bR I E f #
35
juLy 2012
Program on
Retirement Policy
www.urban.org
InSIdE THIS ISSuE
•If labor force participation increases more than
projected, shortfalls in systems like Social
Security will be smaller.
•Almost all formal models predicting labor force
participation among older workers fail to
account for the importance of labor demand.
•Older workers are the largest underused source
of labor and human capital in the economy.
Correcting Labor Supply Projections for Older Workers
Could Help Social Security and Economic Reform
C. Eugene Steuerle and Caleb Quakenbush
Changes in life expectancies, birth rates, and health care (among other conditions) affect the employment of older workers. Older
workers’ employment, in turn, has wide-ranging implications for the sustainability of the nation’s entitlement programs and the
broader federal budget, as well as the future economic growth of both the elderly and the nation. Will future workers continue to
spend longer portions of their lives in retirement? Or will the recent shift from declining to increasing labor force participation
among older workers continue, or even accelerate—and not just during recessions?
T
he answer has enormous implications
for how policy reforms can or should
be designed. More years of work by
the population produces more
income, higher private saving as people draw
down their assets over fewer years, fewer years
of dependence on government, and higher
Social Security, Medicare, and income tax
revenue that can support higher annual and
lifetime benefits at any tax rate (Butrica,
Smith, and Steuerle 2006). Yet, the
Congressional Budget Office (2012) has only
recently started to show how policy changes,
such as increases in the retirement age, could
increase personal income and revenues outside Social Security.1 Whatever the cause, if
labor force participation increases more than
projected, shortfalls in systems like Social
Security will be smaller. Policies that lean with
rather than against the wind could accelerate
or enhance that trend.
This brief first points out some fundamental flaws in both theory and empirical
work surrounding labor supply. Although it
is theoretically possible for workers to supply
more or less work over time, these flaws lead
to biased estimates that over-predict the
share of life spent in retirement and underpredict the future labor force participation
of older workers. Next, the brief reviews
some recent trends in both actual and predicted labor force participation by the Social
Security Administration. Finally, it highlights how estimates associated with Social
Security reform proposals traditionally have
accounted inadequately for employment
Both public and
private policy
must change to
allow increased
employment
among older
workers to
blossom further.
Correcting Labor Supply Projections for Older Workers
Could Help Social Security and Economic Reform
effects (regardless of their size). Avoiding
these shortcomings would mean that any
balanced system reform would produce
higher benefit rates at any tax rate or lower tax
rates at any benefit rate.
All in all, there is a good reason to be optimistic—at least on this front—about the
future of the economy. However, both public
and private policy must change to allow
increased employment among older workers
to blossom further.
Leisure and Retirement years: not the
Same Thing
Economists often view leisure as a superior
good: that is, as the economy grows richer,
people demand more time in activities outside the formal labor market. Economists
then apply this view to retirement, using it to
help explain the large growth in retirement
years in countries across the globe in the 20th
century. As real incomes rise, they argue,
these larger lifetime incomes (the income
effect) tend to dominate the higher wages
made possible by working later in life (the
substitution effect), and workers tend to
retire earlier.
Costa (1999) is among the best known of
those who reviewed this evidence. According
to her, increased incomes from private and
public pensions, decreased travel and communications costs, and a burgeoning market
targeted at retirees increased workers’ real
wealth. It established retirement as a social
norm, making withdrawal from the labor
force appealing at increasingly younger ages.
Costa cautioned that the small uptick in labor
force participation rates just gaining notice in
the 1990s could be a temporary deviation
from trend, not a reversal of retirement-age
declines. In other words, the jury was still out
on whether the reversal would be permanent.
Costa was not alone. At about the same
time, the Social Security actuaries projected
continually lower or stagnating labor partici-
pation rates of older workers far into the
future. Some technical panels of economists,
demographers, actuaries, and other professionals advising Social Security actuaries on
their long-range projection methodologies
also shared this point of view. The 2003
Technical Panel noted that, “given the projection of a 127 percent increase in income
[over the projection horizon], it seems inadvisable to assume increases in labor force
participation rates for older persons. Such a
reversal in the trend toward earlier retirement
has never been seen in the historical record of
any country.”
In March 2001, Steuerle and Carasso predicted that just the opposite would happen.
In their view, the classic labor-leisure distinction in economics oversimplifies how workers approach their decisions to participate in
the labor force. In today’s economy, where
work for most is less physically strenuous
than it was for previous generations, workers
may actually find benefits in work similar to
those hypothesized for leisure (Steuerle,
Spiro, and Johnson 1999). At the same time,
the demand for a better life can play out in
different ways than increasing retirement
years from, say, 20 to 25. There may be
increased demand for part-time or bridge
jobs. Rising real incomes and shifting attitudes about work-life balance could bring
about demand for shorter workweeks, longer
vacations, or more parental leave.
The limitations of the simple leisure
theory derive from economic simplifications
that are often useful but sometimes fail
to capture real-world nuances. In truth,
leisure is often put in economic models to
complete them mathematically. Work is
assumed—not proven—to provide negative
value or utility, so people trade off the
“bad” from working for the “good” from
working—a paycheck—until those bad
consequences are marginally more costly in
absolute terms than the pay people receive
(Steuerle 2007). Sociologists and psychologists would scoff at this type of simplification, trusting more in what a person says
gives him or her a sense of well-being. They
would be much more likely to recognize
that labor force participation can be a source
of social and intellectual fulfillment, particularly if older workers have more flexibility
in when and where they work.
The simplified economic theory is still
useful if work is defined as activity outside the
home that provides decreasing and, eventually,
negative utility at some margin (for example,
increasing work from 8 to 9 hours a day).
However, it is unnecessary to assume that
increasing labor force participation from 0 to
4 hours a day provides negative value (absent
pay) to everyone or almost everyone. If that
were true, for instance, there would be no
voluntary labor for charitable organizations.
Yet, many older individuals volunteer or continue to volunteer as they enter retirement
(Zedlewski 2007).
Workers as One-Hoss Shays
The notion of complete retirement from the
workforce is actually a very modern one.
Until recently, most of the population worldwide was primarily agrarian. Work life
revolved around the farm; the hours were
long, and little if anything was available in the
way of financial saving for retirement. Older
farm workers did not sit back while the rest of
the family did all the work. Rather, they
pitched in with what they could, taking
account of their depreciated skills.
With the growth of an industrial economy
putting huge stress on manual labor, many
people wore out and needed to retire from
those strenuous jobs. This led to the development of retirement plans that often treated
workers like “one-hoss shays” (horse-drawn
buggies) that worked perfectly, then suddenly
collapsed and depreciated to uselessness.
Social Security started and continues with
2.
Correcting Labor Supply Projections for Older Workers
Could Help Social Security and Economic Reform
figure 1. Labor force Participation Rates by Age Group (percentage of age group population, both sexes)
80
Ages 16–24
70
60
Ages 55–64
50
40
30
20
Ages 65+
10
0
1948
1958
1968
1978
1988
1998
2008
Source: Bureau of Labor Statistics.
this model of human capital depreciation in
mind. For instance, it does not offer partial
retirement options, though some people
might effectively take them indirectly.. The
one-hoss shay stereotype never represented
the diversity of work and family experiences,
but today it relates even more poorly to how
individuals’ skills and human capital evolve.
To make matters even more complicated,
most workers still retire at age 63 or 64. If
they were to retire today for the same number
of years as when Social Security benefits were
first paid, they would be retiring at age 75,
and in another 50 years or so at age 80.
Workers in 1940 and 1950 retired at age 68 on
average; today the combination of earlier
retirement and longer lives gives workers
more than 10 additional years of retirement
than workers in 1940. That any demand for
leisure—no matter how superior a good—
would evolve this way makes little sense
unless the availability of Social Security benefits at age 65, then 62, is taken into account.
Labor demand: Missing from the
Predictive Models
While no one yet knows how people will
adjust to increasingly higher lifetime earnings,
almost all formal models predicting labor
force participation among older workers—
including those used by the Social Security
Administration—contain a fundamental
flaw: they fail to account for the importance
of labor demand on labor force participation.
Employment at a point in time measures not
labor supply, but the intersection of labor
supply and labor demand. The models, however, ignore demand and project future labor
supply of different age groups by following
their employment trends over time, almost
as if each group were totally independent of
the others.
3.
Correcting Labor Supply Projections for Older Workers
Could Help Social Security and Economic Reform
Older workers are
to the first half of
the 21st century
what women were
to the last half
of the 20th: the
largest underused
source of labor
and human capital
in the economy.
As an extreme example of how such projection fails to account for labor demand,
consider a population where the birth rate
falls to zero and everyone will eventually be
age 65 or older. In this case, it is unlikely that
the future labor force participation of those
older than 65 would in any way parallel that
of older workers in an earlier population with
many younger people. As long as citizens
demand goods and services, businesses will
seek out the labor necessary to satisfy that
underlying demand.
This example shows the danger of
extrapolating labor force participation rates
of different age groups without considering
the number of potential workers relative to
the population. Take an extreme case where
labor demand is inelastic—that is, we need
about the same proportion of the population to provide us with the goods and services we want. When the decline in work
among older workers can no longer be offset by an increase among younger workers,
the changed age distribution will dramatically affect the demand for workers at different ages and the trend lines of specific
age groups.2
What allowed that demand to be filled
in the last half of the 20th century, even while
longer-term workers retired earlier and earlier? Mainly the introduction of women and
baby boomers into the workforce. In fact, the
share of adults working increased almost
every non-recessionary year over that halfcentury. Thus, where labor demand existed, it
could easily be met by the many additional
productive, more highly educated entrants.
As the entrance of new women and young
workers slows, employers are likely to train
their hiring sights on older workers and the
vast pool of talent they represent.
Adjusting the labor force of different age
groups by education levels produces yet
another explanation for why past trends
have slowed or reversed themselves: new
labor force entrants no longer demonstrate
average skill levels well above those at or
near potential retirement ages. College graduation rates of those now entering the
workforce are no longer significantly above
those of the workers they replace. These
changes, too, increase the relative demand
for older workers.
Today’s older workers possess qualities
that employers will increasingly seek out:
their education level matches that of younger
workers, they have lifetimes of experience,
and they are healthier than their predecessors
were at the same age (Munnell 2006).
Trends in Actual and Predicted Labor
force Participation
So far we have mainly discussed theory. Now
let’s look at the data.
Overall labor force participation
increased over the last half of the 20th
century. While it has been trending downward recently as the economy suffered, it is
by no means at record lows. Who has been
driving this recent decline? Younger workers,
who are now more likely to remain out of
the labor force while pursuing education or
to take more time to engage the workforce
more fully. In today’s unfriendly job environment, more young adults may feel forced
into or opt for more schooling or other
non-labor alternatives in the face of poor
employment prospects.
Meanwhile, among citizens age 55 and
older, the trend of declining participation has
largely reversed. Participation among this
group has increased from its low in the early
’90s and now slightly surpasses its 1980s level
(figure 1). This is not just the result of a continued increase in participation among
women: among men age 55 and older, labor
force participation fell from 45.6 percent in
1980 to 37.7 percent in 1993, but it has since
climbed to 46.3 percent in 2011 (BLS, not
shown). Additionally, while the Great
Recession saw a short uptick in new Social
Security retirement claims among eligible
workers, retirement benefit uptake has since
fallen to its lowest level since 1976, and a
decade-long trend in delaying retirement
benefits may have resumed (Johnson 2012).
Social Security’s Predictions of Labor
force Participation by Cohort
In developing its annual OASDI Trustees
Reports, the Social Security actuary attempts
to project future labor force participation
rates among the working-age population.
While specific methodology is refined over
time, employment statistics used in the
4.
Correcting Labor Supply Projections for Older Workers
Could Help Social Security and Economic Reform
figure 2. Trustees’ Assumptions versus Actual Participation Rates (men, age 65–69)
45
2012
SSA projections by year
2009
40
2005
35
BLS historical data
30
2000
25
1992
1986
20
1987
15
1985
1995
2005
2015
2025
2035
2045
2055
2065
2075
2085
Sources: Bureau of Labor Statistics and authors’ compilations of data from Social Security actuary.
5.
Correcting Labor Supply Projections for Older Workers
Could Help Social Security and Economic Reform
reports rely on historical Current Population
Survey (CPS) data provided by the Bureau of
Labor Statistics (SSA Chief Actuary 2011).
These data are disaggregated by age and sex to
capture effects of specific demographic trends
on various sections of the population.
Variables that influence SSA’s projections
include the effect of early and normal retirement ages, marriage rates, divorce rates,
spousal labor force participation, disability
prevalence, and unemployment rates.
Published projections of labor force participation by the Social Security actuary have
painted sometimes grim and at best modest
outlooks for participation rates among older
workers, but how well have these matched
reality? Figure 2 plots labor force participation
projections of previous Trustees Reports
against BLS-reported rates among 65- to 69year-old men since 1985. In this period, actuals have almost continuously surpassed projections, with projections almost always
implying a flattening of the overall upward
trend that does not occur. Calculations for
older groups generally provide a similar tale.
The one exception is the group just before
Social Security eligibility age (55–60). This
group’s prevalence rate of disability insurance
receipt is at least partially related, an issue we
do not pursue further here.
All this is not to question the utility of
using historic trends in forecasting, but to
point out that the future does not always
resemble the present. As seen in figure 2,
Social Security allows for some change from
current levels, but these projections almost
always imply a relatively flat trend line outward from the year of projection. Projections
used to head slightly downward, but more
recently they head slightly upward. The 2012
Trustees Report projects slightly higher overall participation rates among men and
women over age 16, citing in part higher life
expectancies.3 The 2011 Social Security
Technical Panel recommended that the
actuaries take more account of the factors
likely to affect labor supply—for instance,
the shift from defined benefit to defined
contribution pensions in the private sector.
Workers with defined contribution plans stay
in the workforce longer since they tend to
have less security that their pensions will last
(Johnson and Steuerle 2003). However, the
panel’s recommendations only went halfway:
they recognized modern influences on labor
supply but still failed to note the flaw that
derives from ignoring labor demand.
The failure of Policy Reform to Take
Advantage of the Skills and Talents of
Older Workers
Failure to fully recognize the shifts occurring
in labor force participation among older
workers creates a blind spot for policymakers
exploring options for much-needed reform in
Social Security and labor policy. Policy has
come a long way in removing some institutional barriers that discourage work, but
much more can be done. For example, Social
Security reform could make it easier for workers to take a partial retirement benefit while
continuing to work part time, or it could
allow workers who defer retirement to purchase a higher Social Security annuity more
easily than the today’s clumsy arrangement of
earnings tests and delayed retirement credits
(Steuerle 2010). Greater labor force participation at older ages aids not just in the solvency
of our entitlement programs, but increases
personal income and general revenues as well.
At the same time, if low-earning workers
continue to be encouraged to retire earlier
and earlier relative to life expectancy, while
higher-earning workers remain in the workforce longer, current policies could lead to
increased inequality in the incomes of the old.
Reform should therefore consider other policies, even independently of any shortfall in
trust fund balances. These include raising the
earliest retirement age, which now signals that
people are old when they are 62 and on average have very long remaining life expectancies,
and increasing minimum benefits for workers
with low lifetime earnings.
Older workers are to the first half of the
21st century what women were to the last half
of the 20th: the largest underused source of
labor and human capital in the economy.
Few policymakers are taking this extraordinary possibility into account in their reform
packages. In an increasingly informationand service-based economy, older workers
represent a valuable source of knowledge
and experience that employers will tap, especially if Social Security and related economic
reforms attempt to channel rather than
obstruct these forces. •
Acknowledgments
The authors are indebted to the Social
Security Office of the Actuary for their very
generous assistance in providing both past
and current projection data. They are also
grateful to Richard Johnson for valuable
insight and comments.
6.
Correcting Labor Supply Projections for Older Workers
Could Help Social Security and Economic Reform
notes
References
1. When it comes to the budget, for instance, the
Social Security actuaries and the Congressional
Budget Office more traditionally have only
reported on changes on Social Security trust
funds, not on what is often a larger and more
important effect on income taxes. We had
been encouraging both offices for some time to
start showing these other economic effects.
Butrica, Barbara A., Karen E. Smith, and C.
Eugene Steuerle. 2006. “Working for a Good
Retirement.” Retirement Project Discussion Paper 3.
Washington, DC: The Urban Institute.
2. Technically, models typically calculate trends
for specific age/sex groups and then derive a
population estimate by taking those trends and
reweighting by the relatives size of different
age/sex cohorts over time. As shown in the
anecdotal examples above, this methodology
mistakenly assumes that the changing weights
themselves do not affect the trend lines for the
various age/sex groups. It ignores, for instance,
how labor demand could more easily allow early
retirement when the birth rate was higher or
when women increasingly entered the workforce.
3. In other reports, we have suggested that projections over time should also be made on the basis
of remaining life expectancy and relative life
expectancy, which are often better measures of
people at equivalent levels of health over the
decades than is chronological age. Note that the
trend toward higher labor force participation
would be lower if measured by equivalent life
expectancy rather than equivalent chronological
age, an issue we do not pursue further here.
See Cushing-Daniels and Steuerle (2007) and
Steuerle and Spiro (2010).
Congressional Budget Office. 2012. “Raising the
Retirement Ages for Medicare and Social Security.”
Issue brief. Washington, DC: Congressional Budget
Office.
Costa, Dora L. 1999. “Has the Trend Toward
Early Retirement Reversed?” Paper presented at the
First Annual Joint Conference for the Retirement
Research Consortium, Washington, D.C.,
May 20–21.
Cushing-Daniels, Brendan, and C. Eugene Steuerle.
2007. “Retirement and Social Security:
A Time Series Approach Based on Remaining Life
Expectancy.” Washington, DC: The Urban
Institute.
Johnson, Richard W. 2012. “Social Security Claims
Edged Down in 2011.” Retirement Security Data
Brief 5. Washington, DC: The Urban Institute.
Steuerle, C. Eugene, and Adam Carasso. 2001.
“A Prediction: Older Individuals Will Work More
in the Future.” Straight Talk on Social Security and
Retirement Policy 32. Washington, DC: The Urban
Institute.
Steuerle, C. Eugene, and Christopher Spiro. 1999.
“Adjusting for Life Expectancy in Measures of Labor
Force Participation.” Straight Talk on Social
Security and Retirement Policy 10. Washington,
DC: The Urban Institute.
Steuerle, C. Eugene, Christopher Spiro and
Richard W. Johnson. 1999. “Can Americans Work
Longer?” Straight Talk on Social Security and
Retirement Policy 5. Washington, DC: The Urban
Institute.
Technical Panel on Assumptions and Methods.
2003. Report to the Social Security Advisory Board,
Washington, D.C., October.
———. 2011. Report to the Social Security
Advisory Board, Washington, D.C., September.
Johnson, Richard W., and C. Eugene Steuerle. 2003.
“Promoting Work at Older Ages: The Role of
Hybrid Pension Plans in an Aging Population.”
Working Paper 2003-26. Philadelphia, PA: Pension
Research Council.
U.S. Social Security Administration, Board of
Trustees. 2012. The 2012 Annual Report of the Board
of Trustees of the Federal Old-Age and Survivors
Insurance and Federal Disability Insurance Trust Funds.
Washington, DC: U.S. Social Security
Administration.
Munnell, Alicia H. 2006. “Policies to Promote
Labor Force Participation of Older People.”
Working Paper 2006-2. Chestnut Hill, MA: Center
for Retirement Research at Boston College.
U.S. Social Security Administration, Office of the
Chief Actuary. 2011. Long-Range OASDI Projection
Methodology. Washington, DC: U.S. Social Security
Administration.
Steuerle, C. Eugene. 2007. “The Seven Deadly
Sins in Aging Policy and Research: A Cautionary
List for Policymakers and Prognosticators.” In
Labor Supply in the New Century, June 2007, edited
by Katharine Bradbury, Christopher L. Foote, and
Robert K. Triest. Boston, MA: Federal Reserve
Bank of Boston.
Zedlewski, Sheila R. 2007. “Will Retiring Boomers
Form a New Army of Volunteers?” Perspectives
on Productive Aging Brief 7. Washington, DC:
The Urban Institute.
———. 2010. “How Social Security Can Costlessly
Offset Declines in Private Pension Protection.”
The Government We Deserve opinion column.
Washington, DC: The Urban Institute.
7.
About the Authors
Program on Retirement Policy
C. Eugene Steuerle is an Institute
fellow and Richard B. Fisher Chair
at the Urban Institute.
http://www.retirementpolicy.org
Caleb Quakenbush is a research
assistant at the Urban Institute.
The Program on Retirement Policy addresses how current and proposed retirement policies,
demographic trends, and private-sector practices affect the well-being of older individuals,
the economy, and government budgets.
Copyright © July 2012
The views expressed are those of the authors and do not necessarily reflect those of the
Urban Institute, its trustees, or its funders. Permission is granted for reproduction of this
document, with attribution to the Urban Institute.
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8.