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Living Longer, Working Less, Saving Less.
| Article
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10913 |
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CURRENT ISSUES
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| Issue
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5 / 1993 |
2,066 Words |
| Author
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David Wise
David Wise is John F. Stambaugh Professor of Political Economy
at the JFK School of Government, Harvard University, and
director of health and retirement programs at the National
Bureau of Economic Research. |
The American population is aging rapidly and individuals are living longer. Yet Americans are saving less and leaving the labor force at increasingly younger ages. The prospect is for a shrinking labor force to be supporting a growing number of retired persons. The trend is unlikely to be sustainable and will have to be addressed if the federal budget is to be brought into balance.
Based on a recent study by Roger Ransom and Richard Sutch, the labor force participation rate of men over 60 fell continuously, from about 65 percent in 1940 to about 30 percent by 1980. About 65 percent of men 55 and over were in the labor force in 1940, but by 1970 the proportion had fallen to 53 percent, and in 1985 only 40 percent of men in this age group were in the labor force. The participation rate of women 55 and over increased until 1970, and then fell. Indeed, for both men and women, there was an abrupt change in labor force participation rates in the early 1970s: For men, the reduction was accelerated in most age groups, and, for women, the rates that had been increasing began to decline. What has enabled people to leave the labor force at younger and younger ages?
Support in old age is typically not financed by personal savings. Based on the Census Bureau's Survey of Income and Program Participation, Steven Venti and David Wise have computed the composition of total wealth. Most families approach retirement age with very little personal savings other than equity in their houses. For example, among households with heads aged 60 to 65, the median of liquid wealth is only $6,600; the median of housing equity is $43,000. The majority of families rely heavily on Social Security benefits for support after retirement and, to a more limited extent, on the saving that is done for them by employers, through defined benefit pension plane (in which benefits are defined according to a specified formula). About 59 percent of households with persons between 65 and 70 receive pension benefits; 89 percent receive pension benefits; 89 percent receives Social Security benefits. Social Security and pension wealth is by far the most important component of the wealth of most elderly.
Social Security and pensions
It seems evident that the reduction in labor force participation has been made possible by Social Security benefits and by company pension plans. Social Security was introduced under the Social Security Act of 1935, and company pensions were spurred by the Revenue Act of 1942, which granted tax reductions to firms that established
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