A Research Focus of the Urban Institute
A crosscutting team of Urban Institute experts in Social Security, Medicare, Medicaid, tax and budget policy, and microsimulation modeling studies the aging of American society.
About the Research
The aging of America raises many questions about what's in store for future and current retirees and whether society can sustain current systems that support the retired population. Who will prosper? Who won't? Many good things are happening too, like longer life and better health. Although much of the baby boom generation will be better off than those retiring today, many face uncertain prospects. Especially vulnerable are divorced women, single mothers, never-married men, high school dropouts, and Hispanics. Even Social Security—which tends to equalize the distribution of retirement income by paying low-income people more than they put in and wealthier contributors less—may not make them financially secure.
Uncertainty about whether workers today are saving enough for retirement further complicates the outlook. New trends in employment, employer-sponsored pensions, and health insurance influence retirement decisions and financial security at older ages. And, the sheer number of reform proposals, such as personal retirement accounts to augment traditional Social Security or changes in the Medicare eligibility age, makes solid analyses imperative.
Urban Institute researchers assess how current retirement policies, demographic trends, and private sector practices influence older Americans' security and decision-making. Numerous studies and reports provide objective, nonpartisan guidance for policymakers.
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Recent Findings
Increasing work at older ages could ease the aging crisis.
One way of relieving the economic pressures of an aging society is to encourage workers to delay retirement. By working longer, people produce additional goods and services that can raise their living standards and generate tax revenue that help cover the costs of retirement and other government programs. Our research shows that the payroll and income tax revenue from an additional five years of work exceeds the Social Security deficit.
Yet a significant share of older adults experience late-career health and employment shocks that derail any plans to work longer. About one-quarter of workers age 51 to 55 in 1992 developed health-related work limitations and about one-fifth were laid off from their jobs before age 62. Social Security’s disability, spouse, and survivor benefits provide important protections for these workers.
Working longer also requires employers’ willingness to hire and retain older workers. While the evidence is incomplete, many firms appear to have serious reservations about older workers. Employment prospects may be especially bleak for rank-and-file workers and those with limited skills. Managerial attitudes toward older workers may shift in the future, however, as the population and workforce age.
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Many older Americans continue to make important contributions to society after they retire.
Older Americans are a vibrant group with wisdom and energy to offer society and their families. Many older adults engage in productive activities, including paid work, formal and informal volunteering, and caregiving. The value of volunteering and unpaid caregiving by adults age 55 and older approached $162 billion in 2002. Staying active also benefits older adults themselves. Engaged seniors report being more satisfied with retirement than less active adults.
The vast majority of adults who volunteer while working also do so after retirement. Also, a significant share of older adults who do not formally volunteer while working give it a try after retiring. Older adult volunteers who put in many hours over many years and who are married to volunteers tend to volunteer the longest. Despite older adults’ relatively high rates of engagement – defined as paid work or formal volunteering – there remains tremendous potential for recruiting older adults into the workforce and nonprofit volunteer forces. We estimate that over 10 million unengaged older adults are in good health and have no caregiving responsibilities. Employers and nonprofits likely will want to harness more of this potential talent in the future.
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Proposals to solve Social Security's adequacy, equity, and funding problems create uncertainties about future retirement benefits.
The Social Security trustees reported in 2007 that the system would begin paying out more in benefits than it receives in revenues by 2017, and that the trust fund would be depleted by 2041. Most agree that something must be done to restrain future costs or raise additional revenues, but few agree on what should be done or when. Reform options include changing the formula used to compute benefits, reducing cost-of-living adjustments for retirees, increasing the tax on earnings for high-income workers, raising the retirement age, and adding personal savings accounts to the system.
Other countries such as Canada, Sweden, Japan, Germany, the United Kingdom and Italy have much to teach the United States about what works well and what works badly. Their experiences offer lessons about private accounts, incentives to delay retirement and automatic pension adjustments.
Our research shows how Social Security reforms that cut benefits will potentially increase poverty among the most vulnerable older populations. Reforms that include a well-designed minimum benefit for long-service, low-wage workers could protect the highest-risk groups for a fairly modest cost.
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Changes in pensions over the past 25 years alter retirement outlook.
A generation ago, most participants belonged to traditional defined benefit plans, which provide lifetime annuities that begin at retirement and promise benefits based on years of service and earnings received near the end of the career.
Today, about one-half of full-time workers participate in pension plans. However, less than one in five workers in the private sector has a traditional plan. Instead, 401(k) plans now dominate. Rather than promising to pay a specific retirement benefit, firms offering 401(k) plans set up retirement accounts for their workers, into which both employers and employees make tax-deferred contributions. These plans can generate substantial benefits if workers are willing to regularly set aside a portion of their paychecks for retirement savings and if they make wise investment decisions. Yet, few workers invest the maximum amount allowed by law, and too many invest in risky employer stock.
Although controversial, cash balance plans have emerged in recent years as an important alternative to other types of employer pensions. They combine aspects of both traditional plans and 401(k) plans, and are particularly beneficial for young mobile workers. Some participants claim that they discriminate against older workers, sparking lawsuits.
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The economic health of major programs for the elderly, combined with Medicaid's rapid growth, could spell economic crisis.
Government has promised more than it can afford, which will squeeze out other programs unless action is taken. Current 2008 law implies that the share of gross domestic product consumed by Social Security, Medicare, and Medicaid will rise by about 8 percentage points over the next 25 years—an alarming fact that dominates long-term budget projections. In the past, such growth was financed through a decline in defense spending. Because further defense cuts may be unwise, historical precedent must be broken. Few options exist. Either some of the promises will have to be withdrawn, tax burdens raised to unprecedented levels, deficits allowed to soar, or other spending squeezed. If the squeeze occurs, programs for the poor, especially children and working families, will probably be most vulnerable.
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The rising cost of health care and long-term care could undermine retirement security.
Health care costs present the greatest insecurity for older Americans. Soaring health care costs and high future tax rates could lead people to delay retirement. Our simulations show that moderate-income couples retiring in 2030 will have to work an additional 2.5 years to receive the same income in the first year of retirement if health care costs grow rapidly and tax rates rise to help balance the federal budget, compared with the less-likely scenario that assumes that current real health care costs and tax rates continue indefinitely.
Long-term care costs also strain families and government. Frail older adults are one of the most vulnerable groups in the nation, and many rely on family members to help them with the basic activities of daily living. Adult daughters have traditionally served as the primary caregivers. Our research shows that time spent helping parents strongly reduces daughters’ labor supply at midlife, potentially jeopardizing their ability to save for their own retirement income needs. A new solution for financing and providing long-term care services remains one of the most important public policy challenges.
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Greater reliance on private savings to finance retirement leads to additional uncertainty.
The growing popularity of Individual Retirement Accounts and defined contribution (DC) pension plans, which generally provide lump sum payments instead of lifelong annuities, require many older Americans to carefully manage these assets during retirement. Older adults spend more when they hold relatively little of their wealth in annuities, suggesting that the shift from defined benefit (DB) pensions to DC plans will promote faster spending of retirement resources. More options for converting retirement wealth into an annuity that guarantees a lifetime income could help retirees manage their spending and prevent them from outliving their savings.
Older adults have to plan to finance their consumption needs over a long retirement period. We find that adults typically experience declines in wealth and income between the ages of 67 and 80. Changes in living arrangements and marital, health, and work status all affect adults’ retirement incomes.
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The Research Team
- Barbara Butrica, senior research associate, an economist and expert in retirement and Social Security;
- Melissa Favreault, senior research associate, a sociologist and an expert on aging and Social Security;
- Richard Johnson, principal research associate, an economist and expert in pensions, retirement, and aging;
- Gordon Mermin, senior research associate, an economist focused on factors affecting future retirement incomes;
- Rudolph Penner, senior fellow, former head of the Congressional Budget Office;
- Karen Smith, senior research associate, an expert in the development of microsimulation models and retirement income trends;
- Eugene Steuerle, senior fellow, former Deputy Assistant Secretary of the Treasury;
- Eric Toder, senior fellow, former Deputy Assistant Secretary of the Treasury;
- Sheila Zedlewski, center director, an expert in retirement and cash assistance.
The Forecasting Tool
The Dynamic Simulation of Income Model (DYNASIM3)
Designed to analyze the long-run distributional consequences of retirement and aging policies, this dynamic microsimulation model was developed at the Urban Institute in the 1970s. DYNASIM3 is a major update used recently to simulate the effects of potential changes to Social Security on future retirement benefits, explore annuitization options and impacts under a Social Security system with personal accounts, and estimate the potential retirement consequences of the recent entry of many low-wage, single mothers into the workforce.
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Publications
