5 reasons Americans are retiring later in life

August 8, 2022 6:51 PM

On average, Americans are retiring later now than they did in the 1990s.

Americans are now retiring three or four years later in life than they did three decades ago, puzzling researchers and reversing a trend that had lasted more than a century.

Several recent studies have confirmed this shift. Gallup found that from 1991 to 2022, the average U.S. retirement age rose from 57 to 61. The American Enterprise Institute said that from 1990 to 2019, the age rose from 62.6 to 65.6. And the Center for Retirement Research, a non-profit research group at Boston College, focused solely on male workers but reached largely the same conclusion: From 1991 to 2021, their average retirement age climbed from 61.9 to 64.7.

What makes this so startling is that for about 100 years, history had been moving in the opposite direction. Starting in the 1880s, American men began retiring younger, possibly thanks to generous pensions awarded to Civil War veterans. In the 20th Century, as the social safety net expanded — first with Social Security in 1935, then with Medicare in 1965 — workers continued to end their careers earlier in life. The average retirement age kept lowering until the 1980s, when it slowed to a halt. Then, in the 1990s, it suddenly started climbing back up.

There have been some exceptions. From 2019 to 2021, the Pew Research Center saw a slight increase in the number of Americans aged 55 to 64 who are retired, from 16.6 to 17.1%. But as Pew noted in its own report, this was a short interruption of a 30-year trend, and was most likely tied to the short-lived pandemic recession of 2020.

The bigger picture is that Americans are retiring later in life, after a century of retiring earlier. What could explain this? Studies point to a number of social and economic changes, as well as cuts to social safety net programs. Here's a look at some of the biggest factors:

Social Security

Social Security checks are printed at the U.S. Treasury Philadelphia Finance Center in Philadelphia, Pennsylvania on February 11, 2005. Photographer: Dennis Brack/Bloomberg News

Dennis Brack/Bloomberg News

Changes to Social Security have been a major driver of delaying retirement, the Center for Retirement Research found. In the 1980s, Congress raised the program's full retirement age from 65 to 67. This meant that for many Americans retiring earlier, benefits would be reduced. Today, for example, if a person born after 1960 tries to claim at age 62 instead of 67, he or she would lose $300 of a $1,000 benefit.

"From my perspective, it is being whittled away," Ron Mastrogiovanni, CEO of the research group HealthView Services, said of Social Security. "As time went on and the program got into financial difficulties, they would make changes to the program… As it keeps getting cut, it keeps getting tougher for those folks who are in retirement."

Meanwhile, other tweaks incentivized retiring later. In the 1970s, Social Security introduced the Delayed Retirement Credit, which offers increased benefits for those who retire after the FRA. And in 2000, Congress repealed the so-called "earnings test," an income threshold that many saw as a penalty for working in old age.

In spite of all this, most beneficiaries still claim Social Security before the FRA. In 2021, for example, 57% of new beneficiaries were under 66, the new FRA for that year, according to the Congressional Research Service. That means the majority of them received reduced benefits.

The 401(k) revolution

Withholding paperwork

Igor Dimovski/Getty Images/iStockphoto

Another factor is a generational shift in how Americans plan for retirement. Starting with the baby boomers, Americans have largely switched from defined-benefit plans, like pensions and annuities, to defined-contribution plans, like employer-sponsored 401(k)s and individual retirement accounts. In 1940, about 58% of American households had access to a defined-benefit plan, according to Center for Retirement Research data. By 1965, less than 5% did.

The difference is significant: With a pension, the worker knows exactly how much he or she will be paid in retirement. With a 401(k), the worker only knows how much he or she is saving.

"It's not an automatic retirement paycheck that starts at age X," said Frank O'Connor, vice president of research at the Insured Retirement Institute, a trade group and lobby. "One [defined-benefit] is an income payment, and the other one [defined-contribution] is just a pile of savings and you have to figure out what to do with it."

According to the Center for Retirement Research study, the reliable paychecks of pensions gave workers an incentive to retire sooner rather than later. Workers with 401(k)s, meanwhile, risk running out of money if they retire too early or in a down market. As a result, those with defined-contribution plans tend to retire one or two years later, on average, than those with defined-benefit.

Health insurance

One major consideration for anyone planning to retire is how they'll pay their medical bills. Unfortunately, just as healthcare costs in the U.S. have skyrocketed, employer-provided health insurance for retirees has declined. This creates an obvious incentive for Americans to delay retirement, the study said: the longer they keep working, the longer they stay covered.

"If they stay with their employer, they continue to receive health insurance; if they leave… they are forced to purchase insurance on their own," the study said.

Americans become eligible for Medicare at age 65. Many wait to retire until then, in order to avoid leaving a gap in their health coverage.

Healthier retirees

Pexels/Marcus Aurelius

Another reason for retiring later is simple: Americans are living longer, healthier lives. According to the Center for Retirement Research, the life expectancy for men aged 65 and older has increased by about 3.7 years since 1985 — around the time retirement ages stopped going down.

"We're living a lot longer," Mastrogiovanni said. "When [Social Security] was first put into place, people were not living into their 90s."

That longer life expectancy reflects better health, which the study found was strongly correlated to later retirement. As one might expect, people with healthier bodies and fewer disabilities tended to stay in the workforce longer.

Added to that, today's jobs are generally less physically strenuous than in the past. Since the 1980s, manufacturing in the US has declined and the service industry has soared, creating more desk jobs that men can continue doing in their later years.

Marriage

An elderly couple walk arm-in-arm past an outdoor cafe terrace in Edinburgh, U.K., on Wednesday, July 31, 2013. The latest opinion polls show supporters of Scottish First Minister Alex Salmond's campaign for independence lagging behind those in favor of the status quo by more than 20 percentage points ahead of the Sept.18, 2014, referendum. Photographer: Simon Dawson/Bloomberg

Bloomberg News

The Center for Retirement Research study focused on men, but women do play a role in delaying their retirement.

Many couples prefer to retire at the same time, and wives are typically younger than their husbands — by about three years, on average. This means that as more women joined the workforce over the past century, more and more of them began to push their husbands' retirement age back a few years. The husband of a woman retiring at 62, for example, might decide to retire in the same year, when he is 65.

"The increased percentage of married women working means the decision to retire involves both spouses," the study said.

Overall, the picture the study paints is clear: Americans typically want to retire together with their spouses, with enough money in the bank and their health expenses covered. If they have to wait longer to get that, they will.