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retirement dillema

Business Week

The Case Against Retirement
Financial and demographic developments point toward Americans working into their golden years. And that’s a good thing By Chris Farrell

Ah, retirement! Before the 1950s it was something only the wealthy could afford to do. Everyone else needed an income, and most folks struggled to get by in the industrial economy as their faculties deteriorated. Back in the days before 401(k)s—let alone Social Security—older people faced the kind of pressures portrayed by filmmaker D.W. Griffith in his melodramatic 1911 silent film What Shall We Do With Our Old? It’s a sad tale of the setbacks endured by an elderly couple, the wife ailing, the husband tossed off the assembly line to make way for a younger worker.

Griffith was one of many social activists calling for a social insurance system to provide an income for the elderly. The social reformist dream became reality with the 1935 Social Security Act, the spread of the corporate defined benefit pension plan, and Medicare in 1965. For most workers the last stage of life became a time of leisure, recreation, and enjoyment.

The Age of Retirement was one of America’s most successful social reforms ever. But that era is over. A new vision of old age is emerging from the trauma of the credit crunch and the Great Recession: Forget retirement. Keep working.

A Long Time Coming
Surveys show that a majority of baby boomers say they want to work during their golden years. They’re going to get their wish. The key question is no longer “How early can I retire?” It’s “Why retire?”

Of course, like all tectonic social and economic shifts, the trend isn’t new. It has been building for the past three decades with the move away from traditional pensions with their involuntary contributions and steady payout for 401(k)-type plans with their voluntary contributions and uncertain returns. We’re also living longer. That’s good news, but it does mean that to maintain their standard of living the elderly have to either earn a paycheck longer or save more—a lot more.

For workers nearing their retirement years, the median balance on 401(k)s and IRAs combined was a mere $78,000 in 2007. And the stock market reached its all-time peak that year! But the Great Recession has devastated portfolios since then, a stark reminder to millions of near-retirees that they haven’t saved enough to fund a good retirement. Indeed, taking into account both the decline in financial assets and housing, the National Retirement Risk Index as of mid-2009 signals that 51% of households are at risk at age 65 of not having enough retirement income to maintain their pre-retirement standard of living. That’s up from 44% in 2007 and 43% in 2004, according to the index’ creator, the Center for Retirement Research at Boston College.

When You’re Sixty-Four
Those are hardly heartening percentages, and the situation seems even worse when the U.S. unemployment rate is at 10.2%, according to the Labor Dept.’s October survey. The jobless rate for workers 55 and older is around 7%.

But a look at longer-term trends is encouraging. An aging workforce is living longer and is less disabled than previous generations. After all, average life expectancy in 1935 when Social Security became law was 61 years. It’s now 78. A tweak might have to be made to the famous Beatles song When I’m Sixty-Four:

When I get older losing my hair,

Many years from now,

Will you still be sending me a valentine,

Birthday greetings, bottle of wine…

If I’m at work till quarter to ten

Would you lock the door?…

(It should be noted that the man who sings the lead vocal on the original tune, Sir Paul McCartney, continues to enjoy a productive career three years beyond his 64th birthday.)

Older workers probably won’t be “digging the weeds,” to mine the Beatles vein one last time. An economy dominated by services, information industries, and knowledge businesses is far easier to labor in than one where the commanding heights are full of factories, mines, and farms.

The prospect of longer employment suggests more people will choose to alternate the rhythm of their lives, sometimes working intensely and at others exploring other opportunities.

Nevertheless, it’s a social and economic revolution. Take those surveys that show a majority of boomers expect to earn a paycheck in retirement. Only about a third in the past actually worked for pay following retirement.

Yet companies are far from eager to fill their ranks with an aging workforce. The same energy and marketing savvy that created the postwar retirement of mass tourism and leisure will need to be expended on building satisfying careers and job opportunities for a highly experienced but graying and less robust workforce.

That said, the pressure to accommodate older workers will be there, much as the demand for old age insurance was growing around the time D.W. Griffith made his movie. The reason is that the financial impact of working even a few years longer on the average older worker is dramatic. A paycheck has a greater effect on living standards than increasing retirement contributions from 15% of paycheck to 25%, for example. Your savings continue to compound, and your Social Security benefit grows. The same dynamic holds with working part-time. “You don’t have to pay for expenses out of savings,” says Christine Fahlund, a senior financial planner at T. Rowe Price (TROW). “You meet them with your paycheck.”

Work Longer, Stay Healthier
Take this illustration from the number-crunchers at T. Rowe Price. A worker earns $100,000 a year. He has a portfolio worth $500,000. His asset allocation is 40% stocks, 40% bonds, and 20% cash. Instead of retiring, he continues to work and socks away 15% of his income for three more years. At age 65 he would have boosted his total retirement benefit package by 28%. If he went to age 70 his retirement finances would almost double in value, rising 90%. Of course, he doesn’t have to work full-time to get a return from waiting. An income of $20,000 from part-time work is the equivalent of withdrawing 4% a year from a $500,000 portfolio.

It’s also underappreciated that laboring for a paycheck may actually make aging workers healthier. More than making ends meet, work is physically and mentally energizing for many people. Work is a social environment, with birthday celebrations and coffee klatches, friends and acquaintances, people to swap gossip and stories with, neighbors to commiserate with over divorce and to congratulate on pregnancy. It’s likely that you’ll want to move on to a different employer or paid activity when you’re older. But that doesn’t mean you won’t want to work. “For most people work is a community,” says Meir Statman, finance professor at Santa Clara University.

For workers burning the midnight oil in a tough economy, this may all seems like the social equivalent of happy talk. They’re bone tired from working. Health problems are wearing them down. And, as the astute social commentator H.L. Mencken noted back in 1922, occupation matters:

If he got no reward whatever, the artist would go on working just the same; his actual reward, in fact, is often so little that he almost starves. But suppose a garment worker got nothing for his labor: Would he go on working just the same? Can one imagine his submitting voluntarily to hardship and sore want that he might express his soul in 200 more pairs of ladies’ pants?

The aging of America isn’t a tale about the arrival of an economic utopia. The transition to the new world of the older worker will be difficult. But there are many positive fundamental forces at work. The elderly are more vital than before. Americans can afford to grow old. They will grow old gracefully—and on the job.

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There is a major social and cultural message in the current economic collapse to the future retirees of the U.S.: Forget retirement.

That’s right. The recession is making clear what we’ve suspected for a long time. The concept of not working and embracing leisure for the last third of life isn’t practical for most people. Put it this way: Survey after survey has shown that a majority of aging baby boomers plan on working in retirement. Well, that plan is coming true.

Economic downturns often accelerate change. For instance, in the latter part of the 19th century, the country moved from a rural, farm economy to an urban, industrial one. The wealthy associated old age with leisure, but for everyone else it usually meant involuntary unemployment and a humiliating dependence upon family, charity, or community organizations for shelter and food. Policy reformers agitated for some kind of a financial safety net for the nation’s impoverished and isolated elderly.

How Insecurity Led to a Security Net
Not much happened until the Great Depression. It was an economic disaster for families, especially the elderly, “as they watched their hard-won assets vanish, and with them their hopes for an independent and secure old age,” write historians Carole Haber and Brian Gratton in Old Age and the Search for Security. (Sound familiar?) Traditional middle-class objections to a national safety net crumbled with the Depression. Social Security became law in 1935.

“The real or incipient collapse of individual households helps to explain the widespread popularity of Social Security,” say Haber and Gratton.

Our image of retirement is still shaped by the early decades after World War II. The elderly poverty rate plunged thanks to Social Security. Older Americans gained universal health-care coverage with Medicare in 1965. And Corporate America offered workers defined benefit pension plans based on a salary and years-of-service formula.

It was in these years that retirees developed a distinct lifestyle captured by the mass migration to Sunbelt communities, traveling in RVs and bus tours, spending long mornings on the golf course and other recreational pursuits. The development of modern retirement is a great social achievement of the 20th century.

But in the 21st century, the underlying economics of retirement are changing.

Living Longer, Working Longer
On the positive side, we’re living longer. Average life expectancy is now about 78 years, up from 61 years when Social Security became law. We’re healthier, too. Disabilities among the elderly are declining, thanks to a combination of healthier lifestyles and medical advances.

A seismic shift in the economy and workplace are making it easier for an aging population to labor longer. An information-and-services dominated economy will ease the transition to longer working lives. Simply put, toiling away on a computer in medical diagnostics or government bureaucracy is far less demanding than manning an auto assembly line or mining for gold. The rise of an economy based on intangibles and longer life expectancy is behind more than a decade’s worth of scholarly research, aging conferences, and popular press articles trying to redefine retirement.

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