July/August 2009

Overhyped Doom and Gloom
By Neal E. Cutler, PhD
Aging Well
Vol. 2 No. 3 P. 40

In my Financial Forum article in the Fall 2008 issue of Aging Well, I introduced the idea of longevity planning to replace traditional retirement planning by incorporating the concept of personal expectations. We all expect to live longer than our parents and grandparents, but expectations and images of our actual retirement are less clear. Such personal expectations are rooted in public facts.

In fact, old-age longevity—the number of years after the age of 65—has been steadily increasing for more than 100 years. And patterns of retirement in the United States have changed in multiple ways during the past century. Although age-based mandatory retirement at the age of 65 was outlawed in the late 1970s, it was about that time American workers increasingly chose to exercise their early retirement options. But around 1990, millions of middle-aged and older men and women chose to remain in the workforce because they wanted to or had to, reversing the early retirement trend.

It shouldn’t be surprising that from a personal expectations perspective, longevity planning presents a more appropriate stance than traditional retirement planning. So how does this mesh with the impact of the current economic crisis on today’s older Americans? It seems to me that the daily doses of bad economic news are creating more disaster expectations than warranted by the relevant facts.

Don’t get me wrong: This is not yet another cheerleader exhortation—to use the words of Bobby McFerrin’s 1988 Grammy-winning song—to “don’t worry, be happy.” There are millions of Americans of all ages who are being financially devastated by the loss of their 401(k) investments, their jobs, and their homes.

There is also a secondary group of financial victims in the current economic mess: those who are psychologically affected by the plight of people who are directly hurt, whether they have family and friends significantly impacted or the millions we see and hear on television. The focus is simply to identify a few relevant facts to illustrate that there are many middle-aged and older Americans who, for a various reasons, are shielded from the more devastating effects of the current economic turmoil.

The Mirror of the Great Depression
I love the fact that I live in the age of cable TV, primarily because I love reruns of Law & Order and That ‘70s Show. But the price we pay for such entertainment is 24-hour news analysis and, in the present context, I’m exhausted by the incessant doom-and-gloom comparisons of today with the Great Depression. So it was gratifying when National Public Radio’s Morning Edition offered some analysis of the comparison.

As part of the segment, Christina Romer, the new chair of the President’s Council of Economic Advisors, noted that most of the comparisons use a phrase something like “the worst financial crisis since the Great Depression.” What isn’t said more clearly, she noted, is that the current situation is not as bad as the 1930s, but the worst since then.

For example, even the current unemployment rate approaching 9% or 10% isn’t as devastating as the 25% rate back then. There were virtually no social and economic safety nets then either. We probably won’t see bread lines or street corner apple salesmen, but the statistical history remains relevant. For example, Romer, formerly a professor in macroeconomic history at Berkeley, noted that while the current economy shrank by 2% through the end of last year, there was a 25% loss at the end of the Great Depression.

Other economists pointed out that the size of the U.S. population and economy is substantially larger than it was at that time. For example, while the number of unemployed people is larger than the previous two recessions, the unemployment rate is lower than the 1973 and the 1980 to 1981 recessions—at least so far.

This doesn’t diminish the social and financial hardships of those who have lost their jobs but simply suggests that the mirror of the Great Depression should not prompt panic planning. And we shouldn’t forget there are substantial differences in the impact of the current crisis on people of different ages.

Pension Trends and Social Security Income
Over the past couple decades, there has been a major shift in the U.S. pension system. Previous generations of American workers had the opportunity to earn defined benefit pensions. The key characteristic of such pensions is that an entity—the company, the union, or the pension plan managers—other than the worker took responsibility for the dollar value of that pension. The trend has turned from defined benefit plans to defined contribution plans, known as 401(k) plans, Keogh accounts, or individual retirement accounts. The key characteristic of defined contribution plans is that the workers’ choices shape the future dollar value of the retirement income account.

Many already-retired older adults receive their retirement income from funds that are not as dramatically affected by the recent stock market nosedive. However, those with defined contribution plans, whether invested in individual stocks or mutual funds, have seen the painful decline of the current value of future retirement assets.

Social Security plays an important role in this part of the story. Social Security remains a national defined benefit pension plan. In what may be the only positive financial policy outcome of the Iraq wars, plans to privatize the Social Security system disappeared from the national policy agenda. We can only imagine what those monthly checks would look like if Social Security had been transformed into another stock-market-based, defined contribution plan.

Further, in talking to clients, relatives, and friends, we shouldn’t forget that even as the full retirement benefits age has been rising to 66 and 67, the age-62, early-retirement option, albeit with reduced monthly benefit, has not been removed. Each individual and family needs to calculate what the monthly reduction in income will be over many years, but for a household with two Social Security incomes, taking the early benefit in these difficult times may present a welcome option.

Recent Trends in Retirement
Retirement trends relate to trends in pension systems. Much has been written in the past year about the impact of the stock market decline on 401(k) pension assets—often referenced now as 201(k)s—and how many middle-agers will now rethink early retirement.

In a national poll I directed for the National Council on the Aging a few years ago, we looked at age patterns of retirement. Among people aged 65 to 75, more than one half (54%) were completely retired, but this was a bare majority within the age group that defines the decade following the traditional retirement age of 65. More to the point, 25% of this age group said they were both retired and working, and roughly one fifth (21%) said they were not retired at all.

In one of my financial gerontology classes several years ago, a student seemed to be irritated by these data and questioned, “What’s wrong with U.S. public policy? They did away with age-based mandatory retirement, but they allow us to retire early in Social Security at age 62 or even earlier by withdrawing from our IRAs [individual retirement accounts] at age 591⁄2. Is U.S. policy schizophrenic?”

The appropriate response, of course, is that the common denominator to these social policies is choice. We are given the choice to retire early or to work until we drop, assuming we have the health, wealth, and spousal approval to do so. What the data for the age 65 to 75 group demonstrate is how American workers are exercising that choice. And well before the current economic meltdown, older workers were straying from traditional patterns of work and retirement.

But this research was a single-year snapshot of a dynamic process. A trend analysis of labor force census data over three decades from 1975 through 2006 yields the moving picture. Here the numbers are fairly unequivocal: While the full 30-year graphic is more dramatic, the summary numbers make the point. In 1975, only one third (35%) of all workers aged 55 and older were in the labor force. This declined further by 1993 to 29% (more early retirement), but by 2006, the number rose to 38%, indicating a clear reversal in the long-time early retirement trend. While the rates for men and women were different, the pattern by 2006 was similar.

In short, noticeably prior to the 2008 to 2009 recession, many middle-agers chose to remain in the labor force. The disparaging cable news and analyses don’t apply to all Americans.

— Neal E. Cutler, PhD, is executive director of the Center on Aging of the Motion Picture and Television Fund in Woodland Hills, CA.