In a recent edition of Financial Planning magazine, there was an interesting column written by Nathan Place that discussed some of the reasons that Americans are retiring later. I'll discuss some of these factors below.
One of the primary reasons people are putting off retirement is changes to Social Security regulations. In the 1980s, Congress changed the full retirement age (FRA) from 65 to 67. Individuals may claim Social Security benefits as early as 62, but if they do so at any age before reaching FRA, their benefits are reduced.
This gives individuals a considerable incentive to work longer. Workers who continue working after reaching FRA, their benefits increase by 8 percent per year up to age 70. Based on the mail I receive, a great number of people are taking advantage of this incentive.
An additional factor is survivor benefits. I receive a great deal of mail from surviving spouses asking about survivor benefits. When a worker waits until 70 to retire, his or her surviving spouse receives 100 percent of their deceased spouse’s Social Security benefit at the stepped-up level. If an individual retires at his or her FRA, the surviving spouse receives a significantly lower survivor benefit. As a result, many people encourage their spouse to continue working after reaching their FRA. In 2000, Congress repealed the “earnings test,” which many saw as a penalty for working in old age.
Even though a majority of workers file for a benefit prior to reaching their FRA, statistics are trending toward later retirement, suggesting that regulations are having a beneficial effect.
Another reason people are putting off retirement is the decline of the defined-benefit retirement plan. It is no secret that the percentage of workers who receive pension has decreased dramatically.
The reason is pretty simple: For employers, a defined contribution plan, such as a 401(k), is much cheaper.
The result is that employees without a defined-benefit plan no longer have a guaranteed fixed monthly lifetime income at 65. Even Individuals who have accumulated a significant balance in their 401(k) plan, are not sure how to convert those balances into a guaranteed lifetime income. Prior to 2022, when interest rates were much lower than they are now, the guaranteed return from a lifetime annuity were not as attractive as lifetime pensions that previously were available from defined benefit plans.
A further reason that Americans keep working later in life is to maintain access to an employer’s health insurance plan. Health care costs continue to rise significantly. Medicare is not available until age 65. Thus, individuals considering retirement prior to 65 are facing significant health care premiums. So many try to continue working up to age 65, at least.
Another factor is the simple fact that Americans are living longer. Many people will spend as many years in retirement as they did in their working lives.
When inflation was at 2 percent, some individuals could expect that they could maintain their standard of living throughout retirement. Now that we are facing a much higher inflation rate—and it’s unlikely that inflation will go back to 2 percent or 3 percent in the foreseeable future—retirees who are concerned with maintaining their standard of living throughout retirement will think twice about early retirement.
Finally, many prospective retirees recognize the high cost of long-term care. The longer you live, the more likely it is that you will need long-term care.
Most workers in America can’t afford the premiums associated with long-term health care. Because insurance companies vastly underestimated the cost of long-term health care claims, virtually all of them have significantly increased premiums, with the result that many workers have either decreased their coverage or dropped coverage completely. So workers have more incentive to work longer to increase their savings prior to retirement.
(Elliot Raphaelson welcomes your questions and comments at [email protected].)
