Sent: 26-05-2009 09:55:03
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Working Longer - Part 1
"Every morning more than 100 million Americans wake up and head out to work. They grab a bite, get the news, and then turn their attention to the issues they'll face that day. At times, however, it becomes necessary to look beyond this workaday routine and deal with issues that could disrupt one's life if not addressed. This is one of those times, and the issue is retirement."
This is the opening paragraph of a new book entitled "Working Longer: The Solution to the Retirement Income Challenge" by Alicia Munnell and Steven Sass. Americans live longer than their ancestors and neither their retirement savings nor the taxes of younger generations can support ever-longer retirements.
A reporter from the New York Times argues that the very idea of working longer and retiring later sounds depressing. He goes on to suggest there may be little choice if we want to avoid a precipitous decline in our accustomed standard of living (haven't I been saying this for several years?). Whilst the book focuses on America, many of the issues are the same across the western world. The minutiae may be different, but the underlying problems are shared.
The authors of the book know what they are talking about as Ms. Munnell is a former assistant Treasury secretary for President Clinton and is a director of the Center for Retirement Research at Boston College. Mr. Sass is an associate director of the same research center and was formerly an economist at the Federal Reserve Bank of Boston.
A report in the Economist magazine agrees that as we are living longer, the cure for population ageing is self-evident, we should simply work longer. However, it is not certain this will happen under current arrangements. Munnell and Sass provide both a concise summary of the evidence about retirement decisions and a handy guide for the middle-aged on how to stay well-off when they decide to stop working.
The authors set out a dismal prospect for future retirees if they try to rely only on pensions and savings. Social Security, America's public-pensions system is becoming less generous and employers have drastically scaled back final-salary pension plans and post-retirement health benefits. Although saving through defined-contribution plans has grown, it will not provide enough to make up the difference. Australia is facing exactly the same situation.
As the report in the Economist points out, ensuring people have sufficient money to provide for a prosperous retirement is often represented as a financial task, but the authors of this book believe it should be seen rather as an employment challenge. If people were to work longer, they could set a financial goal that could realistically be obtained, rather than something that looks totally outrageous and unobtainable. Munnell and Sass suggest that in the US, raising the average retirement age by three years, from 63 to 66, would be enough for this to happen.
Sounds simple, but sadly it is not.
Current trends indicate it simply is not going to happen. For most of the 20th century, American men retired earlier and earlier and although the retreat from work ended in the mid-1980s, the subsequent recovery from the mid-1990s has been sluggish. When I did a rough calculation several years ago, I found that the average retirement age in Australia was around the mid 50s. I do not have up to date figures but I would imagine it is not far off that today.
The situation is not that different for females. Whilst young women poured into the labour force over the post-war period, as they have grown older, it has pushed up employment rates for those aged 55-64. But the momentum will not be strong enough to raise women's retirement age to the extent that is necessary.
Poor health is something that is definitely NOT an obstacle. Older workers (aged 55-64) started getting healthier in the 1980s, and retirees followed suit in the 1990s. Although 15 - 20% of older Americans will be unable to carry on working, the rest will be fit enough. Once again, the same is true elsewhere, including in Australia.
So why don't people simply work longer? That is what I will focus on next time.
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