Patterns Retirement

Economic prosperity followed by economic turndown in the post–World War II period led to changes in retirement patterns. By the end of the 1960s a trend toward early retirement emerged, especially among workers covered by private pensions in major manufacturing and related sectors. Early retirement meant that more and more workers began to voluntarily and permanently exit the labor force prior to Social Security eligibility, in large part because of eligibility for private pension benefits. Economic downturn and restructuring between the early 1970s and the early 1990s further accelerated early retirement, but in this period it was also motivated by incentive packages used by employers to trim their liabilities via plant closings and workforce downsizing (Hardy et al.). Two streams of early retirees developed by the 1980s, one representing the most privileged category of ‘‘pension elites’’ from professional, managerial, and skilled sectors and the other representing workers in declining industries whose early retirements were accelerated by employers’ efforts to downsize and reorganize their production and distribution systems.

These economic cycles coincided with the growth in government regulation of pension plans beginning with the Employee Retirement Income Security Act (ERISA) in 1974 and extending through the Retirement Equity Act of 1984, and the Pension Protection Act and later amendments of ERISA in the 1990s. These legislative actions extended minimum standards of reporting, disclosure, vesting, and benefit management, and sought to regulate plan termination policies by holding employers liable for their ‘‘pension promises.’’ These rising pension liabilities, coupled with growing market uncertainties, provoked employers to abandon the long-term contracts implicit in back-loaded, defined benefit plans and to adopt new pension instruments. The rapid spread of these new instruments, called defined contribution plans, redesigned the pension landscape at the end of the twentieth century. Defined contribution plans are retirement accounts invested by workers in a mix of equity, bond, or money market funds that do not promise a specific benefit level. Workers are primarily responsible for contributions and the financial risks associated with different investment mixes. Employers have limited responsibility and do not always contribute on behalf of employees. The accounts are portable across jobs and can usually be borrowed against, under strict rules of repayment and penalty. Thus they are highly individualized and reflect a departure from the defined benefit plans, born in the nineteenth century, that standardized the work career and the exit from it.

The effect on retirement patterns of these more widely adopted plans is not well established. However, the trend toward early retirement has reversed (Quinn; O’Rand and Henretta). Four patterns appear to have emerged more strongly than at earlier times. Workers are leaving their major jobs later, although still before normal Social Security ages. More workers, especially in the public sector, are reducing their work hours rather than leaving the labor force completely, following what has come to be called ‘‘phased retirement.’’ They are moving to post career jobs, sometimes referred to as ‘‘bridge jobs.’’ And they are returning to work after retirement. Accordingly, retirement is increasingly less ‘‘crisp’’ as a life transition. Jan Mutchler and her colleagues report that as early as the mid-1980s a significant minority of men age fifty-five to seventy-four who were observed over twenty-eight months followed patterns characterized by repeated exits and entrances and spells of unemployment. These patterns appear to have increased over the 1990s (Herz).

The volatility of labor and financial markets in the 1990s and its direct bearing on the performance of defined contribution accounts and on workers’ perceptions of economic security, are potentially important sources of the variability in retirement behaviors. Employers and employees are renegotiating the employment contract. The implicit ‘‘lifetime employment’’ model associated with industrialization and personnel policies over most of the twentieth century is being replaced with a more ‘‘contingent’’ model. Higher rates of job mobility, job displacement, and ‘‘retirements’’ follow. However, these retirements are increasingly less likely to be crisp and permanent. The growing responsibility of workers to manage their own retirements with less institutional support increases expectations of more diversity and heterogeneity in retirement behavior.

However, factors besides labor and financial markets probably also play important roles in these complex patterns (Kim and Moen). The first is that the workforce has become steadily more heterogeneous in its composition: more women and more minority groups participate in the labor market than during the peak period of voluntary early retirement. Women and ethnic minority workers are more likely to have less stable wage/salary histories, more job shifts, multiple spells of unemployment, and higher rates of contingent work. These workers are less likely to be covered by pensions, and when they are covered, they are more likely to be covered by defined contribution plans. There is evidence that these lower wage groups contribute proportionately less to their pensions and are more risk-averse in their choice of investment mix (Bajtelsmit and VanDerhei). In addition, these workers are less likely to be covered by retiree health insurance, another employee benefit that has influenced retirement patterns. Workers with this coverage tend to retire at higher rates. Trends beginning in the 1990s suggest that access to retiree health insurance is declining rapidly for all workers (U.S. Department of Labor) and may disappear for all but the most privileged labor sectors.

The changed demographic composition of the U.S. labor force has had implications for retirement patterns above and beyond the effects of differential access to employee benefits. Disparities in health over the life course allocate workers down different paths to retirement. Racial health disparities account significantly for pre-retirement labor force patterns. Black men and women are more likely to enter retirement via a disability pathway (as disability insurance recipients) or as previously unemployed (Flippen and Tienda). The concentration of Hispanic and African-American males in manual and blue-collar jobs with greater exposure to environmental hazards and occupational injury systematically selects them into disability categories prior to retirement eligibility (Hayward and Grady).

Finally, the recent trend toward increased active life expectancy, especially among white aging cohorts, may become a stronger force to further differentiate retirement behaviors. Active life expectancy is the average number of years of impairment-free life estimated for a population, based on the distribution of aged-based prevalence of functional impairment. Active life expectancy has increased across recent cohorts of those age sixty-five and older, meaning that the prevalence of functional impairments is occurring at later and later ages (Manton and Land), with a notable disparity in this trend between whites and Hispanics and African Americans (Hayward and Heron).

The improved health of current and future aging cohorts may have significant implications for retirement, especially in the context of an aging society. Population aging results from increased life expectancy and declining fertility, with fertility decline the more important factor. It is reflected in the increased ratio of older to younger population groups (e.g. in the ratio of those aged sixty-five and over to those younger or to those of working ages eighteen to sixty-four). Aging societies are confronted by the fiscal implications of these changing ratios. How can fewer workers support more retirees? The trend toward increased active life expectancy may in fact provide a solution to this problem. Healthier, older workers may choose to remain at work, and employers may choose to retain these workers in one fashion or another (e.g., through later retirement, phased retirement, or even post-retirement contingent reemployment). The coincidence of increased active life expectancy with public policies that delay eligibility for Social Security to later ages and that eliminate earnings limits while collecting Social Security, and with private policies that place more savings responsibilities on workers, has the potential impact of diversifying retirement even more, with major subgroups of early permanent retirees, intermittent retirees, later retirees, and so on. Consequently, a dominant pattern such as early retirement may be supplanted by multiple patterns.