Comments on Hurd and Rohwedder “Health and the Future Course of Labor Force Participation at Older Ages” Alan L. Gustman Dartmouth College and NBER SIEPER Conference on Working Longer and Retirement November 2-3, 2017

The Authors’ Research on Retirement Trends This paper is one of a number of pioneering papers by Hurd and Rohwedder aimed at improving our ability to predict retirement trends. Hurd and Rohwedder argue that P62 and P65, the probabilities expressed by someone in their fifties of working full-time at 62 and 65, are key to forecasting their eventual labor force participation and retirements. They believe that forecasts based on P62 and P65 are superior to other approaches to forecasting, which have their own problems. E.g., forecasting retirement using structural or other models requires projecting the values of independent variables.

What Motivates This Study of Trends in Health and Its Relation to Trends in P62 and P65? Until this paper the authors found a continuing increase in P62 and P65 followed by an increase in labor force participation at older ages. More recently the authors find a flattening in these trends. They argue the continuing flattening of the trend in P62 and P65 portends a reduction in growth or a decline in actual labor force participation for younger cohorts ten years later They find that the decline in health helps to explain the declining trend in P62 and P65. Trends in both projected work and health have flattened or turned down among recent cohorts.

Their Aim in This Paper Is to Understand How Recent Health Trends Relate to Trends in P62 and P65 They show the relationships among various measures of health, P62 and P65, life expectancy and labor force status have shifted over time. They disaggregate cohort differences in P62 and P65, and differences in health between workers and non workers in their fifties. They find that objective health has declined within self-reported health categories, weakening the gradient between self-reported health and expected labor force activity.

Factors Complicating Efforts to Forecast Labor Force Participation and Retirement, and The Role of Health in Their Forecasts Within older cohorts, the subjective probability of working is an imperfect predictor of actual labor force participation, requiring adjustments in the predictions. P62 and P65 pertain to full-time work, a different measure from labor force participation which includes partial retirement. P62 and P65 occur a decade before labor force participation is observed for a cohort. Even within a cohort, covariates and the economic environment may change between the time of prediction and realization. The relation between actual labor market participation and the subjective probability of working solicited ten years earlier may vary among cohorts. The quality of predictions may change between cohorts, e.g. with retirement education. With the relation of P62 and P65 to labor force participation varying within and between cohorts, the task of isolating the role played by health changes in these relations is made more complex. Importantly, we have yet to formally model how the relation of retirement expectations to health is affected by other covariates.

(Yellow highlights flows from P62 and P65.) Retirement Flows from 2006 to 2012 for Early Boomers: Ages 53-58 in 2006.   Status in 2006 Status in 2012 (Yellow highlights flows from P62 and P65.) (Red highlights flows for return to full-time work.) (Flows related to labor market activity include first 2 columns and first 2 rows.) Uncondi-tional (row percents add to 100) Not Retired (>1560 hours) Partially Retired (based on hours and self report) Completely (<100 hours) Other Not Working (self report) 58 9 22 11 62 Partially Retired 19 36 27 17 10 Completely Retired 3 5 82 Other Not Working* 8 44 37 Unconditional Status in 2012 40 32 16 100 Source: Gustman, Steinmeier and Tabatabai, Journal of Retirement (2015)

Simulations With A Structural Model Suggest the Scope for Health Changes to Affect Retirement Model uses detailed HRS data on health and is comprehensive in modeling retirement and saving (Gustman and Steinmeier, forthcoming). Simulations are for health improvements -- in the wrong direction, but orders of magnitude are interesting. Eliminating all health problems is projected to defer retirement for full HRS sample by one year. Smoking depresses full-time work of smokers by up to 3.5 percentage points in the early 60’s and depresses any work by over 4 percentage points in the mid 60’s. In contrast, diabetes, emphasized in this paper, has only a small effect. Eliminating diabetes increases the average retirement age by only a week. Coefficients in the structural model are estimated for one cohort, so differences in retirement with differences in health do not reflect changes in coefficients between cohorts.

Source: Gustman and Steinmeier, Research in Labor Economics (2018) Effects of Health Vary Between Definitions of Retirement; Percentage Assuming Good Health Minus Percentage with Baseline Health Percent Working Full Time Percent Working At All ----------------------------------- --------------------------------- Percentage Point Percent Percentage Point Percent Increase Increase Increase Increase Age in Work in Work in Work in Work   54 4.6% 5.8% 4.0% 4.7% 55 5.4 7.1 4.8 5.9 56 6.1 8.4 5.5 7.0 57 6.8 9.9 6.2 8.2 58 7.6 11.8 7.1 9.8 59 8.5 14.1 7.9 11.6 60 9.2 16.8 8.5 13.4 61 9.9 19.7 9.4 15.8 62 8.7 24.0 9.8 19.3 63 8.8 27.5 10.3 21.7 64 8.6 32.1 10.6 24.9 65 7.9 38.0 10.2 27.6 66 6.9 39.9 9.4 28.1 67 5.7 41.3 8.3 27.8 Source: Gustman and Steinmeier, Research in Labor Economics (2018)

In Addition to Health, Other Covariates Affect Projections for Younger Cohorts Ability to predict LFP for younger cohorts from regressions of LFP on P62 and P65 in older cohorts may be affected by covariates. Differences in covariates may also affect the perceived relation of health trends to the P62-P65-labor force participation relation. Important covariates noted by the authors in their previous work include: Higher women’s Labor Force Participation reduces husband’s participation. Pessimism that full Social Security benefit will not be paid fosters earlier claiming. Trend from DB to DC pensions encourages later retirement. The Great Recession reduced work for job losers, but encouraged other leavers to report continued attachment to the labor force, even when not working.

Source: Gustman and Steinmeier, Research in Labor Economics, 2014 Simulated Effect on Husband’s Work and Retirement of Eliminating Wife’s Labor Force Participation   Change in Percent In Full Partially Fully Age Time Work Retired Husbands 55 7.8 -2.4 -5.5 56 9.3 -2.5 -6.7 57 11.1 -3.0 -8.1 58 12.4 -2.8 -9.5 59 12.8 -10.3 60 13.1 -2.1 -11.0 61 13.3 -1.5 -11.9 62 9.7 3.5 -13.2 63 8.9 4.0 -12.9 64 7.6 4.5 -12.1 65 6.0 4.3 -10.4 66 5.0 4.6 -9.6 67 4.1 4.8 -8.9 Source: Gustman and Steinmeier, Research in Labor Economics, 2014

Expectation That Full SS Benefits Will Not Be Paid Courtney Coile and her coauthors have pointed out that retirement models under predict claiming of Social Security benefits in the early 60’s. In a structural analysis we find that expectation of lower SS benefit may explain earlier claiming.

Source: Gustman and Steinmeier, JPUBE, 2015 Age of Claiming Social Security Benefits Simulated with Full Benefits and with Half Benefits Under Insolvency Source: Gustman and Steinmeier, JPUBE, 2015

The Trend from DB to DC Pensions May Reduce Retirements (Structural Model Fit to Original HRS Cohort; Simulation Uses Pension Values From Early Boomer Cohort) Age Percent Completely Retired in Baseline Difference in Percent Retired Using Early Boomers Data 50 6.0% 0.3% 51 52 6.7% 0.0% 53 7.7% 54 9.1% 1.0% 55 11.9% -0.2% 56 14.0% 57 16.7% -0.3% 58 20.0% -0.6% 59 23.4% -0.4% 60 28.2% -1.2% 61 31.7% -1.9% 62 42.2% -2.6% 63 46.3% -3.1% 64 51.6% -3.4% Source: Hou, Munnell, Sanzenbacher and Li (2017), Using Gustman-Steinmeier model

Estimated Percent Change in Full-Time Work Due to Great Recession Husbands Wives Age Group 55-59 60-64 65-69 55-59 60-64 65-69   2009 -3.2 -0.4 0.4 -2.3 0.0 2.8 2010 -3.8 -2.5 -0.5 -3.0 -2.1 2.7 2011 -0.3 0.2 0.0 -0.7 0.2 0.0 2012 0.0 1.1 2.6 -0.7 0.9 2.7 Source: Gustman, Steinmeier and Tabatabai (2016). Includes effects of unemployment and wealth changes. Funded by Sloan Foundation, Working Longer Project.

Conclusions The authors do an outstanding job of documenting recent health changes and relating them to P62 and P65. Their methodology for projecting labor force participation and retirement from P62 and P65 is a useful step forward. Nevertheless, although P62 and P65 can contribute to forecasts for younger cohorts, the required adjustments to regressions for older cohorts are complex. Updating these projections for changes in health also is not straight forward. The authors show the relation of self reported health to actual health differs between cohorts. The gradient between self reported health and the expectation of working longer seems to have changed after the Great Recession. In addition, a more systematic analysis of the effects of other covariates on the estimated health-labor force status relations is required. Much remains to be done if we are to produce reliable forecasts of working longer.

A Structural Model of the Effects of Health on Retirement Gustman, Steinmeier and Tabatabai (forthcoming) estimated a structural model of retirement and saving using HRS detailed health data, including: Effects of smoking, obesity, alcohol consumption, depression and other proclivities on medical conditions are analyzed, including hypertension, diabetes, cancer, lung disease, heart problems, stroke, psychiatric problems and arthritis. Major Sources of Uncertainty Facing Older Workers in the Model The possibility of job loss and resulting loss of wages and health insurance. The possibility of major health problems. Uncertainty whether SSDI will be available if major health problems do occur. The possibility of large medical expenditures for uninsured before Medicare eligibility. Uncertain asset returns may reduce funds available to support retirement. Uncertain life expectancy affects the funds needed in retirement. Possibility of large nursing home expenses at the end of life.

Great Recession and Retirement The Great Recession increased their probability of being laid off and the length of time it took to find other full-time employment. Differences in layoffs between those affected by the recession and members of older cohorts in turn accounted for almost the entire difference between cohorts in employment change with age. At the recession’s peak, half of those who experienced a layoff ended up in the Not Retired or Partially Retired, Not Working category. But only a quarter of those who declared themselves to be Not Retired or Partially Retired, and were Not Working, had experienced a layoff. Most of the jump in Not Retired or Partially Retired, Not Working appears to reflect a change in expectations about the potential or need for future work, a change that is not the result of an actual job loss. Apparently, many of those who have left their jobs voluntarily declare themselves to be Not Retired or Partially Retired. During the Great Recession, even more of those who left their employment and in other times would have declared themselves to be retired, instead held on to a subjective connection to the labor market. Having been laid off in the last three years reduces full-time work by 30 percent. There also are lingering effects of layoff on the probability of working longer. Having been laid off three or more years in the past reduces full-time employment in the current year by about 12 percent. This reflects the reduced work incentives for full-time work arising from lower earnings due to the loss of job tenure with a layoff as well as the additional earnings penalty from a layoff. All told the overall effect of the Great Recession on near retirees was relatively modest. Not clear if that was true for members of younger generations.