THE STASH OCTOBER 5, 2009
While the impact of falling stock prices on older workers' retirement decisions has received a lot of attention this downturn, the more important driver of retirement rates appears to be unemployment, according to new research by Courtney Coile and Phillip Levine. (Sorry, pay-version only.) Using 30 years of data on changes in home and stock prices and labor market conditions, they conclude:
When the unemployment rate rises, more workers between ages 62 and 69 retire, particularly those with less education. Workers between ages 55 and 61 are not found to be responsive to either type of market fluctuation. Individuals do not seem to respond to fluctuations in the housing market regardless of their age. On net, we predict that the increase in retirement brought about [by] the recent rise in unemployment will be almost 50 percent larger than the decrease in retirement brought about by the stock market crash.
Coile and Phillip estimate that 258,000 workers will delay retirement because of the fall in asset prices during this downturn, but 378,000 will be forced into retirement because they lost their jobs. The consequences are most severe for lower-educated workers, who are less likely to hold financial assets, meaning their retirement nest eggs depend critically on their paychecks.
Why wouldn't there be a big change in retirement decisions right now because of the huge drop in housing prices? The most likely explanation is that retirees just haven't traditionally used their housing wealth to finance their twilight years, say Coile and Phillip. Studies have shown that the homes of retirees typically aren't sold until a death or relocation to a nursing home. (Though this doesn't take into account the use of products like reverse mortgages to tap into housing wealth, which had grown rapidly through 2007 but have leveled off since then.)
As it happens, there are already signs the economy is sending more workers into retirement than expected: Last week the Social Security Administration announced that applications for the last fiscal year were 47% higher than projected.