Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The Puzzle of Later Male Retirement

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The Puzzle of Later Male Retirement

Article excerpt

For decades until 1985, the share of older American men who worked for pay trended downward. Since 1985, though, that share has been stable or rising. By 2001, the new trend in male retirement behavior had added 2 million workers to the U.S. labor force.1 Since the number of older men in the United States will increase dramatically as the baby-boom generation ages, the new trend could become even more significant for the U.S. economy in the future.

Understanding male retirement behavior is important to both monetary and fiscal policymakers. Later retirement affects monetary policy by increasing potential output. It also affects fiscal balances by boosting tax revenues and reducing the cost of earnings-tested benefits such as disability insurance and Medicaid.

Economists have put forth several theories to explain why American men are retiring later. One theory is that Social Security reforms have encouraged older men to work more. Another is that the decline in the number of workers with defined-benefit pensions has enabled men to continue working longer. A third theory is that the slower growth of the overall U.S. labor force has increased older mers employment opportunities.

This article tests whether these theories explain the changed male retirement trend. The first section reviews trends in the labor supply of older American men. The second section examines the effects of Social Security reforms. The third section tests the defined-benefit pension plan theory, and the fourth section considers the slower labor-force-- growth theory. The fifth section discusses other possible explanations of the change in the male retirement trend. The article concludes that Social Security reforms have increased the labor supply of men aged 65 and older, but that the abrupt change in the trend of male retirement ages in 1985 remains a puzzle.

I. TRENDS IN OLDER MEN'S LABOR SUPPLY

This section examines the trends in older men's labor supply in the United States since the 1950s. Older men's labor supply fell steadily until around 1985. Since then, it has been roughly stable, with increases at higher ages. While older men's labor supply could not have declined at its pre-1985 rate forever, it could have declined far below its 1985 levels.

A useful measure of older people's labor supply is the labor-force participation rate in older age groups. This is the proportion, within each age group, of people either employed or unemployed and looking for work. Falling rates of labor-force participation among older men imply that men are retiring earlier on average.2

Labor-force participation rates for narrow age groups reveal more about retirement behavior than those for broad age groups. The participation rate in a broad age group can change purely because its composition is changing over time. For example, the age group "men aged 65 and above" now contains far more men aged 80 to 90 than it did in 1950. These older men are unlikely to work. Thus, even if laborforce participation rates at each age remain constant, lengthening life spans tend to make the labor-force participation rate of men aged 65 and above fall steadily over time. For this reason this article examines participation rates of men at single years of age and in five-year-wide age groups, such as ages 60-64.

The male labor-force participation rate in both the 60-64 and 65-69 age groups fell steadily from the 1950s to around 1985 (Chart 1).3 The participation rate at ages 60-64 stabilized after 1985 and rose slightly in the 1990s. The participation rate at ages 65-69 abruptly reversed course in 1985, and has risen steadily since then. By 2001, male participation rates in both the 60-64 and 65-69 age groups were around 20 percentage points higher than they would have been had the trends of 1957-85 continued to 2001. The appendix presents the results of an empirical analysis that confirms a break in 1985 in the trends of the participation rates of both age groups, and tests the main explanations of it advanced later in this article. …

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