WRITER: KESHAV KUMAR, EDITOR: ESMA OZGUN
Go to school, find a job, work, retire. For many Americans, this is the expected trajectory of professional life. However, the last and presumably most anticipated stage of this process—retirement—seems to have lost its certainty. Today, an increasing number of Americans are delaying their retirement. The percentage of Americans in the labor force older than 65 has reached 19%, the highest recorded level in 60 years and almost twice what it was 35 years ago. This largely stems from two factors; an increased willingness to work among older people, and structural factors that have made retirement more difficult. Regardless, these shifts indicate significant departures from traditional economic theories associated with saving and spending.
Let’s first look at the “wants”; people whose motive to work is independent of financial need. Today, older workers are more likely to have college degrees, work full-time jobs, and receive pensions and employment benefits. They also report higher levels of job satisfaction than their younger counterparts. Experts have long hypothesized this is because older workers tend to have more stable professional lives—they have more established roles and responsibilities in their workplace, and are healthier and better educated than ever before.
Businesses also benefit from employing the elderly. Studies have shown that older workers are not only just as productive as their younger counterparts but also possess more experience and a greater willingness to adapt. However, regardless of age, people working for the sake of enjoyment are a boost to both the economy and social utility..
However, we shouldn’t ignore the major systemic reason older people are working—out of economic necessity. Though it appears a bedrock of the workforce, retirement in the United States is actually a relatively recent phenomenon, brought on by the establishment of Social Security during the Great Depression. Before this program, the elderly often worked until they died or reached a point of physical infirmity. Social Security benefits have allowed older Americans a stream of income they can live on when they are no longer employed—meaning, people could retire without falling into poverty.
Although Social Security payments have been effective in reducing poverty amongst the elderly, they are no longer sufficient to singularly support its recipients. . Today, the program only replaces 40% of what the average American could earn by working. This is problematic, as a quarter of people 59 or older currently have nothing saved for retirement, and would thus may end up wholly reliant on their Social Security benefits. In the absence of savings, employment, and governmental support, financial survival becomes a strenuous task. Additionally, increases in cost of living have compounded this problem; over the past few years, inflation has made consumer goods more expensive, with rent and housing prices reaching new highs. With declining social security income, irresponsible fiscal internalities, and the inclining costs of living, retirement has grown increasingly unaffordable. As a result, working has become the only financial recourse for many..
So which of these two groups, wants vs needs, is more responsible for the growing number of elderly workers? Often, people have a foot in each camp. However, what’s clear is that these changes in labor force dynamics are here to stay—at least for the near future. The Bureau of Labor Statistics projects older workers will comprise 8.6% of the working population in 2032, up from 6.6% in 2022. This is a natural consequence of increased life expectancy and unaffordable retirement conditions.
Beyond the realistic implications of deferred retirement, these developments also represent further departures from consumption patterns predicted by economic theory. Specifically, the life cycle hypothesis states that the rational consumer will borrow early in life, save money between 40 to 60, and spend their savings after they stop working. This correlates to the traditional education→working→retirement pathway we expect to follow. However, the observed delays in retirement directly contradict this model. Now, due to structural changes in the economy, people must work for longer to maintain their standard of living, as the expenses we incur to live comfortable lives have skyrocketed in comparison to stagnating wages.
A modified life cycle hypothesis for this new age of personal finance would differ on a person-to-person basis. Higher earners would continue to operate under the traditional model—saving for most of their adult lives and spending after retirement. However, many may face a delayed retirement with limited spending, or possibly no retirement at all. If we earn differently, it follows that we would spend and save differently.
We will still have to wait to see how the future plays out empirically. Without adequate government policy to keep up with runaway inflation and sliding wages, the state of retirement will continue to worsen in America. So don’t be surprised if your future workplace has much more diversity in age than it used to.
Photo Credit: Filadendron
