Optimal Retirement Age*Jon Forman
Alfred P. Murrah Professor of LawUniversity of Oklahoma
Yung-Ping (Bing) ChenFrank J. Manning Eminent Scholar's
Chair in GerontologyUniversity of Massachusetts Boston
Retirement 20/20: Changing the SignalsWashington, DC
November 17, 2008
*PowerPoint and underlying paper available at http://jay.law.ou.edu/faculty/jforman.
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Overview• Demography, health, and retirement• How pension laws influence the design of
pension plans and the timing of retirement• Optimal retirement age from the perspective of
employers, government, workers• New perspectives on the relationship between
demography and retirement age• Implications for public policy• Recommendations about pension reform
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Table 1. Americans are Living Longer
Year Life expectancyat birth
Life expectancyat age 65
Men Women Men Women1960 66.7 73.2 12.9 15.92000 74.0 79.4 15.9 19.02040 79.0 82.6 18.8 20.92080 82.4 85.6 20.8 22.8
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Table 2. Percentage of Workers Electing Social Security Benefits at
Various Ages
Year Age 62 Ages 63-64
Age 65 Ages 66+
Average age
1965 23.0 17.7 23.4 35.9 65.91975 35.7 24.5 31.1 8.7 63.91985 57.2 21.1 17.7 4.0 63.61995 58.3 19.5 16.3 6.0 63.62004 57.5 19.0 18.6 4.8 63.7
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Table 3. Percentage of People Age 65+ with Chronic Health Conditions
Heart disease
Hyper-tension
Any cancer
Diabetes Arthritis
1997-1998
32.3 46.5 18.7 13.0 na
2001-2002
31.5 50.2 20.8 15.4 na
2005-2006
30.9 53.3 21.1 18.0 49.5
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Table 4. Health Problems by Age, 2002(percent of respondents)
Number of health problems
55-64 65-74 75-84 85+
0 40 26 18 171 35 36 34 342 17 24 29 293 6 10 16 14
4 or more 2 4 5 6
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Table 5. Activities of Daily Living (ADLs) or Instrumental Activities of Daily Living (IADLs), or in a Facility
1992 2005IADLs only 13.7 12.31 to 2 ADLs 19.6 18.33 to 4 ADLs 6.1 4.75 to 6 ADLs 3.5 2.5Facility 5.9 4.3Total 48.8 42.1
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Table 6. Job Requirements by Age, 2002 (percent reporting that “My job requires
X all or most of the time”)
Age category
Lots of physical
effort
Lifting heavy loads
Stooping, Kneeling,
or Crouching
Computer use
55-59 30 14 27 5360-64 33 13 24 4565-69 29 11 21 2970-74 27 8 17 2375-79 28 10 17 1780+ 23 10 11 17
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Table 7. Pension Plans for Full-time Employees in Medium and Large
Establishments (percent)
Year DB plans DC plans All plans1985 80 41 911995 52 55 802000 36 50 70
Perspectives on the Optimal Retirement Age
• Employers – Use pension rules to shape their workers’ choices
about work and retirement• Government
– Wants workers to be productive and work as long as they can
• Workers– Choosing an optimal, “economically feasible
retirement age” is a complicated endeavor– Many times, people just get it wrong
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Implications of Changing Demography for the Optimal Retirement Age
• Why define retirement age as “years-since-birth”?
• Instead tie the optimal retirement age to remaining life expectancy
• Or to mortality risk. • Or by allocating a fixed percentage of
each adult’s life between working and retirement years
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Table 8. Retirement Age for Year Equivalent to Age 65 in Base Year
(Year: Months)Base Year
Year 1940 1980 2000 20201940 65:001960 67:001980 68:11 65:002000 69:11 66:00 65:002020 70:09 66:11 65:10 65:002040 71:10 67:11 66:11 66:002060 72:09 68:10 67:09 66:112080 73:07 68:08 68:07 67:09
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Implications for Public Policy:Some Modest Reforms
• Raise the Early Retirement Age Applicable to the Penalty on Premature Withdrawals
• Raise the Normal Retirement Age• Raise the Minimum Distribution Age• Repeal the Age Discrimination Exceptions • Require that Benefits be Paid as Indexed
Annuities• Require that Pension Benefits be Paid to Part-
time Workers
A More Comprehensive Proposal
• Mandate Age Neutrality• Benefits would accrue at a constant
annual rate• Final Average Pay DB plans could not
meet an age neutrality requirement• But DC and Cash Balance plans could
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Conclusion• Tying the early and normal retirement ages to
longevity improvement would be beneficial to workers, to government, and to employers– would encourage workers to work longer and accumulate more
savings so that they have higher incomes when they eventually retire
– would help the government raise revenues and reduce its expenditures for its social welfare outlays
– would help employers stave off the labor shortages that could occur if large numbers of talented baby-boomers choose retirement over work
• Changes are clearly needed, and the sooner the better
