Delayed retirement here to stay

Summer is over. It's back to work.

Get used to working. Many of us – especially those age 50-plus – may be doing it longer than originally expected.

A slumping stock market is just one of the reasons. Changes in Social Security laws, stingier corporate pensions, and other economic and social factors mean many Americans will wait longer to retire and may have less gold in their golden years, experts say. Especially hard hit: those closest to retirement with the least time to rebuild nest eggs – or build them from scratch.

"Americans value retirement so highly they will certainly still retire," says John Rother, public-policy head for AARP, which lobbies for older Americans. "It is just that they may retire a little later with [a lower] standard of living than they had hoped."

There is already some evidence older Americans are staying on the job longer.

The portion of the population working or looking for work has fallen for those under 55. But labor force participation has risen in the past two years for people age 55 to 64, in part due to the aging of the population.

Also, "older Americans are sensing that their retirement nest eggs have evaporated and [they] need to work longer to rebuild" them, says Mark Zandi, chief economist at Economy.com.

The changing retirement picture is setting off both political and economic ripples. Widespread voter concern about retirement issues is one reason Congress is expected to take up pension reform before heading home for this fall's elections. And steps to strengthen retirement savings accounts are an element of a revised economic program President Bush is considering.

It is no surprise that the stock market's slump is a key factor in the changing retirement outlook. Between March 2000 and the end of 2001, some $5 trillion in stock market wealth evaporated, according to the Employee Benefit Research Institute (EBRI). Many workers saw their 401(k) plans and individual retirement accounts take major hits.

But the stock slide is only one factor reshaping retirement in the US. For many individuals, it is not the most important factor.

Why? Most Americans have only modest stock holdings. In fact, 4 in 10 people in the 55 to 64 year age bracket own no stock at all, according to the Federal Reserve. For those nearing retirement who do have stock, the median portfolio is just $47,000.

"The change in the stock market affected some people's plans to retire early," says David John, a research fellow at the Heritage Foundation, a conservative think tank. "But these were upper income workers, not a large portion of the work-force."

Other experts argue that the drop in financial markets will speed up changes in retirement that were coming anyway. "Even if markets had not contracted, you would still see rebellion against the existing retirement model, because it is failing to provide [what] modern, healthy older adults are seeking," says Ken Dychtwald, an expert on retirement and author of "Age Power." He says older Americans "want to stay in the game even if with less time and less pressure."

One key factor that will push Americans toward later retirement is a change that takes effect in January in the Social Security program. The age for full retirement benefits has been 65 since the program began. But beginning with people who turn 65 next year (those born in 1938), the age at which full benefits can be collected will gradually increase, until it reaches 67 for people born after 1959.

Those born in 1938 or thereafter can still collect Social Security benefits as early as age 62. But they face a bigger reduction in benefits than those who retired before the changes took effect. "It is the equivalent of a benefit cut," says Annika Sunden, associate director at the Center for Retirement Research at Boston College. "People will have to retire later to get a full benefit."

At least Social Security recipients know how much their check will be each month. That is less and less true for those with corporate pensions. The number of companies offering pension plans with a set monthly check has fallen sharply in recent years. These so-called "defined benefit" plans were once the most common kind of corporate pension. Now, only about a third of pension plan participants are covered by this kind of plan.

Increasingly, businesses offer "defined contribution" plans, which now cover 6 in 10 pension-plan participants. In these, employees have no guarantee as to the size of their future retirement check. Their employer simply promises to put a certain amount in a pension account, with the employee having to manage the funds both before and after retirement.

"Companies are shifting to less advantageous plans," says Lawrence Mishel, president of the Economic Policy Institute, a think tank focusing on living standards for working people. "The private pension system has been eroded for many households."

In fact, the halting economic recovery makes it more difficult for smaller companies to offer pension plans, according to recent study by EBRI. The benefit-research organization, notes that only 52.3 percent of workers age 21-64 participate in a company pension plan. That leaves almost half of all workers dependent on Social Security alone.

In an ideal world, individuals would augment any corporate pension plan with their own savings. But with college costs climbing 6 percent a year and medical costs rising 8 percent, many baby boomers are having trouble saving. Some 15 percent of Americans say they have no retirement savings and three out of five have less than $100,000.

Lately, there are signs that Americans are stepping up their savings to deal with this situation. The savings rate was 4.2 percent in June, up from the 2.3 percent level it averaged for all of 2001. "Unless the stock market comes back, we are headed to the 6 to 8 percent savings rate experienced in most of the post World War II period," economist Zandi says.

A survey out last week underscores Americans' retirement worries. Roughly one third of those age 45 to 65 with incomes at least $75,000 surveyed in July by Harris Interactive said they were concerned they might have to postpone retirement and reduce their expectations for a retirement lifestyle.

The changing retirement outlook has potential political and economic implications. Politically, when voters are concerned about their retirements, "it is increasingly difficult to make substantial changes to Social Security or Medicare," notes Zandi.

The changing climate will be felt in the workplace, too. It may make older workers more interested in new flexible work options. Some younger workers may find their career paths blocked by veteran employees holding on to jobs to bolster their savings. But overall, economists expect a labor shortage as boomers retire, which could bode well for older-worker wages.

Delayed retirement may also dampen growth in areas of the country – like Florida – that attract resettling retirees.