In this research study, the authors discuss the pros and cons of the proposed “Retirement Security Projection Model” (RSPM) that attempts to gauge the adequacy of income after individuals retire. The RSPM, among other features, supports postponing the age of retirement beyond 65 years to meet the demands for an adequate income. It was found that even a retirement age of up to 80 years did not benefit the average household in terms of income.
The RSPM was launched in 2003. The model has been focused on assessing the adequacy of income among retired individuals. The RSPM has found that extra savings are necessary to maintain an optimum retirement at the age of 65. For those who are closer to their retirement age, the amount of savings required is nearly a quarter of the yearly income, and is considered too large to be made feasible by most people. This review looks at the possible ways of increasing or postponing the retirement age, in order to allow adequate amounts of extra savings. The review also investigates whether postponing the retirement age could increase the chances of having an adequate income at retirement. This review focuses on increasing the retirement age from 65 years to 84 years. The aim was to first increase the income from 50 percent to 70 percent and eventually to 80 percent. The costs of health and elderly care were also accounted for, in order to assess the income adequacy after retirement.
- The study is based on data obtained from millions of participants, dating back to 1996. An assessment was made of individuals in three different age groups, 57-63 years, 47-56 years, and 37-46 years.
- For all the surveyed individuals, social security, retirement account balances, benefit annuities, housing equities, and long-term insurance were assessed.
- All the factors assessed provided sufficient data to evaluate the probability of achieving income adequacy at the retirement age of 65 years, as well as in the case of deferring the retirement age.
- It was noted that in 2010, around 47.2 percent individuals in the 57-63 age group were at the risk of inadequate retirement income and uninsured health costs. In the 47-56 years age group, the risk was found to be 43.7 percent and in the 37-46 years age group, the risk was 44.5 percent.
- The results of this study show that even if the individual can work profitably and the retirement age is deferred to 80 years, the chances of inadequate income remain.
- In case of low-income groups, the retirement age needs to be 84 years, to achieve 90 percent adequacy of income in at least 50 percent of the families.
- If the health costs are not taken into account, only 3.8 percent low-income families and 2.6 percent high-income families are at the risk of income inadequacy. In contrast, when health costs are considered, about 16 percent of the low-income families and 12.8 percent of high income families are at the risk of inadequacy of income.
This study was largely based on assumptions. It was limited by the paucity of data available on wage and benefit conditions in the case of workers above 65 years of age. Most of the assumptions made on the effect of postponing the retirement age were optimistic, which may not exactly be true. Moreover, the data on the percentage of households having an adequate retirement income was only the best possible estimate, which is yet to be verified.
This study analyzes the effectiveness of postponing the age of retirement in all income and age groups, in order to assess the chances of adequacy of income among them. It is seen that in low-income groups, the postponement of retirement age from 65 to 84 years could only provide 90 percent of income adequacy in 50 percent households. It is further noted that in this income group, postponing the retirement age above 84 years had no effect on the gain in income. Thus, this study concluded that extension of the retirement age to 80 years did not guarantee adequacy of income in all age and income groups under the RSPM.
For More Information:
The Impact of Deferring Retirement Age on Retirement Income Adequacy
Publication Journal: Employee Benefit Research Institute, June 2011
By Jack VanDerhei; Craig Copeland
From the Employee Benefit Research Institute, Washington, DC
*FYI Living Lab Reports Are Summaries of the Original Research.