A tale of two retirements: Working longer is exacerbating income inequality among older Americans
For many well-educated older adults, this is the best of times. The new generation of college-educated Americans in their sixties are, on average, healthier than ever, and they are living longer. Millions are extending their careers, working in financially rewarding jobs that provide purpose, intellectual stimulation, and supportive social networks. When these older college-educated workers retire, most will have built a substantial nest egg, primarily through employment-based retirement accounts, to supplement their Social Security benefits.
But for many older adults without a college degree, this is the worst of times. Health problems, physically demanding jobs, and layoffs often limit their employment options, forcing many to retire when they first qualify for Social Security and threatening their financial security in later life. My study released earlier this year found that delaying retirement is deepening income inequality for older adults by leaving those with health problems behind.
The benefits of working longer
A later retirement often means a more comfortable retirement. Today, 62-year-olds receive 33 percent more Social Security income each month, for the rest of their lives, by waiting to collect benefits at age 66 instead of 62, when people first qualify for retirement benefits. Waiting until age 70 to collect raises benefits another 40 percent.
Working longer also boosts lifetime earnings, which generally raise Social Security benefits even more because benefits are tied to past earnings. In addition, people can set aside more money for retirement when they earn more. And those savings don’t have to last as long when people keep working and shorten their retirement.
More people are reaping the benefits of a later retirement, as employment among older adults surges. Data from the Bureau of Labor Statistics show that adults ages 62 to 64 were 34 percent more likely to be working (or looking for work) in 2017 than in 1995, reversing a long-term trend of earlier retirement. Between 1970 and 1995, the chance that people ages 62 to 64 participated in the labor force fell 26 percent.
Older workers with health problems are left behind
My study found that employment gains for people in their early sixties went only to those in good health. Between 1996 and 2014, the employment rate for adults ages 62 to 64 increased 12 percentage points for people without any work disabilities but fell 1 percentage point for those with some work disabilities. Health problems are concentrated among people with limited education and less earning power. In 2014, adults ages 62 to 64 who never attended college were two-thirds more likely to report a work disability than those who attended college.
Increased employment among people without health problems in their early sixties significantly raised their income over the past two decades. Between 1995 and 2013, median household income, adjusted for household size and inflation, increased 34 percent for adults ages 62 to 64 without any work disabilities but only 0.3 percent for those with some work disabilities.
Older people with limited education must confront multiple employment obstacles. In addition to facing disproportionate health risks, which appear to be rising, they are more likely than college graduates to work in physically demanding jobs and to be laid off. Poor health raises out-of-pocket health care spending at older ages. Combined with low lifetime earnings and limited access to employer-sponsored retirement accounts, these challenges threaten later-life financial security for less-educated workers, reinforcing growing earnings inequities and raising income inequality at older ages.
How can we ensure all Americans have access to a comfortable retirement?
There are several evidence-based steps that could improve retirement security for people with limited education, including
- adjusting the Social Security benefit formula to raise payments for those with limited lifetime earnings;
- expanding Supplemental Security Income, a joint federal-state program that provides cash benefits to older adults and people with disabilities with little income and wealth;
- strengthening the disability safety net by providing more rehabilitative services to promote work among people with health problems;
- expanding the savers’ credit and changing tax breaks for retirement savings to encourage more low-income people to save for retirement; and
- creating state-run retirement programs that automatically enroll workers into a payroll deduction savings plan.
Together, these steps could extend the promise of a comfortable retirement to a broader segment of the older population and narrow the growing educational gap in old-age financial security.
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