Optimal Retirement Age* Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma Yung-Ping (Bing) Chen Frank J. Manning Eminent Scholar's Chair in Gerontology University of Massachusetts Boston Retirement 20/20: Changing the Signals Washington, DC November 17, 2008 *PowerPoint and underlying paper available at

2 Overview Demography, health, and retirement How pension laws influence the design of pension plans and the timing of retirement Optimal retirement age from the perspective of employers, government, workers New perspectives on the relationship between demography and retirement age Implications for public policy Recommendations about pension reform

3 Table 1. Americans are Living Longer YearLife expectancy at birth Life expectancy at age 65 MenWomenMenWomen

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5 Table 2. Percentage of Workers Electing Social Security Benefits at Various Ages YearAge 62Ages Age 65Ages 66+ Average age

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10 Table 3. Percentage of People Age 65+ with Chronic Health Conditions Heart disease Hyper- tension Any cancer DiabetesArthritis na na

11 Table 4. Health Problems by Age, 2002 (percent of respondents) Number of health problems or more2456

12 Table 5. Activities of Daily Living (ADLs) or Instrumental Activities of Daily Living (IADLs), or in a Facility IADLs only to 2 ADLs to 4 ADLs to 6 ADLs Facility Total

13 Table 6. Job Requirements by Age, 2002 (percent reporting that “My job requires X all or most of the time”) Age category Lots of physical effort Lifting heavy loads Stooping, Kneeling, or Crouching Computer use

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15 Table 7. Pension Plans for Full-time Employees in Medium and Large Establishments (percent) YearDB plansDC plansAll plans

Perspectives on the Optimal Retirement Age Employers –Use pension rules to shape their workers’ choices about work and retirement Government –Wants workers to be productive and work as long as they can Workers –Choosing an optimal, “economically feasible retirement age” is a complicated endeavor –Many times, people just get it wrong 16

Implications of Changing Demography for the Optimal Retirement Age Why define retirement age as “years- since-birth”? Instead tie the optimal retirement age to remaining life expectancy Or to mortality risk. Or by allocating a fixed percentage of each adult’s life between working and retirement years 17

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22 Table 8. Retirement Age for Year Equivalent to Age 65 in Base Year (Year: Months) Base Year Year : : :1165: :1166:0065: :0966:1165:1065: :1067:1166:1166: :0968:1067:0966: :0768:0868:0767:09

23 Implications for Public Policy: Some Modest Reforms Raise the Early Retirement Age Applicable to the Penalty on Premature Withdrawals Raise the Normal Retirement Age Raise the Minimum Distribution Age Repeal the Age Discrimination Exceptions Require that Benefits be Paid as Indexed Annuities Require that Pension Benefits be Paid to Part- time Workers

A More Comprehensive Proposal Mandate Age Neutrality Benefits would accrue at a constant annual rate Final Average Pay DB plans could not meet an age neutrality requirement But DC and Cash Balance plans could 24

25 Conclusion Tying the early and normal retirement ages to longevity improvement would be beneficial to workers, to government, and to employers –would encourage workers to work longer and accumulate more savings so that they have higher incomes when they eventually retire –would help the government raise revenues and reduce its expenditures for its social welfare outlays –would help employers stave off the labor shortages that could occur if large numbers of talented baby-boomers choose retirement over work Changes are clearly needed, and the sooner the better