Retirement inequality is increasing in the United States and the age of retirement is one dimension of that inequality. While the overall average retirement age for Americans is increasing, that increase is not even across socio-economic status. Less educated workers tend to retire earlier than more highly educated workers. This is due to a variety of factors including poor health, more physically demanding jobs, and less control over work schedules. This increasing gap has important implications for retirement policy, such as retirement ages for claiming benefits for public pensions and other programs.
A new report from the Center for Retirement Research digs deeply into this widening gap in retirement ages. In 2016, there was a three year difference in the retirement age between men who are high school graduates and men who are college graduates. On average, men with a high school degree retired at age 62.8 and men with a college degree retired at age 65.7. This age gap matters when it comes to saving for a secure retirement.
There are basically three different ages to retire and claim Social Security benefits. The Full Retirement Age (FRA) is the “normal” age at which people retire, but the FRA is steadily increasing. Currently, the full benefit age is 66 years and 2 months for people born in 1955, but it will gradually rise to 67 for those born in 1960 or later. Workers can also retire early at age 62 and begin claiming their Social Security benefits, but those benefits are reduced depending on how many years earlier they retire. Finally, workers who retire later than the FRA can receive a financial bonus for delayed retirement. This means that workers who retire early will receive less in Social Security benefits for the rest of their lives than workers who are able to delay retirement.
There are similar dynamics at play in many public pension plans. Many plans offer workers the chance to claim their benefits early, but with a reduced benefit amount. Some plans, especially those for police officers, firefighters, and other physically demanding professions, allow retired workers to begin claiming full benefits at a younger age, recognizing that people in these professions cannot stay in their jobs as long as others can. However, many public pension plans are facing political pressure to increase retirement ages. Just this year in Colorado, the legislature passed SB 200, which, among other things, raised the retirement age for all workers in Colorado PERA.
The CRR report also examines the role that the shift from defined benefit (DB) to defined contribution (DC) plans has played in increasing the retirement age gap. Research has shown that defined contribution plans, like 401(k)s, are associated with later retirement. This should not be surprising. Defined contribution plans are less efficient than defined benefit pensions. It is more difficult for an individual worker to accumulate sufficient savings for a secure retirement through a DC plan than through a DB plan.
Research has also demonstrated that DC plans favor high income workers over low income workers. Since workers with more education typically earn higher incomes, it seems likely that those workers who retire later are able to save more for retirement and, thus, have a more secure retirement when they do retire. Combine this with the fact that workers who retire later collect more in Social Security benefits, and low-income, high school educated workers who retire early are facing a serious retirement savings crisis.
Policymakers must remember that raising the retirement age is not the easy solution many claim it is. For many workers, retiring later is just not realistic given their health condition and the physically demanding nature of their jobs. Despite the steadily rising Full Retirement Age for Social Security, many workers still retire early each year, at the cost of a lifetime of reduced Social Security benefits. Furthermore, moving from DB pensions to DC plans will force many to work longer while attempting to save enough to retire securely. This powerful story from the Washington Post last year documented the struggles of those working past 70 who are just trying to get by.
