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Summary:
As the members of the "baby boom" generation -- people born between 1946 and 1964 -- approach retirement, the demographic profile of the U.S. workforce will undergo a substantial shift: a large number of older workers will be joined by relatively few new entrants to the labor force. According to the U.S. Bureau of the Census, while the number of people between the ages of 55 and 64 will grow by about 11 million between 2005 and 2025, the number of people who are 25 to 54 years old will grow by only 5 million. This trend could affect economic growth because labor force participation begins to fall after age 55. In 2003, 91% of men ages 25 to 54 and 76% of women in this age group participated in the labor force. In contrast, just 69% men ages 55 to 64 and 57% of women ages 55 to 64 were either working or looking for work in 2003. Recent Census Bureau data show men and women working longer. From 1995 to 2004, while there was little change in the rate of employment among men age 55 to 61, the percentage of 62- to 64-year-old men employed in March of each year rose from 42% to 48%. The percentage of 65- to 69-year-old men who were employed increased from 27% to 31% during the same period. Among women age 55 to 61, employment increased from 54% in 1995 to 60% in 2004. At the same time, the percentage of 62- to 64-year-old women employed in March of each year rose from 31% to 38% and the percentage of 65- to 69-year-old women who were employed increased from 18% to 25%. The rate of employment among persons age 55 and older is influenced by general economic conditions, eligibility for Social Security benefits, and the prevalence and design of employer-sponsored pensions. Labor force participation among people 55 and older could, for example, be affected by the trend away from defined-benefit pension plans, which often include early-retirement subsidies and pay a guaranteed benefit for life, toward defined contribution plans, which are age-neutral and often pay a lump sum at retirement. Also, the repeal in 2000 of the Social Security earnings test for individuals at or above the "full retirement age" (65 years and 4 months in 2004), could induce more people to work beyond age 65. As more workers reach retirement age employers may try to induce some to remain on the job, perhaps on a part-time schedule. This is sometimes referred to as "phased retirement." Several approaches to phased retirement -- job-sharing, reduced work schedules, and rehiring retired workers on a part-time or temporary basis -- can be accommodated under current law. Some of these approaches, however, require the individual to separate from the firm before returning under an alternative work arrangement. Under current law, a pension plan cannot pay benefits unless the recipient has either separated from the employer or reached the pension plan's normal retirement age. Some employers would like to pay partial pension distributions to workers at the plan's early retirement age and to be allowed to limit participation in the phased retirement arrangement to workers in particular occupational categories. However, targeted participation could cause a pension plan to violate the provisions of the tax code that prohibit retirement plans from discriminating in favor of highly compensated employees.
