The answer has enormous implications

for how policy reforms can or should

be designed. More years of work by

the population produces more

income, higher private saving as people draw

down their assets over fewer years, fewer years

of dependence on government, and higher

Social Security, Medicare, and income tax

revenue that can support higher annual and

lifetime benefits at any tax rate (Butrica,

Smith, and Steuerle 2006). Yet, the

Congressional Budget Office (2012) has only

recently started to show how policy changes,

such as increases in the retirement age, could

increase personal income and revenues out-

side Social Security.1 Whatever the cause, if

labor force participation increases more than

projected, shortfalls in systems like Social

Security will be smaller. Policies that lean with

rather than against the wind could accelerate

or enhance that trend.

This brief first points out some funda-

mental flaws in both theory and empirical

work surrounding labor supply. Although it

is theoretically possible for workers to supply

more or less work over time, these flaws lead

to biased estimates that over-predict the

share of life spent in retirement and under-

predict the future labor force participation

of older workers. Next, the brief reviews

some recent trends in both actual and pre-

dicted labor force participation by the Social

Security Administration. Finally, it high-

lights how estimates associated with Social

Security reform proposals traditionally have

accounted inadequately for employment

Program onRetirement Policy

Changes in life expectancies, birth rates, and health care (among other conditions) affect the employment of older workers. Older

workers’ employment, in turn, has wide-ranging implications for the sustainability of the nation’s entitlement programs and the

broader federal budget, as well as the future economic growth of both the elderly and the nation. Will future workers continue to

spend longer portions of their lives in retirement? Or will the recent shift from declining to increasing labor force participation

among older workers continue, or even accelerate—and not just during recessions?

Both public and

private policy

must change to

allow increased

employment

among older

workers to

blossom further.

bR I E f #

35juLy 2012

I n S I d E T H I S I S S u E•If labor force participation increases more thanprojected, shortfalls in systems like SocialSecurity will be smaller.

•Almost all formal models predicting labor forceparticipation among older workers fail to account for the importance of labor demand.

•Older workers are the largest underused source of labor and human capital in the economy.

www.urban.org

Correcting Labor Supply Projections for Older WorkersCould Help Social Security and Economic ReformC. Eugene Steuerle and Caleb Quakenbush

effects (regardless of their size). Avoiding

these shortcomings would mean that any

balanced system reform would produce

higher benefit rates at any tax rate or lower tax

rates at any benefit rate.

All in all, there is a good reason to be opti-

mistic—at least on this front—about the

future of the economy. However, both public

and private policy must change to allow

increased employment among older workers

to blossom further.

Leisure and Retirement years: not theSame ThingEconomists often view leisure as a superior

good: that is, as the economy grows richer,

people demand more time in activities out-

side the formal labor market. Economists

then apply this view to retirement, using it to

help explain the large growth in retirement

years in countries across the globe in the 20th

century. As real incomes rise, they argue,

these larger lifetime incomes (the income

effect) tend to dominate the higher wages

made possible by working later in life (the

substitution effect), and workers tend to

retire earlier.

Costa (1999) is among the best known of

those who reviewed this evidence. According

to her, increased incomes from private and

public pensions, decreased travel and com-

munications costs, and a burgeoning market

targeted at retirees increased workers’ real

wealth. It established retirement as a social

norm, making withdrawal from the labor

force appealing at increasingly younger ages.

Costa cautioned that the small uptick in labor

force participation rates just gaining notice in

the 1990s could be a temporary deviation

from trend, not a reversal of retirement-age

declines. In other words, the jury was still out

on whether the reversal would be permanent.

Costa was not alone. At about the same

time, the Social Security actuaries projected

continually lower or stagnating labor partici-

pation rates of older workers far into the

future. Some technical panels of economists,

demographers, actuaries, and other profes-

sionals advising Social Security actuaries on

their long-range projection methodologies

also shared this point of view. The 2003

Technical Panel noted that, “given the pro-

jection of a 127 percent increase in income

[over the projection horizon], it seems inad-

visable to assume increases in labor force

participation rates for older persons. Such a

reversal in the trend toward earlier retirement

has never been seen in the historical record of

any country.”

In March 2001, Steuerle and Carasso pre-

dicted that just the opposite would happen.

In their view, the classic labor-leisure distinc-

tion in economics oversimplifies how work-

ers approach their decisions to participate in

the labor force. In today’s economy, where

work for most is less physically strenuous

than it was for previous generations, workers

may actually find benefits in work similar to

those hypothesized for leisure (Steuerle,

Spiro, and Johnson 1999). At the same time,

the demand for a better life can play out in

different ways than increasing retirement

years from, say, 20 to 25. There may be

increased demand for part-time or bridge

jobs. Rising real incomes and shifting atti-

tudes about work-life balance could bring

about demand for shorter workweeks, longer

vacations, or more parental leave.

The limitations of the simple leisure

theory derive from economic simplifications

that are often useful but sometimes fail

to capture real-world nuances. In truth,

leisure is often put in economic models to

complete them mathematically. Work is

assumed—not proven—to provide negative

value or utility, so people trade off the

“bad” from working for the “good” from

working—a paycheck—until those bad

consequences are marginally more costly in

absolute terms than the pay people receive

(Steuerle 2007). Sociologists and psycholo-

gists would scoff at this type of simplifica-

tion, trusting more in what a person says

gives him or her a sense of well-being. They

would be much more likely to recognize

that labor force participation can be a source

of social and intellectual fulfillment, particu-

larly if older workers have more flexibility

in when and where they work.

The simplified economic theory is still

useful if work is defined as activity outside the

home that provides decreasing and, eventually,

negative utility at some margin (for example,

increasing work from 8 to 9 hours a day).

However, it is unnecessary to assume that

increasing labor force participation from 0 to

4 hours a day provides negative value (absent

pay) to everyone or almost everyone. If that

were true, for instance, there would be no

voluntary labor for charitable organizations.

Yet, many older individuals volunteer or con-

tinue to volunteer as they enter retirement

(Zedlewski 2007).

Workers as One-Hoss Shays The notion of complete retirement from the

workforce is actually a very modern one.

Until recently, most of the population world-

wide was primarily agrarian. Work life

revolved around the farm; the hours were

long, and little if anything was available in the

way of financial saving for retirement. Older

farm workers did not sit back while the rest of

the family did all the work. Rather, they

pitched in with what they could, taking

account of their depreciated skills.

With the growth of an industrial economy

putting huge stress on manual labor, many

people wore out and needed to retire from

those strenuous jobs. This led to the develop-

ment of retirement plans that often treated

workers like “one-hoss shays” (horse-drawn

buggies) that worked perfectly, then suddenly

collapsed and depreciated to uselessness.

Social Security started and continues with

2.

Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform

this model of human capital depreciation in

mind. For instance, it does not offer partial

retirement options, though some people

might effectively take them indirectly.. The

one-hoss shay stereotype never represented

the diversity of work and family experiences,

but today it relates even more poorly to how

individuals’ skills and human capital evolve.

To make matters even more complicated,

most workers still retire at age 63 or 64. If

they were to retire today for the same number

of years as when Social Security benefits were

first paid, they would be retiring at age 75,

and in another 50 years or so at age 80.

Workers in 1940 and 1950 retired at age 68 on

average; today the combination of earlier

retirement and longer lives gives workers

more than 10 additional years of retirement

than workers in 1940. That any demand for

leisure—no matter how superior a good—

would evolve this way makes little sense

unless the availability of Social Security bene-

fits at age 65, then 62, is taken into account.

Labor demand: Missing from thePredictive Models While no one yet knows how people will

adjust to increasingly higher lifetime earnings,

almost all formal models predicting labor

force participation among older workers—

including those used by the Social Security

Administration—contain a fundamental

flaw: they fail to account for the importance

of labor demand on labor force participation.

Employment at a point in time measures not

labor supply, but the intersection of labor

supply and labor demand. The models, how-

ever, ignore demand and project future labor

supply of different age groups by following

their employment trends over time, almost

as if each group were totally independent of

the others.

3.

0

10

20

30

40

50

60

70

80

Ages 16–24

Ages 65+

Ages 55–64

1948 1958 1968 1978 1988 1998 2008

Source: Bureau of Labor Statistics.

figure 1. Labor force Participation Rates by Age Group (percentage of age group population, both sexes)

Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform

As an extreme example of how such pro-

jection fails to account for labor demand,

consider a population where the birth rate

falls to zero and everyone will eventually be

age 65 or older. In this case, it is unlikely that

the future labor force participation of those

older than 65 would in any way parallel that

of older workers in an earlier population with

many younger people. As long as citizens

demand goods and services, businesses will

seek out the labor necessary to satisfy that

underlying demand.

This example shows the danger of

extrapolating labor force participation rates

of different age groups without considering

the number of potential workers relative to

the population. Take an extreme case where

labor demand is inelastic—that is, we need

about the same proportion of the popula-

tion to provide us with the goods and serv-

ices we want. When the decline in work

among older workers can no longer be off-

set by an increase among younger workers,

the changed age distribution will dramati-

cally affect the demand for workers at dif-

ferent ages and the trend lines of specific

age groups.2

What allowed that demand to be filled

in the last half of the 20th century, even while

longer-term workers retired earlier and ear-

lier? Mainly the introduction of women and

baby boomers into the workforce. In fact, the

share of adults working increased almost

every non-recessionary year over that half-

century. Thus, where labor demand existed, it

could easily be met by the many additional

productive, more highly educated entrants.

As the entrance of new women and young

workers slows, employers are likely to train

their hiring sights on older workers and the

vast pool of talent they represent.

Adjusting the labor force of different age

groups by education levels produces yet

another explanation for why past trends

have slowed or reversed themselves: new

labor force entrants no longer demonstrate

average skill levels well above those at or

near potential retirement ages. College grad-

uation rates of those now entering the

workforce are no longer significantly above

those of the workers they replace. These

changes, too, increase the relative demand

for older workers.

Today’s older workers possess qualities

that employers will increasingly seek out:

their education level matches that of younger

workers, they have lifetimes of experience,

and they are healthier than their predecessors

were at the same age (Munnell 2006).

Trends in Actual and Predicted Laborforce ParticipationSo far we have mainly discussed theory. Now

let’s look at the data.

Overall labor force participation

increased over the last half of the 20th

century. While it has been trending down-

ward recently as the economy suffered, it is

by no means at record lows. Who has been

driving this recent decline? Younger workers,

who are now more likely to remain out of

the labor force while pursuing education or

to take more time to engage the workforce

more fully. In today’s unfriendly job environ-

ment, more young adults may feel forced

into or opt for more schooling or other

non-labor alternatives in the face of poor

employment prospects.

Meanwhile, among citizens age 55 and

older, the trend of declining participation has

largely reversed. Participation among this

group has increased from its low in the early

’90s and now slightly surpasses its 1980s level

(figure 1). This is not just the result of a con-

tinued increase in participation among

women: among men age 55 and older, labor

force participation fell from 45.6 percent in

1980 to 37.7 percent in 1993, but it has since

climbed to 46.3 percent in 2011 (BLS, not

shown). Additionally, while the Great

Recession saw a short uptick in new Social

Security retirement claims among eligible

workers, retirement benefit uptake has since

fallen to its lowest level since 1976, and a

decade-long trend in delaying retirement

benefits may have resumed (Johnson 2012).

Social Security’s Predictions of Laborforce Participation by Cohort In developing its annual OASDI Trustees

Reports, the Social Security actuary attempts

to project future labor force participation

rates among the working-age population.

While specific methodology is refined over

time, employment statistics used in the

4.

Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform

Older workers are

to the first half of

the 21st century

what women were

to the last half

of the 20th: the

largest underused

source of labor

and human capital

in the economy.

5.

15

20

25

30

35

40

45

BLS historical data

SSA projections by year2012

2009

2005

2000

19921986

1987

1985 1995 2005 2015 2025 2035 2045 2055 2065 2075 2085

Sources: Bureau of Labor Statistics and authors’ compilations of data from Social Security actuary.

figure 2. Trustees’ Assumptions versus Actual Participation Rates (men, age 65–69)

Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform

reports rely on historical Current Population

Survey (CPS) data provided by the Bureau of

Labor Statistics (SSA Chief Actuary 2011).

These data are disaggregated by age and sex to

capture effects of specific demographic trends

on various sections of the population.

Variables that influence SSA’s projections

include the effect of early and normal retire-

ment ages, marriage rates, divorce rates,

spousal labor force participation, disability

prevalence, and unemployment rates.

Published projections of labor force par-

ticipation by the Social Security actuary have

painted sometimes grim and at best modest

outlooks for participation rates among older

workers, but how well have these matched

reality? Figure 2 plots labor force participation

projections of previous Trustees Reports

against BLS-reported rates among 65- to 69-

year-old men since 1985. In this period, actu-

als have almost continuously surpassed pro-

jections, with projections almost always

implying a flattening of the overall upward

trend that does not occur. Calculations for

older groups generally provide a similar tale.

The one exception is the group just before

Social Security eligibility age (55–60). This

group’s prevalence rate of disability insurance

receipt is at least partially related, an issue we

do not pursue further here.

All this is not to question the utility of

using historic trends in forecasting, but to

point out that the future does not always

resemble the present. As seen in figure 2,

Social Security allows for some change from

current levels, but these projections almost

always imply a relatively flat trend line out-

ward from the year of projection. Projections

used to head slightly downward, but more

recently they head slightly upward. The 2012

Trustees Report projects slightly higher over-

all participation rates among men and

women over age 16, citing in part higher life

expectancies.3 The 2011 Social Security

Technical Panel recommended that the

actuaries take more account of the factors

likely to affect labor supply—for instance,

the shift from defined benefit to defined

contribution pensions in the private sector.

Workers with defined contribution plans stay

in the workforce longer since they tend to

have less security that their pensions will last

(Johnson and Steuerle 2003). However, the

panel’s recommendations only went halfway:

they recognized modern influences on labor

supply but still failed to note the flaw that

derives from ignoring labor demand.

The failure of Policy Reform to TakeAdvantage of the Skills and Talents ofOlder WorkersFailure to fully recognize the shifts occurring

in labor force participation among older

workers creates a blind spot for policymakers

exploring options for much-needed reform in

Social Security and labor policy. Policy has

come a long way in removing some institu-

tional barriers that discourage work, but

much more can be done. For example, Social

Security reform could make it easier for work-

ers to take a partial retirement benefit while

continuing to work part time, or it could

allow workers who defer retirement to pur-

chase a higher Social Security annuity more

easily than the today’s clumsy arrangement of

earnings tests and delayed retirement credits

(Steuerle 2010). Greater labor force participa-

tion at older ages aids not just in the solvency

of our entitlement programs, but increases

personal income and general revenues as well.

At the same time, if low-earning workers

continue to be encouraged to retire earlier

and earlier relative to life expectancy, while

higher-earning workers remain in the work-

force longer, current policies could lead to

increased inequality in the incomes of the old.

Reform should therefore consider other poli-

cies, even independently of any shortfall in

trust fund balances. These include raising the

earliest retirement age, which now signals that

people are old when they are 62 and on aver-

age have very long remaining life expectancies,

and increasing minimum benefits for workers

with low lifetime earnings.

Older workers are to the first half of the

21st century what women were to the last half

of the 20th: the largest underused source of

labor and human capital in the economy.

Few policymakers are taking this extraordi-

nary possibility into account in their reform

packages. In an increasingly information-

and service-based economy, older workers

represent a valuable source of knowledge

and experience that employers will tap, espe-

cially if Social Security and related economic

reforms attempt to channel rather than

obstruct these forces. •

AcknowledgmentsThe authors are indebted to the Social

Security Office of the Actuary for their very

generous assistance in providing both past

and current projection data. They are also

grateful to Richard Johnson for valuable

insight and comments.

6.

Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform

notes1. When it comes to the budget, for instance, the

Social Security actuaries and the Congressional

Budget Office more traditionally have only

reported on changes on Social Security trust

funds, not on what is often a larger and more

important effect on income taxes. We had

been encouraging both offices for some time to

start showing these other economic effects.

2. Technically, models typically calculate trends

for specific age/sex groups and then derive a

population estimate by taking those trends and

reweighting by the relatives size of different

age/sex cohorts over time. As shown in the

anecdotal examples above, this methodology

mistakenly assumes that the changing weights

themselves do not affect the trend lines for the

various age/sex groups. It ignores, for instance,

how labor demand could more easily allow early

retirement when the birth rate was higher or

when women increasingly entered the workforce.

3. In other reports, we have suggested that projec-

tions over time should also be made on the basis

of remaining life expectancy and relative life

expectancy, which are often better measures of

people at equivalent levels of health over the

decades than is chronological age. Note that the

trend toward higher labor force participation

would be lower if measured by equivalent life

expectancy rather than equivalent chronological

age, an issue we do not pursue further here.

See Cushing-Daniels and Steuerle (2007) and

Steuerle and Spiro (2010).

ReferencesButrica, Barbara A., Karen E. Smith, and C.

Eugene Steuerle. 2006. “Working for a Good

Retirement.” Retirement Project Discussion Paper 3.

Washington, DC: The Urban Institute.

Congressional Budget Office. 2012. “Raising the

Retirement Ages for Medicare and Social Security.”

Issue brief. Washington, DC: Congressional Budget

Office.

Costa, Dora L. 1999. “Has the Trend Toward

Early Retirement Reversed?” Paper presented at the

First Annual Joint Conference for the Retirement

Research Consortium, Washington, D.C.,

May 20–21.

Cushing-Daniels, Brendan, and C. Eugene Steuerle.

2007. “Retirement and Social Security:

A Time Series Approach Based on Remaining Life

Expectancy.” Washington, DC: The Urban

Institute.

Johnson, Richard W. 2012. “Social Security Claims

Edged Down in 2011.” Retirement Security Data

Brief 5. Washington, DC: The Urban Institute.

Johnson, Richard W., and C. Eugene Steuerle. 2003.

“Promoting Work at Older Ages: The Role of

Hybrid Pension Plans in an Aging Population.”

Working Paper 2003-26. Philadelphia, PA: Pension

Research Council.

Munnell, Alicia H. 2006. “Policies to Promote

Labor Force Participation of Older People.”

Working Paper 2006-2. Chestnut Hill, MA: Center

for Retirement Research at Boston College.

Steuerle, C. Eugene. 2007. “The Seven Deadly

Sins in Aging Policy and Research: A Cautionary

List for Policymakers and Prognosticators.” In

Labor Supply in the New Century, June 2007, edited

by Katharine Bradbury, Christopher L. Foote, and

Robert K. Triest. Boston, MA: Federal Reserve

Bank of Boston.

———. 2010. “How Social Security Can Costlessly

Offset Declines in Private Pension Protection.”

The Government We Deserve opinion column.

Washington, DC: The Urban Institute.

Steuerle, C. Eugene, and Adam Carasso. 2001.

“A Prediction: Older Individuals Will Work More

in the Future.” Straight Talk on Social Security and

Retirement Policy 32. Washington, DC: The Urban

Institute.

Steuerle, C. Eugene, and Christopher Spiro. 1999.

“Adjusting for Life Expectancy in Measures of Labor

Force Participation.” Straight Talk on Social

Security and Retirement Policy 10. Washington,

DC: The Urban Institute.

Steuerle, C. Eugene, Christopher Spiro and

Richard W. Johnson. 1999. “Can Americans Work

Longer?” Straight Talk on Social Security and

Retirement Policy 5. Washington, DC: The Urban

Institute.

Technical Panel on Assumptions and Methods.

2003. Report to the Social Security Advisory Board,

Washington, D.C., October.

———. 2011. Report to the Social Security

Advisory Board, Washington, D.C., September.

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Trustees. 2012. The 2012 Annual Report of the Board

of Trustees of the Federal Old-Age and Survivors

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Form a New Army of Volunteers?” Perspectives

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The Urban Institute.

7.

Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform

Program on Retirement Policy

http://www.retirementpolicy.org

The Program on Retirement Policy addresses how current and proposed retirement policies,

demographic trends, and private-sector practices affect the well-being of older individuals,

the economy, and government budgets.

Copyright © July 2012

The views expressed are those of the authors and do not necessarily reflect those of the

Urban Institute, its trustees, or its funders. Permission is granted for reproduction of this

document, with attribution to the Urban Institute.

uRbAn InSTITuTE

2100 M Street, nW ●

Washington, dC 20037-1231

(202) 833-7200 ●

paffairs@urban.org ● www.urban.org

About the AuthorsC. Eugene Steuerle is an Institute

fellow and Richard B. Fisher Chair

at the Urban Institute.

Caleb Quakenbush is a research

assistant at the Urban Institute.

8.