For release: May 19, 2003

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Early retirement a "disturbing characteristic" of employment trends: St. Louis Fed's Poole

Washington, DC. — Early retirement is a "disturbing characteristic" of employment trends in recent decades, according to William Poole, president of the Federal Reserve Bank of St. Louis.

Speaking at a conference of the International Association of Employee Benefit Plans, Poole said that in the 1960s, the employment ratio of U.S. males aged 55-64 was over 80 percent, less than 10 percentage points lower than that of the entire male population aged 20-64. By 2001 the employment ratio of the older group was only 65 percent, nearly 20 percentage points less than the same ratio for males aged 20-64.

"I find the substantial increase in early retirement disturbing for several reasons," Poole said. "People in this age group have considerable work experience and likely have accumulated substantial skills. The improved health of the population and increased life expectancy might be expected to yield longer rather than shorter working lives."

Poole observed that in the future, as baby boomers reach normal retirement age, the fraction of the total population at work to support retirees will fall. "The burden of the dependent population—both the young and those retired—on the working population will grow," he said. "In my opinion, we all will have to consider whether the government should adopt policies to increase incentives for older workers to remain employed, perhaps even part time. In any event, U.S. GDP growth will depend in part on whether the trend to earlier retirement continues or is reversed in part."

Poole said that in spite of age discrimination laws, the abolition of mandatory retirement provisions and increasing longevity, the fraction of those 65 and over who are employed has declined from around 17 percent in the mid 1960s to under 13 percent in 2001. This trend, he said, mainly reflects a decline in the employment/population ratio of males aged 65 and over from over 25 percent in the mid 1960s to the 15-17 percent range of the mid-1980s. The employment/population ratio of women aged 65 and older has stayed at under 10 percent for the past 40 years.

"Small as the employed fraction of older people is in the United States, it's substantial compared to the situation in many other countries," Poole said. "This is significant in a period of general aging populations. As people live longer, stable employment ratios for younger people imply an increasing dependency ratio, the ratio of the population that is not employed to that employed," he said. "High dependency ratios cause significant problems for the solvency of pay-as-you-go government benefit programs for seniors, such as Social Security and Medicare in the United States. As the dependency ratio increases, ever-higher taxes on the employed are required to maintain the solvency of such programs."

Poole noted that there are "striking differences" among the G-7 countries in their use of labor resources. Since the mid-1980s, he said, the employment ratios for seniors in the European G-7 countries have been at an extremely low five percent or less. "For practical purposes, individuals of this age do not participate in employment in these countries," Poole said.

At bottom, said Poole, if over time people work fewer hours per week and retire at increasingly younger ages, labor input to the economy will grow more slowly or even shrink. Declining labor input can easily cancel out improvements in productivity growth, leaving GDP growth unchanged or lower.

"The United States has the potential to grow substantially over the next several years, and a major part of that growth will come from growth of labor hours," Poole said. "Productivity growth is the critical element of our longer run future, but over the immediate future labor utilization plays an equally important role. We need to make sure that public policy encourages productivity growth and full utilization of labor, both for the immediate future and for the long run. I think we're on the right track, and have ample reason to be optimistic."

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