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Retirement Age and the Need for Saving 1 (May 2004)

handle is hein.congrec/cbo10169 and id is 1 raw text is: A series ofissue summaries from the Congressional Budget Office MAY 12, 2004 Retirement Age and the Need for Saving American workers typically accumulate a significant amount of savings during their working years to support their standard of living in retirement. In addition, a sub- stantial portion of their working-age income is replaced by defined-benefit private pensions and Social Security benefits, and a large share of their medical expenses is covered by Medicare and Medicaid. Nevertheless, the extent of workers' savings has become an increasing con- cern to policymakers during the past decade as members of the generation born from 1946 to 1964-known as the baby boomers-approach the end of their careers and prepare to leave the workforce. That coming wave of retirees will cause spending for federal entitlement pro- grams to swell, which will in turn increase pressure on the federal budget.1 That pressure could be even greater if, as some researchers have claimed, baby boomers are not accumulating enough private savings to maintain their working-age standard of living in retirement. Low saving could restrain the growth of investment and output and 1. For more details about the likely budgetary pressures from growth in spending for entitlement programs, see Congressional Budget Office, A 125-Year Picture of the Federal Government's Share of the Economy, 1950 to 2075, Long-Range Fiscal Policy Brief No. 1 (June 14, 2002; revised July 3, 2002); The Looming Budgetary Impact ofSociety's Aging, Long-Range Fiscal Policy Brief No. 2 (July 3, 2002); and The Long- Term Budget Outlook (December 2003). thus the tax base from which entitlements must be financed. In response to policymakers' concerns, the Congressional Budget Office (CBO) recently reviewed the past decade's research on the retirement prospects of aging Americans.2 Most of the studies that CBO reviewed conclude that many baby boomers are preparing adequately for retire- ment; at the same time, a substantial portion of boomers may not be able to maintain their current consumption levels in retirement if they retire when they now plan to. The Importance of Retirement Age An important point that is not fully appreciated is that the retirement ages assumed in studies of retirement pre- paredness strongly affect their estimates of preparedness. Most studies estimate how financially well prepared households will be for retirement when their primary workers retire at a fixed age-typically 62 or 65. How- ever, barring disabling injury or illness, workers can choose when to retire, just as they choose how much to save. The longer they work, all else being equal, the more prepared for retirement they are likely to be. Because most studies of retirement preparedness do not treat 2. Congressional Budget Office, Baby Boomers' Retirement Prospects: An Overview (November 2003). Studies of retirement preparedness typically assume that workers will retire at a fixed age-usually 62 or 65. How- ever, the timing of retirement is largely a matter of choice, and studies that ignore workers' ability to delay retire- ment tend to overstate the significance of shortfalls in their retirement savings. Every additional year of work leaves members of a household with more income, a shorter retirement to finance out of pocket, more time to save and earn returns, and higher annual Social Security benefits, which are largely tax-exempt. Taken together, those fac- tors can substantially reduce the private assets that the members of the household need to accumulate to maintain their working-age standard of living in retirement. Even workers who find themselves poorly prepared for retire- ment late in their careers may be able to substantially augment their retirement resources by working a few more years and modestly increasing their saving. Those conclusions hold true for both married couples and single peo- ple across a wide range of incomes.

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