How Delayed Retirement Enhanced Americans’ Retirement Security

In 1934, the French entomologist Antoine Magnan calculated that bees should not be able to fly. The aerodynamics were all wrong. The bees didn’t listen and flew anyway.

We’ve also heard for decades that Americans cannot delay retirement. Our health is too poor, our jobs too physically demanding, and age discrimination too widespread for longer work lives to contribute in any meaningful way to boosting income security in retirement.

And yet, Americans didn’t listen to the experts and they worked anyway. For decades labor force participation at older ages had been declining, encouraged by the introduction of early Social Security benefits in the late 1950s and early 1960s. But today, Americans aged 62 to 65 are participating in the labor force at the highest rates since data collection began in the early 1960s.

And these haven’t been minimum wage jobs: despite the growing number of near-retirees at work, the median earnings of working Americans aged 62 to 65 exceed those of younger workers.

Americans also are delaying Social Security. In 2020, men claimed Social Security retirement benefits an average of 1.3 years later than in 1990, while women claimed 1.4 years later. Each year of delayed claiming results in an almost seven percent increase in monthly Social Security benefits for as long as the person lives, along with higher benefits for their surviving spouse. Delayed benefit claiming is one reason why the average Social Security benefit paid to a new retiree in 2020 was 32 percent higher after inflation than the average benefit received by a new retiree in 2000. Again, that’s a nearly one-third increase in the real purchasing power of Social Security retirement benefits, at a time when some critics claim that Americans face a “retirement crisis.”

The data are now undeniable: if the conditions are right, Americans can and will extend their work lives, and they have been rewarded for doing so.

A common response to such figures is that only high-income, highly-educated Americans are able to delay retirement. Low-earners, who are most at risk of poverty in old age, can’t follow that same model, it is said. It is true that highly-educated workers with less physically-strenuous jobs face an easier time in extending their work lives. That pattern is not likely to change.

But over the last three decades, labor force participation among near-retirees has risen most rapidly among the least-educated workers. So, despite the hurdles lower-income workers face, longer work lives have not been a story of the elite pulling away from the rest but of the least well-off Americans catching up.

Working longer enhances retirement income security in three ways. First, it gives more time and contributions for retirement savings to build up. Second, it permanently increases Social Security benefits. And third, delayed retirement shortens the period over which savings must last. While much of the emphasis in policy discussions is on how to get Americans to save more for retirement, my AEI colleague Sita Slavov and her co-authors have found that “delaying retirement by 3–6 months has the same impact on the retirement standard of living as saving an additional one-percentage point of labor earnings for 30 years.”

But there’s more we can do. Social Security often punishes delayed retirement because benefits don’t increase along with the extra taxes a worker must pay. My own research has shown that for every dollar of additional taxes a near-retiree pays, they typically receive back only 2.5 cents in additional benefits. That’s because, first, Social Security benefits are based only on the highest 35 years of earnings, and additional work years often add little to the average. And second, because many women continue to receive a spousal benefit based on their husband’s earnings. A woman working longer may increase her own earned benefit, but her spousal supplement is generally reduced dollar-for-dollar. The United Kingdom eliminates their payroll tax once a person reaches retirement age, a step that research concludes would encourage delayed retirement.

In addition, Medicare acts only as a “secondary payer” for seniors who continue to work, meaning that their employer’s health plan must pay first. That deprives retirees of the Medicare benefits they’ve paid for. And worse, by increasing employer’s health costs for older workers, it reduces their incentive to hire seniors or causes them to pay lower wages. Shifting Medicare to the primary payer for over-65s would sweeten the deal for seniors who continue to work.

Longer work lives aren’t possible for everyone, but they’ve worked for most Americans – bringing the highest retirement incomes and the lowest levels of old-age poverty in history. Even as many critics said Americans couldn’t extend their work lives, they went ahead and did it. Policymakers should build on that record of success.

For more details on how extended work lives have enhanced Americans’ retirement security, see my recent testimony to Congress’s Joint Economic Committee.