By Chip Castille, Managing Director, BlackRock's US & Canada Defined Contribution Group
Is there a retirement crisis? Yes. Are changing demographics at the same time driving an evolution in retirement? Yes. Is the relationship between these two observations clear cut? Not at all.
At first glance, changing demographics - including an aging population and increased lifespans -make the retirement crisis worse for the simple reason that there is less money and it has to last longer. But there is another factor at work that doesn't get enough attention. And that is the increased human capital found at what used to be the traditional retirement age.
By human capital, we mean earning potential or future wages. A college graduate starting her first job has considerable human capital (assuming forty plus years of earnings) and usually very little actual capital. By contrast, someone on the brink of retirement has very little human capital.
Today, however, people are working longer . Sometimes that's a necessity but very often it is a choice. A 65 year old today has a longer life expectancy and is probably healthier and more active than a 65 year old of generations past. What's more, in the US they are most likely in a non-industrial or non-labor job, meaning safety and physical capacity are much less of a concern.
Some continue in the same or similar careers, others work less and others start encore careers that often encompass some previous passion or find new ways to apply their experience. I would not be surprised to see even more people remaining economically active for five or ten years or longer beyond the "traditional" retirement age.
So why should we continue to force them to start withdrawing retirement assets by age 70 1/2?
Push The Limit Higher
Retirement savings are part of a bargain with the government. You get a tax deduction and tax free growth in a qualified retirement account, but the government does want to collect some tax eventually. That's why they want to make sure you start taking taxable withdrawals at some point.
But does it make sense for people to be working, ready, willing and able to pay more into the retirement system yet forced to withdraw assets at the same time? The simple adjustment of pushing out the mandatory withdrawal age to 75 1/2 would acknowledge retirement reality. It would also have several knock-on benefits that could help take the edge off the retirement crisis. In fact, working longer can mean:
- More time to pay into personal retirement accounts,
- More cash flowing into Social Security and Medicare,
- A shorter retirement to fund,
- Potentially extending exposure to professional management and market growth by keeping assets in retirement accounts and 401(k) plans.
Raising the mandatory withdrawal age would not limit anyone's choice as long as 59 1/2 remains the age when individuals can begin making withdrawals without paying an early withdrawal penalty. It would, however, send a clear signal that retirement has changed and that today's workers have more time to ramp up for retirement than they perhaps believed. It's a simple step that could have a sizable impact.