Over the past year, numerous stories in the popular press have suggested that workers in the US will delay retirement as a result of the current economic crisis. Diminished retirement savings and home equity have shrunk expected retirement income, so the standard story suggest older individuals will stay in the labour force longer.
It may seem surprising, then, that the number of new US Social Security benefit claims is sharply up since the crisis began (Goss, 2009), suggesting an increase in retirements rather than a decrease. Why are more workers retiring now if their expected retirement income is going down?
The answer may lie in another aspect of the crisis, the weak labour market. Since the crisis began, the unemployment rate has more than doubled, and the economy has shed millions of jobs. For older individuals who have been laid off and are unable to find new work, retirement may be the only option, despite its involuntary nature. Indeed, past research has established that older workers who experience job loss are much less likely to be employed several years later than similar non-displaced workers (Chan and Stevens, 1999, 2001, 2004). The net effect of the current economic crisis on retirement is thus far from clear.
New research: Stock markets don’t matter for most elderly
It turns out that most older households have little stock wealth, as we show in Coile and Levine (2009). Median stock asset holdings in 2007 for households age 55 to 64 were $8,000, and the 75th percentile of the distribution was roughly $100,000. Not surprisingly, more highly educated households have larger stock holdings. Gustman et al (2009) makes a similar point, arguing that the share of wealth invested in equities is small for most households. The change in retirement income resulting from even a sharp market downturn such as the one just experienced would thus be fairly modest for most households.
Market fluctuations could still affect retirement decisions, though, for those with large holdings or if other workers experiencing smaller losses are quite responsive to them. In Coile and Levine (2009), we use thirty years of data from the Current Population Survey (CPS) to estimate models relating retirement decisions to stock market fluctuations. We find that stock market fluctuations do affect retirement decisions, but only for highly educated workers between the ages of 62 and 69 and in response to long-run fluctuations in returns (changes in the 5- or 10-year return in the S&P 500).
Do housing market fluctuations affect retirement?
Relative to stocks, housing equity is a more broadly-held asset among older households and the value held by the typical family is larger. In 2007, 81 % of households age 55-64 owned homes and the median equity in these homes was $140,000. Thus large fluctuations in home values as workers near retirement age could affect retirement decisions.
We conduct an analogous exercise to that described above examining the influence of housing price movements on retirement decisions. We use the same CPS data as well as two sources of home price data, the S&P/Case-Shiller Home Price Index (available for certain cities since 1987) and the Office of Federal Housing Enterprise Oversight (OFHEO) Home Price Index (available at the state level since 1975). We estimate the relationship between retirement decisions and changes in home prices in an individual’s city or state and find no evidence that workers respond to fluctuations in the housing market. This result is perhaps not surprising given that past research has concluded that most households do not liquidate assets to support their general consumption needs as they age (Venti and Wise, 2004).
Do labour market fluctuations affect retirement?
Job loss is relatively common for older workers and is more common when the labour market is weak. For instance, Farber (2008) reports that 10% to 12% of private-sector workers between the ages of 50 and 64 experienced permanent and involuntary job losses when labour markets were weak during the 1991–1993 and 2001–2003 periods, while displacement rates of around 8% were observed during the expansions of the mid-to-late 1990s and the middle 2000s. The question our research asks is whether the greater job loss associated with weaker labour markets leads to more retirements.
For this analysis, we use the same 30 years of data and relate retirement transitions to the state level unemployment rate. We find that when the unemployment rate rises, more workers between the ages of 62 and 69 retire, particularly those with less education. The fact that this response occurs only starting at age 62 appears to be due to the availability of Social Security benefits beginning at this age. Indeed, in earlier work (Coile and Levine, 2007), we argue that this responsiveness at age 62 combined with the lack of any effect of Unemployment Insurance benefits on retirement suggests that older workers may rely more on Social Security than Unemployment Insurance to weather late-career labour market shocks.
The net effect of the current crisis
Given that both stock and labour market fluctuations affect retirement for certain segments of the population, what is the overall expected effect of the current crisis on retirement? We use our estimates to simulate the effect of a five-point increase in the unemployment rate (an increase similar to that experienced in the US over the past two years) and a 110-point drop in the real ten-year return in the stock market (a change that is equivalent to moving from the average return over the past 30 years to that experienced in the period ending in 2008).
Assuming a linear return to normal conditions in both markets over a five-year period, our simulations suggest that 258,000 workers would delay retirement over the course of the stock market downturn. On the other hand, 378,000 workers would be forced to retire early as a result of the weak labour market. On net, we predict that the increase in retirement attributable to the rising unemployment rate will be almost 50 % larger than the decrease in retirement brought about by the stock market crash.
Taken as a whole, our results indicate that the public discussion regarding the impact of the recent economic crisis on retirement is off target. Some relatively wealthier workers will be forced to delay retirement, but a larger number of workers with fewer economic resources will be forced into retirement because of their inability to find new jobs. These workers may need to start collecting retirement benefits now to make ends meet, resulting in lower income in retirement and an increased risk of poverty in old age. Indeed, the fact that Social Security claims have risen sharply since the recession began suggests this response has already begun. Despite a wealth of media attention to the effect of the economic crisis on older workers, the risks they face as a result of weak labour markets have gone largely unnoticed.
Chan, Sewin and Ann Huff Stevens (1999). “Employment and Retirement Following a Late-Career Job Loss.” American Economic Review, Vol. 89, No. 2, pp. 211-216.
Chan, Sewin and Ann Huff Stevens (2001). “Job Loss and Employment Patterns of Older Workers.” Journal of Labour Economics, Vol. 19, No. 2, pp. 484-521.
Chan, Sewin and Ann Huff Stevens (2004). “How Does Job Loss Affect the Timing of Retirement?” Contributions to Economic Analysis & Policy, Vol. 3, No. 1, article 5.
Coile, Courtney C. and Phillip B. Levine (2007). “Labour Market Shocks and Retirement: Do Government Programs Matter?” Journal of Public Economics. 91(10): 1902-1919.
Coile, Courtney and Phillip Levine (2009). “The Market Crash and Mass Layoffs: How the Current Economic Crisis May Affect Retirement,” NBER Working Paper 15395.
Farber, Henry S. (2008). “Job Loss and the Decline in Job Security in the United States.” Industrial Relations Section Working Paper 520.
Goss, Stephen C. 2009. Applications for Social Security Retired Worker Benefits in Fiscal Year 2009. Washington, DC: Social Security Administration, Office of the Chief Actuary. May 28, 2009.
Gustman, Alan L., Thomas L. Steinmeier, and Nahid Tabatabai (2009). “The Retirement Age Population and the Stock Market Decline.” Dartmouth College. Unpublished manuscript.
Venti, Steven F. and David A. Wise (2004). "Aging and Housing Equity: Another Look,” in David A. Wise (ed.), Perspectives on the Economics of Aging. Chicago: University of Chicago Press.