One of the warning signs of the oncoming retirement crisis is how often people are told to work longer. If you haven’t been able to save enough—work longer. If your savings are wiped out by divorce or medical bills—work longer.
But even if people have the health and strength to keep working past traditional retirement ages, our research (Ghilarducci et al., 2021) finds that working longer increases income in retirement by significantly less than predicted by spreadsheet models.
Why? Because spreadsheet models don’t reflect older workers’ real experiences in the labor market. In reality, many older workers earn so little they cannot afford to delay claiming Social Security benefits, nor can they save for retirement.
Studies Overestimated Benefits of Working Longer
Working longer for practical reasons is anchored in a number of what we call “spreadsheet” studies, which are mechanistic models based on ideal behavior. One such study from 2013 by Munnell, Orlova and Webb was optimistic about the benefits of working longer. It projected the wealth and Social Security benefits of workers in their 50s and concluded that most would be financially prepared for retirement if they remained in the labor force until age 70, or even into their late 60s.
They found that only 26 percent of people could maintain their pre-retirement standard of living if they retired at age 62, but 72 percent could reach financial security if they waited until age 70 to retire. But even these numbers overstate the advantage. When we control for all the other factors that help a person to be prepared for retirement, working longer has no independent effect.
These optimistic predictions are, unfortunately, not supported by survey data based on interviews with older workers that report their real experiences in the job market and as they prepare to retire. Using data from the Health and Retirement Study, a nationally representative sample of older Americans, our researchers at the Retirement Equity Lab found that working from age 62 to 70 increases the share of workers financially prepared for retirement by only 18 percentage points—28 percentage points less than predicted by the Munnell, Orlova and Webb study using a spreadsheet model based on overly optimistic assumptions.
More than two-thirds of the gap in predicted increased financial preparedness for retirement is because most older workers claim Social Security benefits and miss out on the Delayed Retirement Credit. By age 65, more than half (51 percent) of remaining workers in the 1943 to 1947 birth cohort claimed Social Security, and by age 66, 89 percent have claimed benefits. By age 67, almost all workers have claimed benefits.
A further 6 percentage points of the 28 percentage-point gap exists because actual increases in retirement plan balances fall short of projected increases that assume consistent contributions, low fees and zero pre-retirement withdrawals.
This shortfall is not surprising. Studies (for example, Biggs, Munnell and Chen, 2019) show that people’s actual retirement savings accumulation from age 25 to age 60 similarly fall short of projections.
Older Workers Need Social Security to Supplement Low Wages
Advocates of the benefits of work at older ages argue it gives workers additional opportunities to save for retirement—either directly by contributing to their retirement plans or indirectly by delaying claiming Social Security. However, for most people who claim Social Security benefits early, delaying is not the rational choice.
‘The purported solution of working longer ignores the effect of the recession by doing nothing for jobless older workers.’
More than half (54 percent) of those claiming benefits while working do so to supplement low wages. By age 66, more than half (56 percent) of workers who have claimed Social Security earn less on the job than their projected income in retirement, including Social Security benefits and other retirement savings. Overall, these households are using Social Security to smooth consumption over time, just as economic theory says they should.
Some low earners might be better off delaying claiming Social Security by tapping financial assets to make up their consumption shortfall. But most have minimal financial assets. By age 66, almost half (44 percent) of workers who claim Social Security earn less than their projected post-retirement income and have less than $20,000 in financial assets.
Older workers’ inability to save is not due to overspending. We find no evidence that workers are living it up, or using Social Security to enjoy a level of consumption before retirement that they will not be able to sustain in retirement. In fact, older workers who claim benefits spend less than they could afford. At the median, they spend $42,000 compared with the $49,000 they could afford.
Covid-19 Job Loss Exacerbates Retirement Savings Crisis
The drastic job loss experienced by older workers in the wake of the COVID-19 crisis reveals the risk older workers face when working longer is the policy substitute for an effective retirement security system. Beginning in March 2020, nearly 5 million workers ages 55 to 70 lost their jobs in the recession resulting from the virus.
Post-pandemic job loss, coupled with early withdrawals puts an additional 3 million people in older households at risk of poverty in old age. Many unemployed older workers are now at risk of never finding another job, a risk they continue to face the longer it takes the economy to recover.
The purported solution of working longer ignores the effect of the recession by doing nothing for jobless older workers, while deflecting from the need for comprehensive policy reform to ensure retirement security.
This calls for immediate policy support for older workers out of the labor force, as well as systemic reforms to end retirement insecurity for generations to follow. The former includes reinstating early withdrawal penalties, lowering the Medicare eligibility age, increasing and extending unemployment benefits, and enforcement of anti-age discrimination regulations.
Needed systemic reforms include expanding Social Security and creating Guaranteed Retirement Accounts that give workers access to a secure and accessible way to save for their retirement and supplement their Social Security benefits.
Bridget Fisher is associate director, researcher and communications specialist with the Schwartz Center for Economic Policy Analysis at The New School in New York City.
