What the U.S. economy needs is for you to work longer to help protect your retirement benefits

What the U.S. economy needs is for you to work longer to help protect your retirement benefits

Elderly workers have become an increasingly critical driver of U.S. economic growth, accounting for almost 60% of all gains in U.S. employment during the 2010s. But since the onset of the COVID-19 pandemic in February 2020, more than one in 15 elderly workers have dropped out of the country’s labor force.

Near term, the decline in elderly labor-force participation is slowing the current economic recovery. Long term, if the decline proves permanent, it could worsen the already challenging economic, fiscal and retirement security outlook for an aging America.

Everyone knows that the pandemic caused a huge spike in unemployment. What is less well-known is that it also caused a large drop in labor-force participation — that is, the number of people who are either working or actively seeking work. While the unemployment rate has fallen as the recovery has progressed and is beginning to approach its pre-pandemic level, the labor-force participation rate is not much different from what it was a year ago at the height of the pandemic.

There are a number of reasons why labor-force participation has been slow to rebound. Many women were compelled to exit the labor market due to pandemic-related caregiving responsibilities, and some may have decided not to return. Government stimulus checks, together with rising asset prices, may also have enabled some workers to exit the labor market, at least temporarily, while the health effects of long COVID may be keeping others at home.

But the most important reason is the surge in early retirements. As of November 2021, the labor-force participation rate of U.S. adults aged 65 and over was 7.2% lower than in February 2020, while that of “prime age” adults aged 25- to 54 declined by 1.3%. 

The Federal Reserve Bank of St. Louis estimates that around 3 million more workers have retired since the start of the pandemic than would have been expected to retire based on prior-year trends. More than straightforward concerns about health and safety may be driving the exodus. Although a large share of these extra pandemic-era retirees are lower-income workers, which is to say workers who are least likely to be able to work remotely, higher-income workers have also been retiring in much greater-than-expected numbers.

While the reasons for this are not entirely clear, it is possible that the widespread death and disruption caused by the pandemic is prompting a “life is short” reevaluation of the trade-offs between continued work and retirement. If so, the decline in elderly labor-force participation could turn out to be more than a one-time shock.

The extra tax revenue that longer work lives generate could help to alleviate the rising cost of old-age benefit spending. 

Let’s hope not, since longer work lives would have many benefits for an aging America.  In economic terms, they could substantially offset the drag that slower growth in the population in the traditional working years would otherwise have on economic growth. As things stand, the Congressional Budget Office projects that U.S. employment will be growing at a rate of just 0.3% per year by the 2030s and 2040s, slowing GDP growth to 1.5% per year — barely one-half of its postwar average. Meanwhile, in fiscal terms, the extra tax revenue that longer work lives generate could help to alleviate the rising cost of old-age benefit spending. 

There would also be substantial benefits for individuals. For one thing, retirement security would improve. All else being equal, if workers contribute for five more years to a 401(k) or other defined-contribution retirement plan, and thereby collect benefits for five fewer years, the plan’s income-replacement rate would be roughly one-third greater. Moreover, studies show that continued productive engagement has a highly positive effect on the physical health, cognitive function, and emotional well-being of older adults. 

Working longer as America ages is both natural and necessary. It is natural because both life spans and health spans have risen dramatically since retirement institutions were first put in place. It’s also necessary because an equally dramatic slowdown in economic growth, itself largely the result of population aging, is rendering those same institutions unsustainable.  

Read: How will we make the most of an extra 30 years of life?

Plus: The great contradiction in the ‘Great Resignation’: Most people like their jobs

Getting back on track

Before the pandemic struck, older American workers were going the right direction. After falling steeply from the 1950s through the 1970s, the elderly labor-force participation rate bottomed out in the 1980s and 1990s, then began rising again. Once the pandemic is past, it is imperative that America get back on track. 

Several relatively modest policy changes could make it more attractive for those older workers who are able to do so to remain on the job longer, while at the same time protecting those who are not. These include:

1. Adjusting Social Security’s benefit formula to include workers’ entire wage histories, rather than just their 35 highest-earning years.

2. Applying Social Security’s delayed retirement credit, which currently stops at age 70, up to whatever age benefits are claimed.

3. Lowering FICA tax rates for older workers, who often earn no additional benefits for the extra taxes they pay.

4. Making Medicare the primary payer for all Medicare-eligible employees.

Employers could also help by expanding opportunities for partial retirement, phased retirement and “unretirement.”

The goal should not be to have everyone work for their entire lifetimes. Nor should it even be for them to work longer. Some people will not be able to, and some simply will prefer not to. But unless a significantly larger share of adult Americans remain productively engaged well into their later years, the economic and financial challenges the U.S. already faces will only worsen. Whether America succeeds in extending work lives may well determine whether it prospers while it ages.

Richard Jackson is president of the nonprofit Global Aging Institute (GAI). This article is based on “Rethinking Retirement in an Aging America,” a report jointly published by GAI and The Terry Group.

More: While many are looking for work, some older workers are jumping at the chance for a new start

Also read: This is why Congress needs to act on Social Security — right now

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