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An American Perspective on Optimal Retirement Age

An American Perspective on Optimal Retirement Age. Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma & ATAX Fellow University of New South Wales Centre for Pensions and Superannuation Seminar University of New South Wales August 4, 2011. Overview.

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An American Perspective on Optimal Retirement Age

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  1. An American Perspective on Optimal Retirement Age Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma & ATAX Fellow University of New South Wales Centre for Pensions and Superannuation Seminar University of New South Wales August 4, 2011

  2. Overview • Demography, health, and retirement • How pension laws influence the design of pension plans and the timing of retirement • Optimal retirement age from the perspective of employers, government, workers • New perspectives on the relationship between demography and retirement age • Implications for public policy • Recommendations about pension reform

  3. Table 1. Americans are Living Longer

  4. Table 2. Percentage of Workers Electing Social Security Benefits at Various Ages

  5. Table 3. Percentage of People Age 65+ with Chronic Health Conditions

  6. Table 4. Health Problems by Age, 2002(percent of respondents)

  7. Table 5. Activities of Daily Living (ADLs) or Instrumental Activities of Daily Living (IADLs), or in a Facility

  8. Table 6. Job Requirements by Age, 2002 (percent reporting that “My job requires X all or most of the time”)

  9. Table 7. Pension Plans for Full-time Employees in Medium and Large Establishments (percent)

  10. Perspectives on the Optimal Retirement Age • Employers • Use pension rules to shape their workers’ choices about work and retirement • Government • Wants workers to be productive and work as long as they can • Workers • Choosing an optimal, “economically feasible retirement age” is a complicated endeavor • Many times, people just get it wrong

  11. Implications of Changing Demography for the Optimal Retirement Age • Why define retirement age as “years-since-birth”? • Instead tie the optimal retirement age to remaining life expectancy • Or to mortality risk. • Or by allocating a fixed percentage of each adult’s life between working and retirement years

  12. Table 8. Retirement Age for Year Equivalent to Age 65 in Base Year(Year: Months)

  13. Implications for Public Policy:Some Modest Reforms • Raise the Early Retirement Age Applicable to the Penalty on Premature Withdrawals • Raise the Normal Retirement Age • Raise the Minimum Distribution Age • Repeal the Age Discrimination Exceptions • Require that Benefits be Paid as Indexed Annuities • Require that Pension Benefits be Paid to Part-time Workers

  14. A More Comprehensive Proposal • Mandate Age Neutrality • Benefits would accrue at a constant annual rate • Final Average Pay DB plans could not meet an age neutrality requirement • But DC and Cash Balance plans could

  15. Conclusion • Tying the early and normal retirement ages to longevity improvement would be beneficial to workers, to government, and to employers • would encourage workers to work longer and accumulate more savings so that they have higher incomes when they eventually retire • would help the government raise revenues and reduce its expenditures for its social welfare outlays • would help employers stave off the labor shortages that could occur if large numbers of talented baby-boomers choose retirement over work • Changes are clearly needed, and the sooner the better

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