An American Perspective on Optimal Retirement Age

Jon FormanAlfred P. Murrah Professor of Law

University of Oklahoma&

ATAX FellowUniversity of New South Wales

Centre for Pensions and SuperannuationSeminar

University of New South WalesAugust 4, 2011

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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

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Table 1. Americans are Living Longer

Year Life expectancyat birth

Life expectancyat age 65

Men Women Men Women1960 66.7 73.2 12.9 15.92000 74.0 79.4 15.9 19.02040 79.0 82.6 18.8 20.92080 82.4 85.6 20.8 22.8

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Table 2. Percentage of Workers Electing Social Security Benefits at

Various Ages

Year Age 62 Ages 63-64

Age 65 Ages 66+

Average age

1965 23.0 17.7 23.4 35.9 65.91975 35.7 24.5 31.1 8.7 63.91985 57.2 21.1 17.7 4.0 63.61995 58.3 19.5 16.3 6.0 63.62004 57.5 19.0 18.6 4.8 63.7

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Table 3. Percentage of People Age 65+ with Chronic Health Conditions

Heart disease

Hyper-tension

Any cancer

Diabetes Arthritis

1997-1998

32.3 46.5 18.7 13.0 na

2001-2002

31.5 50.2 20.8 15.4 na

2005-2006

30.9 53.3 21.1 18.0 49.5

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Table 4. Health Problems by Age, 2002(percent of respondents)

Number of health problems

55-64 65-74 75-84 85+

0 40 26 18 171 35 36 34 342 17 24 29 293 6 10 16 14

4 or more 2 4 5 6

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Table 5. Activities of Daily Living (ADLs) or Instrumental Activities of Daily Living (IADLs), or in a Facility

1992 2005IADLs only 13.7 12.31 to 2 ADLs 19.6 18.33 to 4 ADLs 6.1 4.75 to 6 ADLs 3.5 2.5Facility 5.9 4.3Total 48.8 42.1

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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

55-59 30 14 27 5360-64 33 13 24 4565-69 29 11 21 2970-74 27 8 17 2375-79 28 10 17 1780+ 23 10 11 17

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Table 7. Pension Plans for Full-time Employees in Medium and Large

Establishments (percent)

Year DB plans DC plans All plans1985 80 41 911995 52 55 802000 36 50 70

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

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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

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Table 8. Retirement Age for Year Equivalent to Age 65 in Base Year

(Year: Months)Base Year

Year 1940 1980 2000 20201940 65:001960 67:001980 68:11 65:002000 69:11 66:00 65:002020 70:09 66:11 65:10 65:002040 71:10 67:11 66:11 66:002060 72:09 68:10 67:09 66:112080 73:07 68:08 68:07 67:09

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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

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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