Why Do More Older Men Work in Some States?

Alicia H. MunnellMauricio Soto Natalia A. Zhivan

IB#8-6

Introduction

With increasing pressure on the nation’s retirement systems, questions about how long people stay in the labor force and why they decide to retire are of great importance. The big unknown going forward is whether the contraction of the retirement income system will cause workers to continue working at older ages. The literature to date suggests that the availability of benefits has a larger impact than the level of benefits on people’s decision to retire. Indeed, 55 percent of men and 59 percent of women who claimed Social Security benefits in 2005 were 62 — the earliest age of eligibility. If availability of benefits is the main driver of retirement, future workers will be relatively insensitive to the coming decline in replacement rates from Social Security and employer-sponsored pension plans. On the other hand, if the level of benefits has a significant impact, future declines could trigger increased work.
One avenue of investigation not previously explored is the variation in labor force activity of older workers across different states. In South Dakota, nearly 90 percent of men aged 55-64 are in the labor force compared to only 40 percent in West Virginia. The question is the extent to which this variation can be explained by differences in replacement rates — benefits relative to pre-retirement income — across states…