Delaying retirement might not solve savings shortfall after all: 4 policy recommendations
Models that conclude working longer is better financially don't account for actual experience, say researchers at the New School's Schwartz Center for Economic Policy Analysis,
Many older Americans plan to delay retirement as they play catchup because of financial losses during the pandemic. However, new research shows that working longer is not the solution to the problem as previously believed.
“Spreadsheet models used by advocates of delaying retirement assume older workers delay claiming Social Security to accrue additional benefits,” according to a research report from Teresa Ghilarducci, Michael Papadopoulos, Bridget Fisher, and Anthony Webb at the Schwartz Center for Economic Policy Analysis, The New School.
Spreadsheet models don’t reflect actual experiences
“But in reality, by age 65, most older workers have already claimed Social Security, often to supplement low wages, and working longer does not increase their Social Security benefits. Working longer increases retirement savings significantly less than predicted by spreadsheet models, which don’t reflect older workers’ real experiences in the labor market.
“Finally, 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.”
3 key statistics illustrate the problem:
- Working from age 62 to age 70 increases the share of workers financially prepared for retirement by only 18 percentage points, compared to the 46 percent increase predicted by spreadsheet models using overly optimistic assumptions.
- More than two-thirds of the predicted retirement income shortfall is because most older workers claim Social Security benefits and miss out on the Delayed Retirement Credit.
- More than half of those claiming benefits while working do so to supplement low wages.
4 policy changes proposed
The authors of the report propose four policy changes to address the retirement savings shortfall among older workers:
1. Reinstate early withdrawal penalties. Retirement assets have a specific purpose: to provide workers with income in retirement. Using these assets when facing financial difficulties and other emergencies may help workers in the short run but hurts their retirement security.
Instead of lifting the early withdrawal penalty, Congress should enact measures to deal with disasters such as the COVID-19 pandemic and effects on people’s jobs and lives by adopting policies such as lowering the Medicare eligibility age, increasing and extending unemployment benefits, and requiring employers to provide paid sick leave for all workers.
Otherwise, workers are forced to choose between suffering from disasters now or hurting their future income by tapping into their retirement assets.
Additionally, by equating early withdrawals with emergency savings, Congress ignores the needs of the majority of workers who do not have access to a retirement savings plan or any liquid retirement savings.
2. Expand Social Security. Many workers do not have access to workplace retirement plans and receive more than three-quarters of their retirement income from Social Security.
Increasing the full retirement age, which cuts Social Security benefits for everyone, especially hurts those unable to work longer and those who supplement low wages by claiming Social Security benefits while working.
Expanding Social Security can make up for benefit cuts, ensuring no one faces poverty in retirement after a lifetime of work. This supports not only the most vulnerable — senior citizens, the disabled, people of color and those in densely populated areas — but also helps the overall economy by increasing aggregate demand.
3. Advance older workers’ bargaining power. Working longer does not help many older workers prepare for retirement, because they are paid low wages.
Older workers are losing bargaining power on the job, requiring federal efforts to protect institutions and policies that support workers’ rights, including stronger anti-age discrimination regulations and enforcement, protection of rights to labor representation and collective bargaining, and properly classifying workers in gig and alternative work as employees.
However, because of the low levels of union membership, minimum wage hikes also are necessary to ensure living wages for older workers who are highly represented in low-paying jobs such as foodservice, retail and care work.
4. Create guaranteed retirement accounts. Going forward, Congress should ensure all workers have retirement plans that are protected against recessions through the creation of a public option retirement plan known as Guaranteed Retirement Accounts (GRAs).
GRAs are universal, individual accounts funded by employer. The plan is portable as workers change jobs or if workers lose their job. GRAs give workers access to a secure and accessible way to save for their retirement and supplement their Social Security benefits.
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