NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Will the Current Economic Crisis Lead to More Retirements?

Over the past year, numerous stories in the popular press have suggested that workers in the U.S. will delay retirement as a result of the current economic crisis. With diminished retirement savings and home equity to draw on, the story goes, expected retirement income has shrunk, forcing older individuals to stay in the labor force longer. It may seem surprising, then, that the number of new Social Security benefit claims is sharply up since the crisis began, suggesting an increase in retirements rather than a decrease. Why are more workers retiring now if their expected retirement income is going down?

The answer may lie in another aspect of the crisis, the weak labor market. Since the crisis began, the unemployment rate has more than doubled and the economy has shed millions of jobs. For older individuals who have been laid off and are unable to find new work, retirement may be the only option, despite its involuntary nature. The net effect of the current economic crisis on retirement is thus far from clear.

In Mass Layoffs and the Market Crash: How the Current Economic Crisis May Affect Retirement (NBER Working Paper 15395), researchers Courtney Coile and Phillip Levine explore this issue.

The authors begin by examining the stock holdings of older households. It turns out that most have little stock wealth. For example, the typical household between the ages of 55 and 64 had just $8,000 of stock wealth in 2007. Not surprisingly, more highly-educated households have larger stock holdings. The change in retirement income resulting from even a sharp market downturn such as the one just experienced would thus be fairly modest for most households, although market fluctuations could still affect retirement decisions for those with large holdings or if other workers experiencing smaller losses were very responsive to them.

To explore this empirically, the authors turn to their main analysis. They use thirty years of data from the Current Population Survey (CPS) to estimate models relating workers' retirement decisions to changes in equity, housing, and labor markets over time and (where possible) across geographic locations. In their analysis of the stock market, they find that workers experiencing higher stock market returns are more likely to retire, but this is only true for highly-educated workers between the ages of 62 and 69. Moreover, workers respond only to long-run returns-the 5-year or 10-year return in the S&P 500 Index, rather than the one-year return.

Relative to stocks, housing equity is a more broadly-held asset among older households and the value held by the typical family is larger. Thus large fluctuations in home values as workers near retirement age could affect retirement decisions. However, when the authors examine this question using the same data and methods described above, they find no evidence that workers respond to house price movements. This result is perhaps not surprising, given that past research has concluded that most households do not liquidate assets to support their general consumption needs as they age.

The labor market also has the potential to affect retirement, since job loss is relatively common for older workers, especially when the labor market is weak. Using the same data and methods, the authors show that when the unemployment rate rises, more workers between the ages of 62 and 69 retire, particularly those with less education. The fact that this response occurs only starting at age 62 appears to be due to the availability of Social Security benefits beginning at this age.

Given that both stock and labor market fluctuations affect retirement for certain segments of the population, what is the overall expected effect of the current crisis on retirement? The authors use their estimates to simulate the effect of a 5-point increase in the unemployment rate (an increase similar to that experienced in the U.S. over the past two years) and a 110-point drop in the real ten-year return in the stock market (a change that is equivalent to moving from the average return over the past 30 years to that experienced in the period ending in 2008).

Assuming a steady return to normal conditions in both markets over a five-year period, the authors' simulations suggest that 258,000 workers would delay retirement over the course of the stock market downturn. On the other hand, 378,000 workers would be forced to retire early as a result of the weak labor market. On net, the authors predict that the increase in retirement attributable to the rising unemployment rate will be almost 50 percent larger than the decrease in retirement brought about by the stock market crash.

Taken as a whole, the authors' results indicate that the public discussion regarding the impact of the recent economic crisis on retirement is off target. Some relatively wealthier workers will be forced to delay retirement, but a larger number of workers with fewer economic resources will be forced into retirement because of their inability to find new jobs. These workers may need to start collecting retirement benefits now to make ends meet, resulting in lower income in retirement and an increased risk of poverty in old age. Indeed, the fact that Social Security claims have risen sharply since the recession began suggests this response has already begun. Despite a wealth of media attention to the effect of the economic crisis on older workers, the risks they face as a result of weak labor markets have gone largely unnoticed.

 
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