The deep recession in the US has accelerated a trend toward late retirement, according to BNP Paribas analyst Julia Coronado.
In the second installment of her series on how the financial crisis has changed the retirement landscape for the Baby Boomers, published on Tuesday, Coronado argued thus (emphasis ours):
According to the Employee Benefit Research Institute’s Retirement Confidence Survey, in 2009 Americans’ confidence in their ability to afford a comfortable retirement dropped to its lowest level since the survey began in 1993. The decision on how long and how much to work is one significant margin of adjustment, with 28% of respondents saying they have changed their expected retirement age in the past year and 72% reporting plans to continue to work part-time even after they “retire”. The deep recession accelerated a trend toward later retirements that began in the mid-1990s; in 1994 half of all respondents in the Retirement Confidence Survey expected to retire before age 65, on the eve of the recession in 2007 that had fallen to 38%, and it dropped to 25% in 2009.
According to her analysis, and per the chart above, labour force participation rates among workers 55 and over have moved in a counter-cyclical way over the past two recessions, “likely owing to the wealth destruction that accompanied them”:
lost wealth through labor income, as well as see how their portfolio recovers. These cyclical moves are also part of a steady trend toward later retirements among older workers that owes to a number of factors (see chart below). Labor force participation among women rose steadily from 38% in 1960 to about 60% in the mid-1990s and has been roughly steady since then. As the women who entered the labor force several decades ago age, this has pushed up on participation rate in the 55 and over age group. Participation rates among men aged 55 and over declined steadily from 88% in 1960 to about 66% in 1995 before the trend reversed course. It has been roughly 71% in recent years.
Longer life expectancies for both men and women also played a role, Coronado argued:
Both men and women may want to remain in the labor force longer owing to longer life expectancy, which also implies more years of spending that needs to be financed. Life expectancy at age 65 rose to 82.2 in 2005 for men from 77.8 in 1960 and to 85.0 in 2005 for women from 80.8. That is a 34% increase in the time spent in retirement and, roughly speaking, the amount of spending that needs to be financed for men and a 27% increase for women. A trend towards service sector jobs that are also less physically taxing has made it easier for many workers to finance these additional spending needs through a longer working life. Given ever later labor force entrance among younger workers, the trend toward later retirements is likely to continue as these workers need to accumulate saving.
We’re not sure about that latter assertion regarding “ever later labor force entrance among younger workers”, but that might be a function of the relatively low average age here on FT Alphaville.
Nonetheless, she concluded the change has important macroeconomic implications:
Ever later retirements among older workers could mean a more gradual slowing in labor force growth as the population ages than we had previously expected.
This has two macroeconomic implications: First, over a longer horizon this suggests less of a slowing in potential GDP growth, however in the short run this means a longer period of slack and greater downward pressure on inflation as we move out of the recession given the abundance of workers who cannot yet afford to retire.
Commensurate with that, of course, is the number of young people just entering the labour force who may find it harder to find jobs. Thanks, guys.
Related links:
Oye, Baby Boomers: don’t retire, if you can possibly avoid it – FT Alphaville
Older workers and their rights – NY Times Room for Debate
Steep losses pose crisis for US pensions – FT Alphaville
Why It’s Time to Retire the 401(k) – Time