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Wednesday, May 30, 2012

Some thoughts on retirement

Retirement, as a common end-stage of our lives, is an artifact of the mid-to-late 20th century (brief histories of retirment in America can be found here or here; a more detailed view, with a somewhat different take than mine is here.).  Before (roughly) the 1950s, people normally worked until (a) they died or (b) they were physically or mentally incapacitated.  People who achieved (b) typically lived wih their children (if they had children) or in abject poverty (often institutionalized, in "county homes").  [Even before 1950, an increasing percentage of the population did, in fact, achieve retirement in the earlier part of the 20th century (as incomes, and the ability to save for retirement rose).  This remained a distinctly minority accomplishment, and was confined to the upper-middle and upper income groups.]

Two developments--public support for retirement through Social Secuirity and the broadening of private-sector pensions to "working-class" employees, generally as a result of union activity--made secure retirement incomes more widely available.  Increasing lifespans, as a result of rising incomes, more widespread access to health care, and health incurance, coupled with increasing provision of retirement incomes, creaed a population of people with the ability and the desire to cease work.  By 1986, the labor force participation rate for men, which was about 47% in 1948, had declined to about 16%.  Retirement, far from being the preserve of (largely white) upper-income families, had become a mass phenomenon.


By 2008, pension coverage had declined.  In particular, participation of workers in defined benefit pension plans had declined dramatically.  In 1979, 38% of all private sector workers were covered by defined benefit pension plans (with or without additional coverage by a defined contribution plan).  By 2008, coverage by defined benefit plans had declined to only 15% of all workers (for detals, see this).

Why do defined benefit plans matter?  What's the problem with the expansion of defined contribution plans?  Simply, defined benefit plans allow for people to make fairly secure plans for retirement; defined contribution plans--as we saw in the declines in asset values recently--subject us to the vagaries of financial markets.


Social Security has come, increasingly under attack, with more and more efforts to delay retirement benefits, or, as proposed by President George W. Bush, to convert it to a defined contribution plan.

So what does the future of retirement look like?  We already know that people are more likely now to remain in the labor force after age 65.  From its low point in 1986 (16%), for example, the labor force participation rate of men has increased to nearly 23%, roughly where it was in 1973.  Will retirement once againbecome the province of upper-middle and upper-class families?  That outcome seems all too likely to me...


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