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When most people retire, they leave a full-time job and stop working entirely. However, for a substantial minority, retirement is not a simple transition from working full-time to not working at all. It is a complex process. Those who have been working for an extended period for a particular employer may leave that job. They may continue to work for someone else on a job that is less demanding. In some less common circumstances, the long term employer will allow the individual to phase into full retirement, by reducing the demands on the job, or hours of work. Some people may even leave the labor market and then return. This research paper describes the complex patterns that comprise retirement, and discusses the leading explanations for retirement outcomes.
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Given this diverse set of outcomes, various researchers and government agencies deﬁne retirement diﬀerently. Because of the complexity of the retirement process, each deﬁnition of retirement oversimpliﬁes the story. According to one deﬁnition, retirement occurs when a person stops work completely. Among the problems with this deﬁnition, many who continue to work are already in the process of retiring. Thus, this deﬁnition classiﬁes many as not retired, even though they have left a long term job, are working in an easier job than they held for most of their work life, are employed on a part-time basis despite having normally worked full-time, are receiving a lower rate of pay than they were paid before they changed their job or work conditions, even though they may be receiving pension or social security beneﬁts. Another deﬁnition pertains to leaving long term employment. This deﬁnition classiﬁes a person as retired when the older individual leaves a job held for 10 or 20 years. A problem with this deﬁnition is that it classiﬁes those who have left a long-term job but are still at work as retired people. Not only does this deﬁnition classify those who are continuing to work, but are phasing into retirement gradually as retired, but according to this deﬁnition, people who are working full time but lost or left a job in their 40s or 50s are retired, even though they are not yet in the process of leaving the labor market. From the perspective of government agencies such as the Social Security Administration, or a ﬁrm’s pension plan, a person may be considered retired when beneﬁts are accepted. But many people work after having applied for or have received beneﬁts. None of these deﬁnitions of retirement is correct or incorrect. Each deﬁnition attempts to reduce a complex process to one or another two-dimensional outcome. Consequently, a deﬁnition of retirement that is quite useful for one purpose may be not very helpful for another.
1. Data Describing Retirement Outcomes
To understand how retirement varies with age, it is useful to consider data from the Health and Retirement Study. This study is the leading source of data on retirement in the USA. It is also a model for retirement surveys that are now being adopted in other countries. Funded by the National Institute on Aging, every other year since 1992 this survey interviews 12,650 respondents who were born between 1931 and 1941, extensively tracking their retirement and other behavior. In a recent article some of the basic ﬁndings on retirement outcomes from the Health and Retirement Study are presented (Gustman and Steinmeier 2000b), and these ﬁndings are summarized here. One way to measure retirement is with self-reported status, a measure that incorporates the inﬂuence of a number of factors in determining whether an individual is retired, and considers three states: not retired, partially retired, and fully retired. At age 53, about 85 percent of men and 76 percent of women consider themselves to be not retired. Starting at age 54, the fraction not retired begins to decline, falling three or four percent for each year of age until age 61. At age 62 the share not retired falls precipitously, with a ﬁfth of men and a seventh of women leaving nonretirement in that one year. At age 65, there is another large decline, with the fraction of men who are not retired falling 11 percent, and the fraction of women falling by 5 percent, leaving a little under a ﬁfth of men and women reporting they are not retired at age 65. Thus from the perspective of many of the deﬁnitions of retirement noted, most people are retired after age 65. At the same time, from age 53 to age 65, the share of men reporting they are partially retired increases from 6 percent to over 22 percent, with the increase for women from 4 percent to 15 percent. About 8 percent of full-time men and 6 percent of fulltime women are still working after having left a longtime job, that is a job they held at age 45 that lasted more than 10 years. Although less than a ﬁfth of the men and women are working full-time after reaching age 65, roughly another ﬁfth classify themselves as partially retired. The percentages at each age of men and women who report they are completely retired are similar, but women are around 15 percent more likely to report that the retirement question is not relevant, presumably because they have not worked outside the home in a number of years.
Retirement status is not static. The number who are not retired in any year is determined in part by how many of those who reported they were not retired in the previous year remain not retired. It is also determined by how many who were not retired in the previous year leave that state for partial or full retirement. Finally, some people may classify themselves as not retired in a particular year, having previously been retired or partially retired. The same is true for the number who are partially retired or fully retired in any given year: those numbers depend on how many continue in the particular state from the previous year, how many leave the state from the previous year, and how many enter that state. Thus to understand the number reporting a given retirement status by age, we need to understand the ﬂows into and out of, various retirement states over time. The Health and Retirement Study (HRS) is a panel data set that resurveys each respondent every other year. It records changes in retirement status over time as respondents age. In the HRS panel, 77 percent of the time respondents continue in the same Retirement State between waves of the survey—retired, partially retired, and not retired. In 17 percent of the cases there is a transition from greater to lesser work, and more diﬃcult to model, 6 percent of transitions are from lesser to greater work. These transitions cumulate over the course of the survey. Altogether, 17 percent of the sample experienced a reversal in the course of the survey, moving from a state of less work to a state of more work.
Also of interest to students of retirement are trends in retirement outcomes. The aging of the baby boomers and decline in mortality have increased the ﬁnancial pressure on social security and other retirement programs. One solution would be to postpone retirement. If people worked longer, the retirement period would be shorter and less costly. Instead, despite improving health, throughout the post World War II years, and until the end of the twentieth century, there was a continuing trend toward earlier retirement. Indeed, the trend to lower labor force participation by older males is one of the strongest labor market trends witnessed in recent years. (The trends in labor force participation and retirement for older women are not nearly as sharp. They are diﬃcult to discern as the increased participation of women in the labor market oﬀsets a tendency to leave earlier.) According to data from the US Current Population Survey cited in Anderson et al. (1999), continuing an earlier trend, from 1947 to 1985, the fraction of married men over 65 in the labor force fell from 55 percent to less than 20 percent. For those aged 55 to 64, the trend to lower labor force participation started later. From 1957 to 1985, the share of married men in the labor force fell from 90 percent to less than 66 percent. Similar trends are found in other countries. Indeed, the decline in the labor force participation rate of males in the US from 1960 is actually relatively modest compared to other countries, with Japan and Sweden experiencing milder trends, while the UK, Germany, Belgium, Spain, the Netherlands, France, and Italy have experienced even greater withdrawal (Gruber and Wise 1999).
There is evidence, though, of a leveling oﬀ in the middle 1980s in the trend toward reduced labor force participation of older men. For example, in 1985 in the USA, men who were 55 years old in the Current Population Survey had a labor force participation rate of 79 percent; in 1991 the participation rate of 55-yearolds had increased to 81 percent. Similarly, between 1985 and 1991, the participation rate for 60-year-olds increased by one percentage point, from 66 percent to 67 percent, and for those 65 years old, participation remained the same at 26 percent. Participation rates did not resume their downward trend in the 1990s.
The trend to earlier retirement for men is apparent when retirement outcomes from the Health and Retirement Study, collected from 1992 to 1998 in the USA, are compared with retirement outcomes from the Retirement History Study, collected from 1969 to 1979. Using ﬁgures from Gustman and Steinmeier (2000b), between these two surveys, the fraction of 60year-olds who considered themselves to be not retired fell from 80 percent to 66 percent. The fraction of 62year-olds not retired fell from almost 66 percent in the 1970s to a little more than 33 percent in the 1990s. Only at age 65 are the fractions not retired similar in the 1970s and 1990s. A very large number of people retired in the 1970s RHS at age 65, with almost 20 percent of the sample leaving nonretirement. In the 1990s HRS, the comparable number leaving at 65 is a little more than half as large—many more have already left. These trends can be seen in the numbers who retire at any given age. In the 1990s HRS sample, 20 percent of the men left nonretirement at age 62. Although there is evidence that the trend to earlier retirement has abated in the past few years, there is a continuing debate about whether the trend will reassert itself.
Researchers have also focused on other aspects of retirement. The family is the center of decision making. Thus there is a question about whether couples coordinate their retirement decisions. It seems they do. Researchers have documented the coincidence of retirement dates for husbands and wives, despite age diﬀerences and diﬀerences in incentives to retire (Gustman and Steinmeier 2000a, Hurd 1990).
2. Explaining Retirement Outcomes
Students of retirement behavior would like to explain what determines these patterns of retirement by age. Of special interest is the onset of substantial ﬂows into retirement beginning at age 53 or so, the sharp increases in retirement that are observed at ages 62 and 65, and the transition for most out of non-retirement by age 65. Also of interest is the question of why a majority of people proceeds directly from full-time work to complete retirement. A substantial minority partially retires, but what determines how long a person stays partially retired? Why do most people reduce their work eﬀort as they age while others sometimes increase work eﬀort after having reduced it? Also, why do diﬀerent people choose diﬀerent ages to enter and leave full time-work, partial retirement, and full retirement? Similarly, researchers would like to know what has caused the trends to earlier retirement over time. Why has the number of people retiring at age 62 increased while the large spike in the number retiring at age 65 has been halved, and more generally what caused the changes in retirement outcomes at each age? They also would like to understand other key patterns in the data, such as the coincidence of retirement by husbands and wives, and how the new patterns of increased participation by women are aﬀecting retirement outcomes.
To understand what determines the wide variety of retirement patterns, economists rely on a model in which forward looking decision-makers weigh the beneﬁts and costs of alternative retirement dates. Older people decide when to retire by taking into account not only current work and leisure opportunities, but also future opportunities. These opportunities include the pay that would be oﬀered for work on the current job, now and into the future, and the pay on alternative jobs. Involuntary layoﬀs aﬀect these opportunities, reducing the oﬀer for continuing full-time work. Incentives created by pension plans and social security play important roles, especially in shaping the future consequences of a decision to retire. These programs have features that may change sharply the incentive to work at diﬀerent ages, ﬁrst encouraging workers to stay in the labor market, then at a later age, reducing the reward to continue work. Against the monetary rewards to continue work, older individuals weigh the diﬃculty of the work. Whether these demands are physical or mental, they are likely to increase with age at diﬀerent rates, depending on the job held. The opportunity cost of working is the value of leisure time. Health problems may increase the diﬃculty of work, and lower the reward to continued work if the individual becomes less eﬃcient at certain tasks. Retirement decisions of spouses, and demands from dependent children and elderly parents also help to shape the retirement decision.
It is diﬀerences in the rewards to continued work, the eﬀects of social security and their diﬀering pension plans on these rewards, diﬀerences in health status, job conditions, as well as diﬀerent evaluations of the same set of beneﬁts and rewards, that create wide diﬀerences in decisions of when to retire. There is also an interaction with the decision to save, and accumulated assets, leaving some more able to aﬀord retirement at a given age than others with the same earnings history. Similarly, changes over time in wages, pensions, social security, and other factors determining the reward structure to continued work, as well as changes in the valuation of leisure, may aﬀect the trends observed in retirement outcomes.
2.1 Key Explanatory Factors Aﬀecting Retirement Outcomes
Consider now in more detail some of the leading factors shaping retirement outcomes and how they inﬂuence retirement behavior.
2.1.1 Wage Oﬀers For Full-Time Work. Theory does not tell us what relationship to expect between the wage a person makes and retirement age. On the one hand, a higher wage implies greater forgone earnings when one leaves work. On the other, a higher wage implies a higher lifetime income, which should lead the high wageworker to prefer more leisure, just as those with higher incomes prefer more of other luxury goods. To date, the evidence suggests these eﬀects are roughly oﬀsetting, so that higher wages on long term jobs do not have a strong relation to retirement outcomes. There are other possible explanations that might allow the wage to account for an increase in retirement with age; for example, if wage oﬀers declined with age, that might reduce the reward to continued work for older individuals. But they do not. Sometimes researchers record the wage rate received by workers at diﬀerent ages and ﬁnd that the observed wage declines with age. This eﬀect is illusory. As workers age, some of the older workers have left their main jobs and are holding lower paying full-or part-time jobs as they transit to retirement. To be sure, some older workers experience layoﬀs, and, once laid oﬀ, old individual certainly have greater diﬃculty locating new jobs, but that is not a dominating factor in shaping retirement.
2.1.2 Minimum Hours Constraints And Lower Wages When Partially Retired. There is evidence that many jobs do not permit older workers to phase gradually into retirement. Rather, at the job they have held for many years minimum hours constraints allow the worker to choose only whether to work full-time, or not at all. Work is available on a part-time basis, but only at much reduced wage. These minimum hours’ constraints, together with a lower wage oﬀer when one works part-time, account for the decision by many to move directly from full-time work to full retirement.
Pensions and their provisions may account for some of the diversity in retirement ages. There are two basic types of pensions. One plan, called a deﬁned beneﬁt plan, provides a periodic payment after retirement that is based on a formula. The amount of the beneﬁt is typically determined by years of service, age, and pay. So is the age of eligibility for receiving a full, unreduced, beneﬁt (normal retirement age) and the age of eligibility for a reduced beneﬁt (early retirement age). Deﬁned contribution plans, which at the beginning of the twenty-ﬁrst century are most often in the form of 401(k) plans, are essentially tax-favored retirement saving plans. Both the covered worker and the employer may contribute to an account, often with the employer matching the worker’s contribution according to a set schedule, up to a predetermined amount.
‘Deﬁned contribution plans’ do not create sharp incentives that aﬀect the reward to remaining on the job, but deﬁned beneﬁt plans do. Those who leave a ‘deﬁned beneﬁt plan’ before qualifying for early retirement beneﬁts may be penalized heavily. Conversely, an individual who stays until qualifying for early retirement beneﬁts may be heavily rewarded. Studies of workers employed at ﬁrms oﬀering deﬁned beneﬁt plans indicate that workers respond to these incentives. Among studies that pioneered in investigating the relation of pension plan incentives to retirement outcomes, see Burkhauser (1979), Fields and Mitchell (1984), and Stock and Wise (1987). According to pension data for respondents to the Health and Retirement Study (Gustman and Steinmeier, 2000c), deﬁned beneﬁt pensions on average had an early retirement age of 54, and an average normal retirement age of 61. Only 6 percent have an early retirement age above 60. Forty percent face a normal retirement age of 65; with 14 percent having normal retirement at age 62; over 20 percent with normal retirement at age 60; and over a ﬁfth having a normal retirement age below 60. A man who has a deﬁned beneﬁt (DB) pension plan and works the year before qualifying for early retirement, on average, will ﬁnd beneﬁts increased by an amount equal to about 120 percent of one year’s of pay. For a woman, the increase amounts to about a third of a year’s pay.
In addition to contributing to the explanation for the diversity of retirement dates, changes in pensions account for some of the trend to earlier retirement. For the 1970s and 1980s, it has been estimated that about 10 percent of the trend to earlier retirement is due to the decline in ages of early retirement in deﬁned beneﬁt pensions and to other changes in pensions (Anderson et al. 1999).
2.1.3 Social Security. Analyses of retirement behavior suggest that social security has had a modest eﬀect in inﬂuencing retirement, and that eﬀect will decline for those now approaching retirement. Social security beneﬁts are determined from past covered earnings history, where past earnings are indexed to age 60 and are averaged to a summary statistic called the Average Indexed Monthly Earnings (AIME). For those reaching age 62 after 1991, AIME is calculated using the highest 35 years of indexed earnings. If an individual has covered earnings for fewer than 35 years, then zeros are entered into the AIME calculation for the remaining years. From the AIME, the basic beneﬁt, called the primary insurance amount (PIA), is computed. A progressive beneﬁt formula is applied so that those who have low computed lifetime earnings have higher beneﬁts, relative to earnings, than do those with high earnings. The earnings measure is typically expressed as a monthly amount, but when annualized, the formula for the year 2000 speciﬁes beneﬁts that are 90 percent of the ﬁrst $6,372 of annual earnings, 32 percent of the next $32,052, and 15 percent of remaining earnings. Beneﬁts to spouses and survivors aﬀect the relationship between beneﬁts and earnings, both at the level of the individual and at the level of the family. Spouses are entitled to roughly half of their partner’s beneﬁts, and survivors are entitled to an amount roughly equal to the beneﬁts that would have been payable to the deceased spouse. The social security beneﬁt is subject to an earnings test for those between the ages of 62 and 65. But any beneﬁts that are lost to the earnings test are restored at age 65. Indeed, for married couples, the additional beneﬁts from waiting until age 65 to claim beneﬁts are worth slightly more than the beneﬁts that were lost.
However, this was not always the case. In the past, the earnings test applied to earnings of respondents up to the age of 72. However, the age at which the earnings test no longer applies has been reduced slowly, until in the twenty-ﬁrst century it only applies to those between the early and normal retirement age. Moreover, in the past, the adjustment for lost beneﬁts was not nearly as generous as it is today. Initially, the social security beneﬁt structure discouraged work after the age of 65. With recent changes, the program is roughly neutral in its eﬀects on the incentive to retire. Thus social security in the past may have created incentives that accounted for some of the retirements, perhaps both before and after age 65. For example, it is estimated that changes in the beneﬁt formula in the 1970s and 1980s may have increased early retirement by about an eighth. But social security should not have any eﬀect on retirements after the age of 65 in future years.
International evidence reinforces the view that pensions and social security have important eﬀects on retirement behavior. With the aging of the baby boom, the worry in many countries is that pensions and social security discourage still productive individuals who would otherwise work to leave the labor force.
Diﬀerent countries have very diﬀerent pension and social security systems than the USA. Diﬀerences in design among countries create incentives to retire at diﬀerent ages. The diﬀerent retirement incentives created by the diverse retirement systems among countries provide another test of the inﬂuences of social security and pensions in shaping retirement behavior. Gruber and Wise (1999) have brought together researchers from a number of countries, both to describe retirement outcomes, and to see how their pension plans and social security systems aﬀect retirement behavior. They ﬁnd a close correspondence between the early retirement dates and other features of the programs, and the ages at which older workers tend to leave the labor force. Moreover, they ﬁnd that when these dates of early retirement and normal retirement speciﬁed in the social security systems of these countries change, retirement behavior changes correspondingly. Compared to many other countries, the USA has a low relative tax rate on work after the early retirement age speciﬁed in the social security system, which is one reason for the higher labor force participation of older men in the USA. Countries with very high tax rates, which include Belgium, Italy, France, and The Netherlands, have lower participation rates by older workers than the USA.
Many researchers believe that social security has substituted for other forms of retirement saving. Many people enter retirement with no assets, and social security beneﬁts as their sole support. Low-income families may have half or more of their earnings replaced by social security. Those who rely entirely on social security cannot retire before the age of 62. They do not have savings to draw on to support their consumption until they became eligible for social security beneﬁts at 62. As a result, if the social security early retirement age were raised from 62 to 65, there would be a large increase in the number delaying their retirement.
2.1.4 Health Status. Health changes are perhaps the most important of all the uncertain events aﬀecting older workers’ labor force participation. Data on the course of HRS respondents’ health events from 1992–8 suggest a wide variety of health problems among workers, including limitations in activity, diﬃculties in carrying out mental and physical tasks, and medical problems such as high blood pressure. Both the level of health status and changes in health status are associated with diﬀerent patterns of labor force participation in the HRS (Bound et al. 1998).
2.1.5 Retirement Decisions In The Family. Findings at the end of the twentieth suggested that many spouses retire together, even though wives typically are younger than their husbands. Available estimates suggest that each spouse, and husbands in particular, values retirement more once their spouse has retired (Gustman and Steinmeier 2000a). It does not appear that husbands and wives time their retirements to coincide simply because of their pensions or social security. Other family related considerations might help to shape retirement. Some families married or remarried late, have young children, had a spouse who never returned to the labor market once having had children, or faced great demands on time to care for older parents, or a spouse. These and other differences among families may help to account for differences in retirement.
2.1.6 Other Factors Aﬀecting The Retirement Decision. There is also evidence supporting the inﬂuence on retirement of many other factors that diﬀer among individuals and their jobs. Labor market demands for older workers have been investigated. It is clear from this work that many ﬁrms are reluctant to hire older workers, because they will not work over a long enough period for their hiring and training investments to be repaid, together with other reasons (Hutchens 1986). The business cycle also inﬂuences the demand for older workers. On the one hand, in times of tight labor markets, ﬁrms will have diﬃculty replacing older workers and will encourage them to postpone retirement. On the other hand, in times of slack demand, ﬁrms adopt policies such as one-time windows that are designed to encourage earlier retirement. Those who invested more in training for the labor market by staying in school longer may work longer to justify their investments. Unions may shape retirement conditions both to accommodate the preferences of their older workers, and to share work with younger union members. Government policies might have had profound eﬀects, but they have been pushing against the trend. Thus the government since 1980 has outlawed mandatory retirement, forced ﬁrms to make pensions more actuarially fair so as not to penalize work after the normal retirement age, and eliminated the penalty to work after age 65 under social security. Perhaps these policies have had some small eﬀect in mitigating the trend to earlier retirement in the 1990s. However, there is no ﬁrm evidence to support that view.
2.1.7 Imperfect Information And Nonmaximizing Behavior. Of course, the choices we see are determined by more than the maximizing choices made by people who fully understand all their opportunities. Many people do not understand fully the incentives from their retirement programs. Some plan well, some don’t plan at all. In addition, some that are well aware of the importance of preparing for retirement do not have the discipline to follow through. Most people are well prepared for retirement. But if they have not prepared, they will either have to consume less when retired, or to work longer. Economic models are now being expanded to understand better the behavior of those who may not understand fully all the incentives, or for other reasons may not be choosing their retirement date according to a model of strict maximization. Certainly this work will modify our perception of how each of the factors discussed inﬂuence retirement choices. Nevertheless, the modiﬁcations are expected to be modest, and the major inﬂuences on retirement are the forces discussed.
Most of the information we have on how pensions, social security, health status, and other factors aﬀect retirement outcomes comes from analyses that were based on 1970s data (e.g., see Gustman and Steinmeier 1986, Rust and Phalen 1997). The data from the new Health and Retirement Study are being used to estimate comprehensive models of retirement. With these newly available data, researchers are in a position to quantify how the factors noted in Sect. 2 inﬂuence retirement outcomes for those who are just a little older than the baby boomers. The wave of research now in process should also leave us in a good position to understand what will determine the retirement behavior of the baby boomers, and how changes in government social security and pension policies will aﬀect their retirement outcomes.
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