A fellow economics professor recently decided to choose a yearlong sabbatical at half pay instead of a half year at full pay. I asked him why.
"I'm amortizing my retirement."
"How so?"
"I'm OK with working a half year longer before I retire. But I get to take an extra half year of retirement right now. My health is good. I can spend time with my family. And I haven't taken much time off in the last decade. Why should I wait until I'm 70 when I can spend some of my retirement in my 40s?"
This discussion completely changed the way I think about retirement. I'd become so accustomed to seeing middle age as the era of sacrifice where my most important goal is to save for decades of kicking back after retirement. But what is retirement? Why do we stop working in our 60s? Where did we ever get the ideas that define how we think about working later in life?
Retirement is a 20th century idea. In her careful review of the evolution of retirement, UCLA economist Dora Costa traces changes in the workforce that resulted in a sharp drop in the percentage of employed males over the age of 64. The story of retirement is ultimately a history of trends in labor force participation of older men (since women only entered the workforce in large numbers in the late 20th century). Costa describes how men increasingly retired because they could afford it, because they started believing in a new lifestyle of fun and relaxation, or because nobody would hire them.
Our economist friend who chose to bring more retirement into the present was essentially saying that he wanted to extend his work life in his 60s in order to increase his leisure time in his 40s. It's better to think of retirement as a tradeoff between labor and leisure. If we're not working later in life, then we're going to be spending a lot more time engaging in leisure activities. That's why, to an economist, the question of when to retire is really about when to take your leisure time over a life cycle.
Costa notes that young adults today can expect to spend a third of their life in retirement. If your first instinct was to wonder why a lazy professor would spend a year avoiding his teaching responsibilities, consider that the average adult is going to spend 25 years away from the workplace in retirement. Three-quarters of the time, this transition from working to retirement is an abrupt end to life employment rather than a transition to part-time work.
Jumping directly into retirement while living longer (and spending more time in school) means that the average percentage of an American male's life in the labor force has declined from about two-thirds of life expectancy in 1950 to one-half of a lifetime today. And paying for half a life of leisure can get expensive.
Why Do We Retire at 65?
Behavioral economists have long noted the power of a reference point—a number which serves to anchor decision-making that can have a powerful impact on choice. In the case of retirement, the magical age of 65 has been around for over a century. Pensions were granted at age 65 to Union soldiers in the late 19th century and the first social insurance program in Germany set 65 as the retirement age in 1916. According to the Social Security Administration, in 1935 the Committee for Economic Security proposed 65 as the full retirement age in the U.S., to match not only the newly created federal railroad pension but also the age that was then used in half of U.S. state pensions.
According to a number of committees tasked with determining retirement ages during the early 20th century, 65 was chosen because it represented the age at which men appeared to lose their productive capacities. Period arguments include dubious claims of a loss in mental elasticity or ability to keep up with the rapidly changing technologies of the industrial age. When arguing for railroad pensions that started at age 65, it was noted in Supreme Court arguments that "physical ability, mental alertness, and cooperativeness tend to fail after a man is 65." It's good to know that the genesis of the modern retirement age was pegged to the uncooperative stage of the life cycle.
Age 65 also made sense because it wouldn't place too much of a burden on the rest of society. When the average longevity falls below the average retirement age, this places a modest burden on those who transfer dollars through payroll taxes to fund a pension system. In fact, the initial rate on Social Security that was needed to fund the small minority of Americans 65 or older was 1%.
Today about 80% of workers live beyond age 65. And those who reach age 65 will live, on average, an additional 16 years. Unless they have a higher income. In one of the most fascinating trends in recent decades, higher income workers have gained an additional five years of longevity compared to lower income workers in the U.S.
