- The Washington Times - Monday, March 28, 2005

One way the elderly can help support themselves in retirement is to work longer before retiring. Work is becoming less strenuous. In tomorrow’s labor market, experience will count more. Better health and longer life have made it possible to work and save more. If more people work longer, the looming Social Security financing problem will lessen.

Ending the earnings test for workers who have reached normal retirement age makes work more financially rewarding. The legislated gradual increase in normal retirement age to 67 extends the working life of the elderly. A further impetus comes from the reduced availability of private plans that offer defined pensions as more employers shift to contribution plans, such as 401(k)s. Early-out options are also being cut back.

As the Baby Boom generation ages in the years ahead there will be an inevitable labor shortage. In the competition for workers, employers can be expected to offer better wages and working conditions. And more of the elderly, among others, will be encouraged to work. The valuable work experience of older workers will help buttress productivity growth, which in turn will feed back and help relieve the strain on Social Security.

Testifying before the Senate Special Committee on Aging March 15, Federal Reserve Chairman Alan Greenspan, an expert on Social Security, agreed with the point made earlier on these pages: Higher labor force participation could help ease Social Security’s future financial problems. Mr. Greenspan said of the elderly, “A growing scarcity of experienced labor could induce further increases in the labor force participation of the elderly and near-elderly in the future. … [E]xtending labor force participation by just a few years could have a sizable impact on economic output.”

Though Mr. Greenspan didn’t say so, the earnings of elderly workers subject to the payroll tax would add to the Social Security trust fund. Surprisingly, in discussing the factors affecting Social Security’s future, Mr. Greenspan did not mention how increased net immigration could help ameliorate the program’s financial difficulties. Nevertheless, he rightly stressed the need for greater savings and, to that end, supported personal retirement accounts.

Noting a rise in labor force participation among the elderly, Mr. Greenspan said, “It is far to early to determine the underlying causes of this increase.” Since the increase continued through the last recession as well as in later years, one might guess one cause was a need for money.

Historically, the labor force participation rate for those age 65 and older has varied considerably. From a postwar high of 27.3 percent in 1949, it declined to a low of 10.8 percent in 1985 and has since risen to 14.4 percent in 2004. The rise occurred among those in their late 60s and older groups as well.

Since there is reason to believe the economic environment will be encouraging to older workers in the years ahead, the rising trend in their labor force participation is likely to persist. If it does, to what extent might it help ease the expected labor shortage and thereby help with Social Security financing?

A modest but reasonable assumption is that the average annual percentage point increase in the labor force participation of each age component of the elderly population from now to 2020 will be half what it was from the mid-1980s to date.

Based on official population projections, this means 65 and older labor force would grow from 5 million in 2004 to about 10.5 million by 2020, with most of the increase after 2010. For the period 2010-2020, elderly employment would increase almost a half million annually, not a trivial amount. It’s more than 4 times as much as the average annual increase in this group’s employment over the past decade. (Later in this century, the growth in the elderly population slows and their additions to the labor force diminish.)

Such a scenario is not farfetched considering the dramatic changes in demographics we are about to encounter, though it carries the uncertainty common to most long-term projections. The numbers tell us if more of the elderly choose to work longer, they will help not only themselves but future retirees. The Social Security trust fund and the economy can only benefit. By itself, increased labor force participation among the elderly cannot eradicate the financial problem facing Social Security, but for a time it can put a respectable dent in it.

Alfred Tella is former Georgetown University research professor of economics.

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