T he answer has enormous implications for how policy reforms can or should be designed. More years of work by the population produces more income, higher private saving as people draw down their assets over fewer years, fewer years of dependence on government, and higher Social Security, Medicare, and income tax revenue that can support higher annual and lifetime benefits at any tax rate (Butrica, Smith, and Steuerle 2006). Yet, the Congressional Budget Office (2012) has only recently started to show how policy changes, such as increases in the retirement age, could increase personal income and revenues out- side Social Security. 1 Whatever the cause, if labor force participation increases more than projected, shortfalls in systems like Social Security will be smaller. Policies that lean with rather than against the wind could accelerate or enhance that trend. This brief first points out some funda- mental flaws in both theory and empirical work surrounding labor supply. Although it is theoretically possible for workers to supply more or less work over time, these flaws lead to biased estimates that over-predict the share of life spent in retirement and under- predict the future labor force participation of older workers. Next, the brief reviews some recent trends in both actual and pre- dicted labor force participation by the Social Security Administration. Finally, it high- lights how estimates associated with Social Security reform proposals traditionally have accounted inadequately for employment Program on Retirement Policy Changes in life expectancies, birth rates, and health care (among other conditions) affect the employment of older workers. Older workers’ employment, in turn, has wide-ranging implications for the sustainability of the nation’s entitlement programs and the broader federal budget, as well as the future economic growth of both the elderly and the nation. Will future workers continue to spend longer portions of their lives in retirement? Or will the recent shift from declining to increasing labor force participation among older workers continue, or even accelerate—and not just during recessions? Both public and private policy must change to allow increased employment among older workers to blossom further. bRIEf# 35 juLy 2012 InSIdE THIS ISSuE •If labor force participation increases more than projected, shortfalls in systems like Social Security will be smaller. •Almost all formal models predicting labor force participation among older workers fail to account for the importance of labor demand. •Older workers are the largest underused source of labor and human capital in the economy. www.urban.org Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform C. Eugene Steuerle and Caleb Quakenbush
8
Embed
Correcting Labor Supply Projections for Older Workers ... · predict the future labor force participation of older workers. Next, the brief reviews ... Correcting Labor Supply Projections
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
The answer has enormous implications
for how policy reforms can or should
be designed. More years of work by
the population produces more
income, higher private saving as people draw
down their assets over fewer years, fewer years
of dependence on government, and higher
Social Security, Medicare, and income tax
revenue that can support higher annual and
lifetime benefits at any tax rate (Butrica,
Smith, and Steuerle 2006). Yet, the
Congressional Budget Office (2012) has only
recently started to show how policy changes,
such as increases in the retirement age, could
increase personal income and revenues out-
side Social Security.1 Whatever the cause, if
labor force participation increases more than
projected, shortfalls in systems like Social
Security will be smaller. Policies that lean with
rather than against the wind could accelerate
or enhance that trend.
This brief first points out some funda-
mental flaws in both theory and empirical
work surrounding labor supply. Although it
is theoretically possible for workers to supply
more or less work over time, these flaws lead
to biased estimates that over-predict the
share of life spent in retirement and under-
predict the future labor force participation
of older workers. Next, the brief reviews
some recent trends in both actual and pre-
dicted labor force participation by the Social
Security Administration. Finally, it high-
lights how estimates associated with Social
Security reform proposals traditionally have
accounted inadequately for employment
Program onRetirement Policy
Changes in life expectancies, birth rates, and health care (among other conditions) affect the employment of older workers. Older
workers’ employment, in turn, has wide-ranging implications for the sustainability of the nation’s entitlement programs and the
broader federal budget, as well as the future economic growth of both the elderly and the nation. Will future workers continue to
spend longer portions of their lives in retirement? Or will the recent shift from declining to increasing labor force participation
among older workers continue, or even accelerate—and not just during recessions?
Both public and
private policy
must change to
allow increased
employment
among older
workers to
blossom further.
bR I E f #
35juLy 2012
I n S I d E T H I S I S S u E•If labor force participation increases more thanprojected, shortfalls in systems like SocialSecurity will be smaller.
•Almost all formal models predicting labor forceparticipation among older workers fail to account for the importance of labor demand.
•Older workers are the largest underused source of labor and human capital in the economy.
www.urban.org
Correcting Labor Supply Projections for Older WorkersCould Help Social Security and Economic ReformC. Eugene Steuerle and Caleb Quakenbush
effects (regardless of their size). Avoiding
these shortcomings would mean that any
balanced system reform would produce
higher benefit rates at any tax rate or lower tax
rates at any benefit rate.
All in all, there is a good reason to be opti-
mistic—at least on this front—about the
future of the economy. However, both public
and private policy must change to allow
increased employment among older workers
to blossom further.
Leisure and Retirement years: not theSame ThingEconomists often view leisure as a superior
good: that is, as the economy grows richer,
people demand more time in activities out-
side the formal labor market. Economists
then apply this view to retirement, using it to
help explain the large growth in retirement
years in countries across the globe in the 20th
century. As real incomes rise, they argue,
these larger lifetime incomes (the income
effect) tend to dominate the higher wages
made possible by working later in life (the
substitution effect), and workers tend to
retire earlier.
Costa (1999) is among the best known of
those who reviewed this evidence. According
to her, increased incomes from private and
public pensions, decreased travel and com-
munications costs, and a burgeoning market
targeted at retirees increased workers’ real
wealth. It established retirement as a social
norm, making withdrawal from the labor
force appealing at increasingly younger ages.
Costa cautioned that the small uptick in labor
force participation rates just gaining notice in
the 1990s could be a temporary deviation
from trend, not a reversal of retirement-age
declines. In other words, the jury was still out
on whether the reversal would be permanent.
Costa was not alone. At about the same
time, the Social Security actuaries projected
continually lower or stagnating labor partici-
pation rates of older workers far into the
future. Some technical panels of economists,
demographers, actuaries, and other profes-
sionals advising Social Security actuaries on
their long-range projection methodologies
also shared this point of view. The 2003
Technical Panel noted that, “given the pro-
jection of a 127 percent increase in income
[over the projection horizon], it seems inad-
visable to assume increases in labor force
participation rates for older persons. Such a
reversal in the trend toward earlier retirement
has never been seen in the historical record of
any country.”
In March 2001, Steuerle and Carasso pre-
dicted that just the opposite would happen.
In their view, the classic labor-leisure distinc-
tion in economics oversimplifies how work-
ers approach their decisions to participate in
the labor force. In today’s economy, where
work for most is less physically strenuous
than it was for previous generations, workers
may actually find benefits in work similar to
those hypothesized for leisure (Steuerle,
Spiro, and Johnson 1999). At the same time,
the demand for a better life can play out in
different ways than increasing retirement
years from, say, 20 to 25. There may be
increased demand for part-time or bridge
jobs. Rising real incomes and shifting atti-
tudes about work-life balance could bring
about demand for shorter workweeks, longer
vacations, or more parental leave.
The limitations of the simple leisure
theory derive from economic simplifications
that are often useful but sometimes fail
to capture real-world nuances. In truth,
leisure is often put in economic models to
complete them mathematically. Work is
assumed—not proven—to provide negative
value or utility, so people trade off the
“bad” from working for the “good” from
working—a paycheck—until those bad
consequences are marginally more costly in
absolute terms than the pay people receive
(Steuerle 2007). Sociologists and psycholo-
gists would scoff at this type of simplifica-
tion, trusting more in what a person says
gives him or her a sense of well-being. They
would be much more likely to recognize
that labor force participation can be a source
of social and intellectual fulfillment, particu-
larly if older workers have more flexibility
in when and where they work.
The simplified economic theory is still
useful if work is defined as activity outside the
home that provides decreasing and, eventually,
negative utility at some margin (for example,
increasing work from 8 to 9 hours a day).
However, it is unnecessary to assume that
increasing labor force participation from 0 to
4 hours a day provides negative value (absent
pay) to everyone or almost everyone. If that
were true, for instance, there would be no
voluntary labor for charitable organizations.
Yet, many older individuals volunteer or con-
tinue to volunteer as they enter retirement
(Zedlewski 2007).
Workers as One-Hoss Shays The notion of complete retirement from the
workforce is actually a very modern one.
Until recently, most of the population world-
wide was primarily agrarian. Work life
revolved around the farm; the hours were
long, and little if anything was available in the
way of financial saving for retirement. Older
farm workers did not sit back while the rest of
the family did all the work. Rather, they
pitched in with what they could, taking
account of their depreciated skills.
With the growth of an industrial economy
putting huge stress on manual labor, many
people wore out and needed to retire from
those strenuous jobs. This led to the develop-
ment of retirement plans that often treated
workers like “one-hoss shays” (horse-drawn
buggies) that worked perfectly, then suddenly
collapsed and depreciated to uselessness.
Social Security started and continues with
2.
Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform
this model of human capital depreciation in
mind. For instance, it does not offer partial
retirement options, though some people
might effectively take them indirectly.. The
one-hoss shay stereotype never represented
the diversity of work and family experiences,
but today it relates even more poorly to how
individuals’ skills and human capital evolve.
To make matters even more complicated,
most workers still retire at age 63 or 64. If
they were to retire today for the same number
of years as when Social Security benefits were
first paid, they would be retiring at age 75,
and in another 50 years or so at age 80.
Workers in 1940 and 1950 retired at age 68 on
average; today the combination of earlier
retirement and longer lives gives workers
more than 10 additional years of retirement
than workers in 1940. That any demand for
leisure—no matter how superior a good—
would evolve this way makes little sense
unless the availability of Social Security bene-
fits at age 65, then 62, is taken into account.
Labor demand: Missing from thePredictive Models While no one yet knows how people will
adjust to increasingly higher lifetime earnings,
almost all formal models predicting labor
force participation among older workers—
including those used by the Social Security
Administration—contain a fundamental
flaw: they fail to account for the importance
of labor demand on labor force participation.
Employment at a point in time measures not
labor supply, but the intersection of labor
supply and labor demand. The models, how-
ever, ignore demand and project future labor
supply of different age groups by following
their employment trends over time, almost
as if each group were totally independent of
the others.
3.
0
10
20
30
40
50
60
70
80
Ages 16–24
Ages 65+
Ages 55–64
1948 1958 1968 1978 1988 1998 2008
Source: Bureau of Labor Statistics.
figure 1. Labor force Participation Rates by Age Group (percentage of age group population, both sexes)
Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform
As an extreme example of how such pro-
jection fails to account for labor demand,
consider a population where the birth rate
falls to zero and everyone will eventually be
age 65 or older. In this case, it is unlikely that
the future labor force participation of those
older than 65 would in any way parallel that
of older workers in an earlier population with
many younger people. As long as citizens
demand goods and services, businesses will
seek out the labor necessary to satisfy that
underlying demand.
This example shows the danger of
extrapolating labor force participation rates
of different age groups without considering
the number of potential workers relative to
the population. Take an extreme case where
labor demand is inelastic—that is, we need
about the same proportion of the popula-
tion to provide us with the goods and serv-
ices we want. When the decline in work
among older workers can no longer be off-
set by an increase among younger workers,
the changed age distribution will dramati-
cally affect the demand for workers at dif-
ferent ages and the trend lines of specific
age groups.2
What allowed that demand to be filled
in the last half of the 20th century, even while
longer-term workers retired earlier and ear-
lier? Mainly the introduction of women and
baby boomers into the workforce. In fact, the
share of adults working increased almost
every non-recessionary year over that half-
century. Thus, where labor demand existed, it
could easily be met by the many additional
productive, more highly educated entrants.
As the entrance of new women and young
workers slows, employers are likely to train
their hiring sights on older workers and the
vast pool of talent they represent.
Adjusting the labor force of different age
groups by education levels produces yet
another explanation for why past trends
have slowed or reversed themselves: new
labor force entrants no longer demonstrate
average skill levels well above those at or
near potential retirement ages. College grad-
uation rates of those now entering the
workforce are no longer significantly above
those of the workers they replace. These
changes, too, increase the relative demand
for older workers.
Today’s older workers possess qualities
that employers will increasingly seek out:
their education level matches that of younger
workers, they have lifetimes of experience,
and they are healthier than their predecessors
were at the same age (Munnell 2006).
Trends in Actual and Predicted Laborforce ParticipationSo far we have mainly discussed theory. Now
let’s look at the data.
Overall labor force participation
increased over the last half of the 20th
century. While it has been trending down-
ward recently as the economy suffered, it is
by no means at record lows. Who has been
driving this recent decline? Younger workers,
who are now more likely to remain out of
the labor force while pursuing education or
to take more time to engage the workforce
more fully. In today’s unfriendly job environ-
ment, more young adults may feel forced
into or opt for more schooling or other
non-labor alternatives in the face of poor
employment prospects.
Meanwhile, among citizens age 55 and
older, the trend of declining participation has
largely reversed. Participation among this
group has increased from its low in the early
’90s and now slightly surpasses its 1980s level
(figure 1). This is not just the result of a con-
tinued increase in participation among
women: among men age 55 and older, labor
force participation fell from 45.6 percent in
1980 to 37.7 percent in 1993, but it has since
climbed to 46.3 percent in 2011 (BLS, not
shown). Additionally, while the Great
Recession saw a short uptick in new Social
Security retirement claims among eligible
workers, retirement benefit uptake has since
fallen to its lowest level since 1976, and a
decade-long trend in delaying retirement
benefits may have resumed (Johnson 2012).
Social Security’s Predictions of Laborforce Participation by Cohort In developing its annual OASDI Trustees
Reports, the Social Security actuary attempts
to project future labor force participation
rates among the working-age population.
While specific methodology is refined over
time, employment statistics used in the
4.
Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform