Delayed Retirement and the Growth in Income Inequality at Older Ages

P R O G R A M O N R E T I R E M E NT P O L I C Y R E S E A R C H R E P O R T Delayed Retirement and the Growth in Income Inequality at Older Ages Richard W. Johnson February 2018 A B O U T T H E U R B A N I N S TI T U T E The nonprofit Urban Institute is dedicated to elevating the debate on social and economic policy. For nearly five decades, Urban scholars have conducted research and offered evidence-based solutions that improve lives and strengthen communities across a rapidly urbanizing world. Their objective research helps expand opportunities for all, reduce hardship among the most vulnerable, and strengthen the effectiveness of the public sector. Copyright © February 2018. Urban Institute. Permission is granted for reproduction of this file, with attribution to the Urban Institute. Cover image by Thanasis Zovoilis/Getty. Contents Acknowledgments iv Delayed Retirement and the Growth in Income Inequality at Older Ages 1 Background 2 Data and Methods 5 Results 7 Employment Rates 8 Social Security Claiming 11 Retirement Income 13 Retirement Income Changes at Older Ages 19 Conclusions 23 Notes 25 References 26 About the Author 29 Statement of Independence 30 IV A C K N O W L E D G M E N T S Acknowledgments This report was funded by the Alfred P. Sloan Foundation. We are grateful to them and to all our funders, who make it possible for Urban to advance its mission. The views expressed are those of the author and should not be attributed to the Urban Institute, its trustees, or its funders. Funders do not determine research findings or the insights and recommendations of Urban experts. Further information on the Urban Institute’s funding principles is available at https://www.urban.org/aboutus/support-urban-institute. The author gratefully acknowledges valuable comments from Melissa Favreault, Teresa Ghilarducci, and Melinda Morrill on an earlier draft of this report and editorial assistance from Michael Marazzi. Delayed Retirement and the Growth in Income Inequality at Older Ages Financial security in old age increasingly requires working beyond traditional retirement ages. As defined benefit pension plans that provide retirement annuity income become less common, more retirees must rely on their 401(k) account balances and other savings to supplement Social Security. These savings must last longer as people live longer. By delaying retirement and working longer, however, people can shorten the time that they must rely on their savings in later life and, through the actuarial adjustments built into Social Security’s benefit formula, increase their monthly payments from the program. Working longer also raises lifetime earnings, which generally boosts future Social Security income and any defined benefit pensions available. Moreover, people who work longer can often save some of their additional earnings for retirement. As concerns about the adequacy of retirement savings have intensified (Johnson et al. 2017; Munnell, Hou, and Sanzenbacher 2018), working longer is an important way for older adults to significantly improve their retirement security. Many older adults have been working more over the past two decades (Johnson and Wang 2017; Munnell and Sass 2009). This development is a remarkable turnaround for older men’s labor force participation, which had been declining for decades. However, the rising employment trend for older adults may leave behind many older people with health problems who are unable to work longer, leaving them less financially secure in retirement and contributing to increased income inequality among older people. Compounding the potential impact on inequality, older adults with limited education and income, who could most gain from working longer, are more likely to have health problems than those of higher socioeconomic status (Centers for Disease Control and Prevention 2013). To assess how the trend toward later retirement might affect income inequality at older ages, this report examines how the relationship among health status, employment, and income has shifted over the past two decades for people eligible for early Social Security retirement benefits but too young to receive full retirement benefits. Using household survey data from the Health and Retirement Study (HRS), we compared health status, employment, Social Security benefit receipt, and household income in 1996 and 2014. The results show that the impact on retirement income of health status in one’s early and mid-sixties has grown significantly over time. Although employment and income at ages 62 to 64 increased substantially over the past two decades for people in good health, employment and income stagnated for those with health problems, and throughout retirement their average incomes remained 2 D E L A Y E D R E T I R E M E N T AN D I N C O M E I N E Q U A L I T Y A T O L D E R A G E S below the average of those in better health. These findings highlight the