Retirement Equity Lab
SCEPA's Retirement Equity Lab, led by economist and retirement expert Teresa Ghilarducci, researches the causes and consequences of the retirement crisis that exposes millions of American workers to experiencing downward mobility in retirement. As a result, SCEPA has developed a policy proposal known as Guaranteed Retirement Accounts (GRA) to provide stable pensions to the 63 million workers who currently have none.
The unemployment rate for workers aged 55 and older increased last month for the second month in a row, from 3.7% in January to 3.8% in February. The overall unemployment rate stayed constant at 4.9%.
More older workers are joining the labor market. From 2005 to 2015, the labor force participation rate for men aged 55 to 64 increased from 69.3% to 69.8%. The labor force participation rate of older women increased somewhat more - from 57.0% to 58.5%.
An increasing labor force participation rate for older workers represents an increase in the supply of labor. Whereas an increase in the demand for labor will increase job opportunities and wages, an increase in supply may be associated with reduced both wages and job quality.
The increase in the labor force participation rate from 2005 to 2015 was associated with a slowing in the rate of growth in wages of older workers, indicative of weak demand for labor. Between 1995 to 2005, real weekly earnings for men and women aged 55 to 64 increased by 7.1% and 23.7%, respectively. But between 2005 to 2015, real weekly earnings increased only 2.5% for men and 1.1% for women. This sluggish rate of growth of weekly wages wasn’t the result of a decline in the number of hours worked. The median hours worked among full-time older workers stayed constant at 40 hours per week between 1995 and 2015.
Without well-designed retirement plans, saving for retirement becomes difficult and delaying retirement becomes necessary. This could be why the Bureau of Labor Statistics predicts older workers’ labor force participation rate will continue to grow in the coming decade, especially for women, who have a projected participation rate of 62.9% by 2024. If older workers are unable to retire, it has a ripple effect on the entire labor market, as increasing competition from older workers decreases the bargaining power of younger workers.
We need to ensure older workers a viable path to retirement by creating reliable retirement savings programs to supplement Social Security. For example, Guaranteed Retirement Accounts (GRAs) require employee and employer contributions over a worker’s lifetime and provide guaranteed lifetime income in retirement. With the confidence provided by secure retirement income, older workers can choose to leave the labor market according their own needs, rather than hanging on to undesirable jobs out of financial desperation.
Notes: Data for median weekly earnings in current dollars for men and women age 55 to 64 as well as historical and projected labor force participation rates are taken from the Bureau of Labor Statistics. Inflation adjustments are made using the Consumer Price Index. Median usual hours worked per week figures for workers aged 55 to 64 are calculated by the author from CPS Annual Social and Economic Supplement.
SCEPA Director Teresa Ghilarducci spoke with The New York Times’s Noam Scheiber about the retirement savings initiatives in President Obama’s 2017 budget proposal. She believes they are an admirable attempt to make up for the long decline in employer provided retirement benefits, but don’t go far enough.
American workers are facing a retirement crisis. Experts recommend we have at least eight times our salary in savings by the time we retire. But the median account balance among families on the verge of retirement is only $12,000. Few have even close to enough savings. Many have none whatsoever.
President Obama’s 2017 budget proposal includes a few modest attempts at improving working Americans’ ability to save for retirement. One is the “auto-IRA,” which would that require all companies who don’t offer a retirement plan to enroll their workers in an IRA. Another is a proposal to make it easier for small businesses to join together and offer their employees pooled 401(k) plans at a lower cost than if they purchased them on their own.
These are notable attempts at reform, but will not solve the retirement crisis even if they make it through Congress. Instead, Ghilarducci calls for Guaranteed Retirement Accounts, managed by the Social Security Administration, to which employers and employees would split a mandated 3% of their income and which would generate a guaranteed rate of return. This is the best way to ensure all Americans can enjoy a comfortable and secure retirement.
The average unemployment rate is down. But it is up for older workers. Today’s jobs report from the Department of Labor reports an unemployment rate of 3.7% for workers over 55 in January, up from 3.2% last month, an increase of 0.5 percentage points. The overall unemployment rate went down by 0.1 percentage points from 5.0% to 4.9%.
Last month, we reported that unemployed older workers took longer to find a new job than younger workers. Drilling down to the different experiences of men and women, we find that that the long-term unemployment rate - defined as being unemployed more than 27 weeks - increased faster for older women.
In 2007, before the recession, a larger share of jobless men ages 55 to 64 (26%) were long-term unemployed than jobless women of the same age (21%). By 2015, well into the recovery, 37% of unemployed men and 35% of unemployed women were long-term unemployed. The share of unemployed women who are long-term unemployed increased 14 percentage points compared to an increase of 11 percentage points for men. For comparison, in 2015, 22% of unemployed 20- to 24-year-olds were unemployed long term.
Other studies confirm that older women face a harsh labor market. The National Bureau of Economic Research (NBER) found that older, college-educated women face more discrimination finding work than both younger women and older men. The Federal Reserve Bank of St. Louis also found that after the Great Recession, older job seekers, especially women, were hit hardest and longest by both unemployment.
It’s no surprise that long-term unemployment decreases bargaining power by increasing a worker’s willingness to accept a less desirable job. Older women nearing retirement already experienced a lifetime of wage disparity that makes it harder to adequately save for retirement during their working years. For women ages 50-64 without enough retirement income, cutting Social Security by raising the retirement age makes the situation worse. They will be forced to work or look for work longer in a labor market characterized by both age and sex discrimination.
Rather, we need to provide Americans with an adequate, secure income in old age. This will level the labor market playing field, allowing all older Americans to choose between retiring with dignity and taking the time to look for decent jobs that best match their skills. Guaranteed Retirement Accounts (GRAs)are one means of achieving this goal.
NOTES: The share of unemployed workers who are long-term unemployed by sex and age is calculated by dividing the number of women and men that are unemployed for 27 weeks or longer by the number of all unemployed workers. The Bureau of Labor Statistics provide the data for the denominator and numerator. The denominator is the number of unemployed men and women aged 55-64 and the numerator is the numbers of long-term unemployed men and women aged 55-64.
Older Unemployed Workers Take Longer to Find Jobs than Younger Workers
The unemployment rate is falling for workers in all age groups. For workers over 55, today’s jobs report from the Department of Labor shows an unemployment rate of 3.2% in December, a decrease of 0.5 percentage points from last month.
While this is good news overall, if an older worker is out of a job, it will take 10 weeks longer to find a new one than their younger counterparts. In 2007, the average time spent unemployed for workers 55+ was 23 weeks, compared to 20 weeks for younger workers, a gap of three weeks. In 2015, the gap increased three fold to ten weeks, with older workers spending 36 weeks looking for a job compared to 26 weeks for younger workers.
Whatever the cause, be it age discrimination or biased job training programs, older workers are less able to recover from the shock of losing a job. As their time looking for work stretches out, many turn to early retirement as an escape, paying a high price in decreased standards of living due to inadequate savings. Cutting Social Security benefits by raising the retirement age will fuel the increase in older workers’ income vulnerability. Systemic change requires a comprehensive program in the form of Guaranteed Retirement Accounts to ensure older workers have the retirement income needed to leave the labor market when they chose.
On January 1st, 2016, The New York Times published an oped by SCEPA Director Teresa Ghilarducci and Blackstone President Tony James, "A Smarter Plan to Make Retirement Savings Last." The article was mentioned in January 4th news updates by Daily Kos and Politico.
In the piece, Ghilarducci and James call for the creation of a mandatory savings plan as a necessary solution to the coming retirement crisis:
"We need a bolder plan, which we are calling the guaranteed retirement account (G.R.A.). Under our proposal, all workers and employers will have to make regular payments into a G.R.A., which builds until retirement age, then pays out a supplemental stream of income until that person and his or her beneficiary die.
The current system - a mix of 401(k)s and individual retirement accounts (I.R.A.s) - is broken."
The retirement crisis is forging unlikely alliances. The New York Times’ Mark Miller writes about how SCEPA director Teresa Ghilarducci and Blackstone President Tony James have joined forces to advocate for replacing 401(k)s with a mandatory retirement savings program on top of Social Security.
Since Dr. Ghilarducci first proposed Guaranteed Retirement Accounts (GRA) in 2009, the effort for reform has gained steam as policymakers recognize the chasm between what experts recommend people save and what they actually do. Most Americans, even in the upper-middle class, have saved nowhere near enough for retirement.
The will for reform is present abroad and at home. Britain, Australia, and New Zealand implemented mandatory retirement programs within the last generation - to great success. In Britain, workers can expect to receive 71% of their salary in retirement. Three U.S. states have enacted universal pension plans since 2012, and another 23 are considering a variety of proposals. According to Ghilarducci, state action is a response to federal inaction, and state policymakers would prefer federal reform.
Last month, the U.S. Treasury debuted its myRA program, which makes government-sponsored starter IRA’s widely available. However, because myRAs are voluntary and small, their impact will be limited. Nonetheless, the program reflects a broad recognition of the need for reform. The Ghilarducci-James alliance is another indicator that a comprehensive federal plan is both necessary and possible.
Today’s unemployment report - while good news for the overall economy - reveals that the number of older people in the labor market continues to outpace population growth. While we all know the number of older people is increasing as the Baby Boomers hit retirement age, this isn’t a story about demographics. It’s about a larger percentage of older workers relying on the labor market.
You can see this trend in both the shrinking unemployment rate for older workers and the increase in their labor force participation rate. In November, the unemployment rate for older workers was 3.7%, one of the lowest since the beginning of the recovery in 2010. More people are working or looking for work.
The labor force participation rate, like the unemployment rate, includes both those looking for work as well as those who have jobs. In November, the participation rate for workers 55+ was about 40.2%, close to its peak of 40% in 2012. In 1995, only about 30% of workers over 55 participated in the labor force, an increase of 124% over the past 20 years. As a result, the labor market is flooded with 35 million older workers. In contrast, the number of prime-age workers (those between 25 and 54 years old) has not grown as fast as the prime-age population. The labor force participation rate of prime-age workers fell to about 80.7% from 80.8% in 1995.
Why are more older workers in the labor market? Given the crisis in retirement savings, some are unable to leave due to inadequate savings, the increase in 401(k)-type plans, and the lack of affordable health insurance.
Cutting Social Security benefits through raising the retirement age leaves work as the primary solution to the shortfall in retirement wealth. While it may look good to see an increasing demand for jobs among older people in an expanding economy, this rosy scenario doesn’t account for bargaining power. If the surge in older workers continues, the job market for all workers takes a hit in lower wages and increased competition between old and young.
The solution is to ensure retirement income through Guaranteed Retirement Accounts. This benefits both old and young. Older workers would have the choice to retire at their current standard of living and younger workers will see an increase in the supply of jobs.
On November 21, 2015, Institutional Investor published Mark Henricks’ review of SCEPA Director Teresa Ghilarducci’s new book, “How to Retire with Enough Money and How to Know What Enough Is” (available December 15th). He describes the book as a basic guide to retirement security for low- and middle-income earners, containing the standard prescriptions (save early, save often, and delay taking Social Security until you’re 70) while offering much more.
Specifically, Henrick calls Ghilarducci’s Guaranteed Retirement Account (GRA) proposal her “primary intellectual contribution to retirement planning.” GRAs are nationwide mandatory savings plans to which workers and their employers would split a contribution of at least 5% of their income. Funds would be pooled and invested in low-cost index funds, managed by the federal government.
GRAs are the solution to what Henricks identifies as the big takeaway from the book: the failure of the “do-it-yourself” retirement savings experiment of the past 35 years. When people are left to rely on employer-sponsored retirement accounts - to which only half the workforce has access - they don’t save enough. Most Americans over age 50 have less than $30,000 in their retirement accounts. This trajectory leaves half of Americans with a food budget under $5/day in retirement.
Ordinary savers aren’t to blame, given the one-two punch of wage stagnation coupled with the complexity of long-term planning in the 401(k) system. Rather, the lack of retirement savings is a systemic failure with a simple and straightforward policy solution: GRAs.
SCEPA Director Teresa Ghilarducci and Christian Weller from the Center for American Progress (CAP) are working to address the retirement crisis by improving the federal government’s system of retirement savings incentives. On October 30th, they published a paper on The Inefficiencies of Existing Retirement Savings Incentives and hosted an event with academic and political experts to discuss the issue in depth. On November 18th, they released a second paper on Laying the Groundwork For More Efficient Retirement Savings Incentives that contains proposals for reform.
Ghilarducci and Weller’s research concludes that the federal government’s current policy to encourage retirement savings through the tax code is both inequitable and inefficient. The wealthy have higher marginal tax rates and therefore benefit more from tax deductions than the poor and middle class. Furthermore, research has shown that wealthy households would save anyways and tax deductions merely encourage them to shift their savings into retirement accounts to lower their tax bill.
The authors suggests five policy reforms to make the federal government’s retirement savings incentives more fair and effective:
- Make the Saver’s Credit fully available to lower-income households
- Establish and expand progressive savings matches
- Simplify retirement savings incentives by streamlining rules
- Limit the automatic increases of tax deductions
- Create simple, low-cost, and low-risk options for people to save for retirement outside of employer plans
In “A Missed Business Opportunity: Senior Centers That Are Actually Fun,” SCEPA Director Teresa Ghilarducci suggests that more and better senior centers are not only an untapped market for entrepreneurs, but also cost-effective for government.
In the U.S., there are about 5,000 adult-daycare centers for a quarter of a million seniors. The remainder of the 40 million Americans over age 65 are a large and unserved market.
The services offered to Japan’s seniors represents the possibilities in the U.S. Last year, 60 casino-themed senior centers opened in Japan, reflecting a desire for “adult” entertainment. The owner of one new casino told the Financial Times that most centers are “too childish.”
More adult-daycare facilities and increased participation could also ease financial pressure on Medicare. At such facilities, seniors are often in constant contact with professionals, who may notice symptoms before they become serious, preventing costly emergency room visits and hospital stays.
The U.S. has three types of adult-daycare facilities: social, medical, and specialized. Medical and specialized centers focus on rehab and managing conditions like Alzheimer’s and Diabetes. Social centers provide a hub for seniors to connect for meals and recreational activities. Both seniors and the insurance companies that pay for their care would prefer more of all three kinds of adult daycare centers.
Perhaps we have a new use for Atlantic City’s abandoned casinos!