The Economy Throws A Shadow On The Golden Years

Is the long-term trend toward early retirement among U.S. men finally running out of steam? Recent labor force data certainly seem to suggest so. The labor force participation rate (those employed or seeking work) for males age 55 to 64, which fell sharply from 83% in 1970 to 63.2% in 1986, has since moved mostly sideways (chart).

If the trend toward earlier departure from the work force has halted, the economy could benefit. Economists have long advocated a shift toward later retirement to offset slowing population growth and reduce the huge costs of a dependent elderly population when the baby boomers reach retirement age.

Policymakers had hoped that market forces themselves would foster the process, as labor shortages produced greater incentives for middle-aged workers to remain on the job or opt for part-time work. In fact, that's what seemed to be happening in the mid-1980s, as labor force participation rates of 55- to 64-year-old men stopped declining. Says economist Philip Rones of the Bureau of Labor Statistics, "The economy was creating 2 million-plus jobs a year, and we were seeing scattered labor shortages. Its not surprising that many workers nearing retirement age found it advantageous to stay employed."

In recent years, however, job growth has slowed to a crawl, and many companies in the throes of restructuring have pressured employees to retire early. Yet there's no sign of a resumption of the downward trend in labor force participation among men age 55 to 64. Indeed, their participation last quarter was the highest since late 1984.

Economist Susan Hering of Salomon Brothers Inc. pins the blame on a number of adverse developments. She notes that delayed benefit cuts mandated by the 1977 and 1983 Social Security Acts have reduced Social Security pension levels for average earners retiring at 65 from 54.4% of preretirement earnings in 1981 to about 43% today. (Since most people retire at 62 or 63 with reduced benefits, actual percentages are lower.) At the same time, early retirement plans are yielding to the rapidly escalating cost of medical insurance, which most retirees must purchase with their own aftertax dollars until medicare kicks in at age 65.

Older Americans also face dwindling assets and incomes. For most, their homes are their single largest asset, and many have watched home values evaporate in recent years. And dividend and interest incomea key source of support for retireesshrank 5.8% in real terms in the past year, the sharpest drop in postwar history.

With such incentives, says Hering, older workers may be less eager to abandon the security of employment for the uncertain pleasures of retirement.

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