November 24, 2013

Commentary: Retirement ... what retirement?

The number of Americans 65 and older is growing, and they’re likely to live for decades. So what’s the best way for them to spend those ‘golden’ years?

By Frank Swain

The fabled Age of Leisure that the Industrial Revolution promised may not have transpired for a majority of working Americans, but a select group had hoped to enjoy something that looks an awful lot like it. As they approach retirement, American workers prepare to step back and enjoy their final years. However, the sheer number of retirees, and the cost of accommodating them, is likely to put an end to these dreams before they begin.

From 2000 to 2010, the number of over-65s in the United States increased to 40 million from 35 million, and this number is expected to increase a further 36 percent to 55 million by 2020 as the baby boomer generation reaches retirement. This glut of retirees will leave behind neither the economy nor the workforce needed to ensure a safe and secure old age. Like many Western countries, the United States has an aging population as a consequence of declining fertility. As more of the population retires, and lives longer in retirement, the burden on those still working increases. Social Security Administration figures showed that in 2012, the ratio of workers to beneficiaries dropped below 3-to-1 for the first time – the point of stability in the current system – and that ratio is expected to hit 2 workers per retiree by 2030. The cracks are already beginning to show. Earlier this year, Detroit became the largest municipality in history to file for bankruptcy, broken by a weakened economy, spiraling debts and crippling pension commitments to public-sector workers.

What, then, is the future that today’s septuagenarians face as they come to the end of their working lives? The notion of retirement is a relatively new invention. A century ago, seven in 10 over-65s in the United Kingdom were working. Today, about two in 10 are. (Similar changes have happened in the United States.) It was the advent of state pensions by the German leader Otto von Bismarck in the 1880s that led to the idea that your twilight years ought to be spent in a state of well-earned idleness rather than working until you dropped. In the century since, life expectancy has soared, but the retirement age has remained doggedly fixed to this 18th-century standard. “When Bismarck introduced the state pension, life expectancy at 65 was 18 months,” said Andrew Hilton, director of the Centre for the Study of Financial Innovation. “Now it’s 23 to 24 years for men, 27 to 28 for women.” The number of Americans entering retirement – and the length of time they’ll spend as retirees – is unprecedented.

Among other things, the wealth that is bound up in this older generation will stay there, or trickle out slowly over the next few decades. “As longevity increases, people will receive inheritance later, in their 60s, when it’s not really useful,” said David Sinclair, assistant director of the U.K.’s International Longevity Centre. The knock-on effect of this, he said, is that elders are opting to transfer their wealth directly to grandchildren, excluding the middle generation entirely. By offloading their accumulated wealth while still alive, not only do retirees avoid paying estate tax, they are able to control how that money is spent, for example, by stipulating the cash gifts be used for a college education. This gives older Americans a much more prominent role in the upbringing of their grandchildren. In Japan, living funerals, or seizenso, have boomed in popularity, offering elderly relatives a way to manage their exit from family life.

The flip side of this is that there may be much less to inherit. As life expectancy increases, so do living costs and medical bills. Many older people opt to use their homes to pay for these expenses. The equity loans market is booming as homeowners opt to remortgage their houses to generate a reliable stream of income. In the United States, the number of reverse mortgages increased almost tenfold between 2001 and 2011, from 7,800 to 73,000. (It peaked in 2008, at about 112,000.)

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