlier than those without pension coverage, a large proportion of retirees are not currently collecting pension income. Further comparisons suggest that unmarried women and nonwhites are likely to be particularly vulnerable.
The reason given for labor force departure varies by age: the younger a worker when leaving a job, the more likely it is that the departure is involuntary, whether the result of job loss or poor health. Only one-quarter of workers leaving a job between ages 55 and 61 retire voluntarily, compared to over one-half of those leaving a job at or after age 62.
Factors that are significantly related to retirement among men include: being aged 61 to 64; having three or more functional limitations; working in agriculture, mining, construction, or transportation industries; working fewer than 20 hours per week; having pension coverage; and having 13 or more years of education. For women, these factors include being age 65, having three or more functional limitations, and working in a physically demanding occupation. Several factors are correlated with delayed retirement. For instance, both men and women are much less likely to retire if they have health insurance coverage from their employer. They are also much less likely to retire if they have a spouse who is working. However, after controlling for the presence of a working spouse, marital status does not appear to be a significant factor for either men or women. Among women, other significant factors that are negatively related to retirement include working 20 to 34 hours per week and being nonwhite.
In general, the study's findings are consistent with previous research. In particular, the findings corroborate previous studies that find that (1) workers with pension coverage are more likely to retire than workers without pension coverage, (2) workers who would lose health insurance coverage upon retirement are less likely to retire, and (3) workers in poor health are more likely to retire.
The ability of workers to adapt to further increases in the Social Security retirement age depends on their ability to extend their working lives, to accumulate enough savings to offset a delay or reduction in Social Security income, or to get by on reduced income. The ability to extend working lives, in turn, depends in part on health and disability status. The vast majority of workers, even those aged 65 and older, are in good health and do not have any functional limitations or conditions that limit work. Furthermore, the trend away from physically demanding jobs will further increase the ability of workers to extend their working lives.
Although retirees, especially early retirees, are in worse health than workers, the majority of retirees are also in good health and do not have any functional limitations or conditions that limit work. On the other hand, a large minority do. Although the Social Security Disability Insurance (DI) program can bridge the gap between the time those in poor health can no longer work and the time they reach the normal retirement age, not all of those in poor health will meet the strict DI eligibility requirements.
To better inform such options, it is necessary to develop better estimates of the size of the population that will be unable to continue working. This involves examining actual job demands, reported health limitations, and employer accommodations. In addition, it will be necessary to estimate how the size of this group might change in the future. And, there is evidence that the timing of the onset of disability matters. In particular, persons whose health declined relatively recently are more likely to leave the labor force than persons whose health declined earlier (Bound et al 1998). The HRS provides an opportunity for exploring these issues.
Extending working lives also requires that jobs be available. Although an analysis of the demand for older workers is beyond the scope of this study, examining the reasons for labor force departure can help shed some light on this issue. Workers leaving the workforce at or beyond age 62 were only half as likely to report leaving involuntarily due to job loss as those leaving prior to age 62. This may imply that persons retiring at age 62 and older are more likely to have been able to continue working. On the other hand, the availability of Social Security benefits beginning at age 62 may result in underestimates of the reports of job loss among those 62 and older, meaning job loss might be just as problematic for persons aged 62 and over.
Those who cannot extend their working lives will be less affected by a delay or a reduction in Social Security benefits resulting from an increase in the retirement age if they have adequate savings and/or pension income. However, the findings suggest that the youngest retirees, especially those who are unmarried, have much less wealth than those who retire later. Because the measures of wealth exclude pension wealth, however, they may understate the ability of retirees to offset any decreases in Social Security income, especially since persons with pension coverage are more likely to retire early. Even so, many retirees do not have pension coverage. Therefore, policies to increase pension coverage as well as to increase private savings would help counter the negative effects of a decrease in Social Security income.
Although the analysis presented in this study has the advantage of incorporating many factors simultaneously in a simple model of retirement, it does not attempt to explain how these factors influence individuals' decisions in a structural model. Rather than providing a model of people's behavior, it can show only correlation between these factors and retirement. Future research should attempt to develop structural economic models of the decision to retire that account for all of these factors simultaneously. That would provide a better guide to policymakers about who can delay retirement, as well as mechanisms by which the people who are most able to delay retirement might be induced to work longer while allowing those who are unable to work to retire with some level of security.
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