Whether you call the trend by the name Unretirement, your Next Avenue, encore careers or third age, there is no question more boomers — now age 51 to 69 — want, and often need, to earn a paycheck well into the traditional retirement years, through part-time jobs, contract work, temp assignments or by starting a business.
So why do so many government programs and employer policies incentivize people in their 60s and 70s to stop working?
I think we need them to do just the opposite, for the good of the boomers and the U.S. economy.
Who Incentives Would Help
If the supply of workers in their 60s and 70s dramatically increased from current levels (about 27 percent of people 65 to 74 are now in the labor force), household incomes would increase, employers would benefit and tax revenues would rise and make it easier to finance Social Security, Medicare and other old-age programs.
Why not declare that older workers are “paid up” for Social Security after 40 years?, asks Stanford University economist John Shoven.
“The story about people working longer is going to happen. Maybe not as much as it should or as fast, but it’s already happening,” says Eugene Steuerle, economist at the Urban Institute, a Washington D.C.-based think tank. “The question is, do we do it well or poorly?”
In other words, policy matters. “Essentially we have to think about different ways to incentivize people to work longer,” says Ruth Finkelstein, associate director of the International Longevity Center-Columbia Aging Center at Columbia University. “It is good for employees, for employers and for communities.”
Let’s divide the discussion of possible incentives into two broad categories: macro and micro.
Social Security and Medicare
The macro issues involve large social safety net programs, such as Social Security, Medicare and pension plans. These worthwhile programs unfortunately contain requirements that, in the aggregate, discourage older workers from staying on the job.
Take Social Security. The current benefit formula is based on a calculation that takes into account a worker’s highest 35 years of earnings. After 35 years, the incentive to stay on the job weakens, especially since older workers usually take home less pay than they did in middle age. (See the MarketWatch article that ran on Next Avenue, “Men’s Earnings Peak in Their Early-to-Mid 50s.”)
Why not declare that older workers are “paid up” for Social Security after 40 years of employment?, asks Stanford University economist John Shoven.
There are a number of proposed variations on the idea, but they all converge on the notion that doing so would provide a boost to an older worker’s take-home pay (by eliminating the employee share of the Social Security payroll tax) and cut the employer’s cost of keeping older workers (by eliminating the employer’s contribution to the tax).
Medicare? It’s considered a secondary payer on any claims for individuals who are eligible for the government’s health program for people 65+ but still working at employers with health benefits. The employer’s plan is the primary payer, which raises the out-of-pocket costs for those older workers.
Mandating Medicare as the primary payer for claims would encourage people to keep working past 65, too. “Switching to Medicare as a primary payer would cost the government approximately nothing,” Shoven said at a conference in 2013. “You get more work, higher wages, more income tax both at the state and federal level, the economy would be better off, the government deficit would not be worse off. It’s just, in my opinion, crazy not to do it.”
In an earlier Next Avenue column, I laid out three other changes that would help create incentives to stay employed: Make America’s retirement savings system universal and lower cost; allow people who delay claiming Social Security to take their eventual benefits in a lump sum and stop requiring people to start taking distributions from 401(k)s, IRAs and the like at age 70 ½ — either push back that date or eliminate it.
Phased Retirement and State Pensions
Legislators should also race to simplify and standardize rules that inhibit employers from offering employees phased retirement and work fewer hours. Surveys show the concept of gradually gliding into retirement is popular among employees and attractive to employers eager to retain skilled workers. But phased retirement programs aren’t widespread. Management is often wary because they face legal and compensation complications trying to embrace a reduced-hour schedule for aging boomers.
How about work-longer incentives on the micro-level?
One area that’s ripe for reform is state and local government pensions. These public retirement systems rely on traditional defined benefit pension plans, the kind with retirement payouts based on a salary and years-of-service formula. While much of the recent focus has been on how underfunded many plans are, far less appreciated is that these pension encourage early retirement. In some plans, long-term employees can retire with full benefits at 55 and can apply for reduced benefits as young as 50.
What if all state and local government workers joined the Social Security system? They could participate in a well-designed defined contribution retirement plan, such as the federal government’s Thrift Savings Plan. Pension funding would no longer be subject to the whims of political leaders. And the switch might better match the public sector workforce. The average tenure in state jobs is about six years, so many public sector workers don’t enjoy the long-term promised benefit.
“Public sector retirement plans cannot provide full retirement security for people who don’t spend a full career in government employment,” says Roger Ferguson, chief executive of TIAA-CREF. “But we still need to provide opportunities for them to save and experience a reasonable outcome after a lifetime of working across society.”
Entrepreneurship and Small Businesses
Local communities could devote more resources to encouraging entrepreneurship in Unretirement, too. Small business incubators, cosharing workspaces and community college classes on starting a business are worth pursuing.
So is lowering barriers to entrepreneurship. It’s time to take a hard look at burdensome regulations to get licensed in service occupations such as interior design and hairdressing.
Arthur Brooks, head of the American Enterprise Institute in Washington D.C., illustrates the barrier to entrepreneurship in his new book, The Conservative Heart, with a story about an African immigrant in Utah. She couldn’t open her hair-braiding business without finishing 2,000 hours of cosmetology lessons.
In many cases, less onerous forms of regulation can substitute for licensing, a boon to would-be older entrepreneurs eager to launch businesses.
Small businesses can also do more to hang on to their older, valued employees who know their lines of work and customers well. These staffers are extremely useful training the next generation of their firms’ employees.
Some mom-and-pop companies get it. At Little Wolf Cabinet Shop in New York City, for instance, the owner convinced a 70-year-old employee to delay retirement for a year to teach his son the business. (It received an Age Smart Employer Award from the Robert N. Butler Columbia Aging Center and The New York Academy of Medicine.)
“When we think about small business, we think they have limited resources,” says Finkelstein. “At the same time, they can be idiosyncratic to adjust to motivate and retain workers.”
Remember Bob Dylan’s memorable lyrics from The Times They Are A-Changin’?
Your old road is
Please get out of the new one
If you can’t lend your hand
For the times they are a-changin’.
The song was written for a different era but it still resonates today. Policymakers and employers should start paying better attention to the 21st century economy, workplace and workers.
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