Will We Have To Work Forever?

Today, the average retirement age is 63. If people continue to retire at 63, they are going to face a severe decline in living standards at retirement for a number of reasons. First, at any given retirement age, Social Security benefits will replace less of pre-retirement earnings as the Normal Retirement Age rises from 65 to 67. Second, Medicare premiums, which are deducted before the Social Security check goes in the mail, are slated to rise dramatically. Third, taxes on Social Security benefits will also rise. In addition, pension coverage in the private sector has shifted from defined benefit plans, where workers receive a life annuity based on years of service and final salary, to 401(k) plans, where individuals are responsible for their own saving and the median balance for individuals approaching retirement is only $60,000. One powerful antidote to reductions in retirement income is to work longer. Working directly increases people’s current income; it avoids the actuarial reduction in Social Security benefits; it allows their 401(k) plans to grow; and it postpones the day when they start drawing down their pension accumulations or other retirement saving. The question is how much longer people will need to work. This brief examines the effect of working longer on replacement rates and finds that delaying retirement by about two years can have a major impact on retirement security for those with significant 401(k) assets; households that depend solely on Social Security, however, would have to extend their work lives by more than three and a half years to achieve similar gains.