Optimal Retirement Age*
Jon Forman
Alfred P. Murrah Professor of Law
University of Oklahoma
Yung-Ping (Bing) Chen
Frank J. Manning Eminent Scholar's
Chair in Gerontology
University of Massachusetts Boston
Retirement 20/20: Changing the Signals
Washington, DC
November 17, 2008
*PowerPoint and underlying paper available at http://jay.law.ou.edu/faculty/jforman.
Overview
• Demography, health, and retirement
• How pension laws influence the design of
pension plans and the timing of retirement
• Optimal retirement age from the perspective of
employers, government, workers
• New perspectives on the relationship between
demography and retirement age
• Implications for public policy
• Recommendations about pension reform
2
Table 1. Americans are Living Longer
Year
1960
2000
2040
2080
Life expectancy
at birth
Life expectancy
at age 65
Men
66.7
74.0
79.0
82.4
Men
12.9
15.9
18.8
20.8
Women
73.2
79.4
82.6
85.6
Women
15.9
19.0
20.9
22.8
3
Remaining Life Expectancy
100
Figure 1. Remaining Life Expectancies
for Males at Various Ages, by Cohorts
from 1900 to 2100
80
At Birth
60
At Age 30
At Age 60
40
At Age 65
At age 70
20
At Age 100
0
1900
1940
1980
2020
Year of Cohort
2060
2100
4
Table 2. Percentage of Workers
Electing Social Security Benefits at
Various Ages
Year
Age 62
1965
1975
1985
1995
2004
23.0
35.7
57.2
58.3
57.5
Ages Age 65
63-64
17.7
23.4
24.5
31.1
21.1
17.7
19.5
16.3
19.0
18.6
Ages
66+
35.9
8.7
4.0
6.0
4.8
Average
age
65.9
63.9
63.6
63.6
63.7
5
Figure 2. Labor Force Participation of
Men Age 55 and Older, 1950-2007
80%
70%
Men age 55 and over
Men age 65 and over
Participation rate
60%
50%
40%
30%
20%
10%
0%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
6
Figure 3. Labor Force Participation of
Men, Selected Ages, 1976-2007
90
80
Participation rate
70
60
Age 55-59
50
Age 60-64
40
Age 65-69
30
Age 70-74
20
Age 75
and older
10
0
1976
1981
1986
1991
1996
2001
2006
7
Year
Figure 4. Life Expectancies at Birth versus
Social Security Full Retirement Age
90
85
80
Age
75
70
65
60
Life expectancy at birth, females
55
50
45
40
1900
Life expectancy at birth, males
Full retirement age for people born
that year
1940
1980
Year of birth
2020
2060
8
Figure 5. Health Limitations and
Work Status, Ages 55-64, 2002
4.5%
5.3%
15.9%
20.0%
50.3%
62.7%
16.9%
24.4%
Men
No Health Limitation, Working
Health Limitation, Not Working
Women
No Health Limitation, Not Working
9
Health Limitation, Working
Table 3. Percentage of People Age 65+
with Chronic Health Conditions
19971998
20012002
20052006
Heart
disease
Hypertension
Any
cancer
Diabetes Arthritis
32.3
46.5
18.7
13.0
na
31.5
50.2
20.8
15.4
na
30.9
53.3
21.1
18.0
49.5
10
Table 4. Health Problems by Age, 2002
(percent of respondents)
Number
of health
problems
55-64
65-74
75-84
85+
0
1
40
35
26
36
18
34
17
34
2
3
17
6
24
10
29
16
29
14
4 or more
2
4
5
6
11
Table 5. Activities of Daily Living
(ADLs) or Instrumental Activities of
Daily Living (IADLs), or in a Facility
IADLs only
1 to 2 ADLs
1992
13.7
19.6
2005
12.3
18.3
3 to 4 ADLs
5 to 6 ADLs
Facility
Total
6.1
3.5
5.9
48.8
4.7
2.5
4.3
42.1
12
Table 6. Job Requirements by Age, 2002
(percent reporting that “My job requires
X all or most of the time”)
Age
category
Lots of
physical
effort
Lifting
heavy
loads
Stooping,
Kneeling,
or
Crouching
Computer
use
55-59
60-64
65-69
70-74
30
33
29
27
14
13
11
8
27
24
21
17
53
45
29
23
75-79
80+
28
23
10
10
17
11
17
17
13
Pension accrual rates (percentage of age 64
wages)
Figure 6. Annual Contribution Rates
40%
30%
Traditional
defined
benefit plan
20%
Defined
contribution
plan
10%
0%
20
40
60
Age
-10%
14
Table 7. Pension Plans for Full-time
Employees in Medium and Large
Establishments (percent)
Year
1985
1995
DB plans
80
52
DC plans
41
55
All plans
91
80
2000
36
50
70
15
Perspectives on the Optimal
Retirement Age
• Employers
– Use pension rules to shape their workers’ choices
about work and retirement
• Government
– Wants workers to be productive and work as long as
they can
• Workers
– Choosing an optimal, “economically feasible
retirement age” is a complicated endeavor
– Many times, people just get it wrong
16
Implications of Changing Demography
for the Optimal Retirement Age
• Why define retirement age as “yearssince-birth”?
• Instead tie the optimal retirement age to
remaining life expectancy
• Or to mortality risk.
• Or by allocating a fixed percentage of
each adult’s life between working and
retirement years
17
Figure 7. Remaining Life Expectancy
at Various Ages, from 1950 to 2040
Remaining Life Expectancy
25
22.35
20
15
20.33
17.31
15.75
18.37
16.55
14.04
12.81
14.74
13.13
11.23
10.16
10
2040
2010
1980
1950
5
60
65
Age
70
18
Figure 8. Age of Remaining Life Expectancy
Milestones for Men, 1900-2100
85
Age When
Remaining Life
Expectancy Falls
Below 10 Years
75
Age When
Remaining Life
Expectancy Falls
Below 15 Years
Age
65
55
45
35
1900
1950
2000
Year
2050
2100
19
Figure 9. Age of Mortality Milestones for Men,
1900-2100
85
Age When Mortality
Risk Reaches 4%
75
Age When Mortality
Risk Reaches 2%
65
Age
Age When Mortality
Risk Reaches 1%
55
45
35
1900
1950
2000
Year
2050
2100
20
80
Figure 10. Projected Retirement Age If
Individuals Work 80% of Their Adult Lives,
1900 to 2100
Projected Retirement Age if
80% of a 20-year-old's Expected
Adult Life is Spent Working
70
60
Remaining Life Expectancy at
Age 20
Age
50
Remaining Life Expectancy at
Age 65
40
30
Projected Period of Retirement
20
10
0
1900
1950
2000
2050
Year of Birth
2100
21
Table 8. Retirement Age for Year
Equivalent to Age 65 in Base Year
(Year: Months)
Base Year
1980
2000
Year
1940
1940
65:00
1960
1980
2000
2020
67:00
68:11
69:11
70:09
65:00
66:00
66:11
65:00
65:10
2040
2060
2080
71:10
72:09
73:07
67:11
68:10
68:08
66:11
67:09
68:07
2020
65:00
66:00
66:11
67:09
22
Implications for Public Policy:
Some Modest Reforms
• Raise the Early Retirement Age Applicable to
the Penalty on Premature Withdrawals
• Raise the Normal Retirement Age
• Raise the Minimum Distribution Age
• Repeal the Age Discrimination Exceptions
• Require that Benefits be Paid as Indexed
Annuities
• Require that Pension Benefits be Paid to Parttime Workers
23
A More Comprehensive
Proposal
• Mandate Age Neutrality
• Benefits would accrue at a constant
annual rate
• Final Average Pay DB plans could not
meet an age neutrality requirement
• But DC and Cash Balance plans could
24
Conclusion
• Tying the early and normal retirement ages to
longevity improvement would be beneficial to
workers, to government, and to employers
– would encourage workers to work longer and accumulate more
savings so that they have higher incomes when they eventually
retire
– would help the government raise revenues and reduce its
expenditures for its social welfare outlays
– would help employers stave off the labor shortages that could
occur if large numbers of talented baby-boomers choose
retirement over work
• Changes are clearly needed, and the sooner the better
25