Café Economics: Worry Free Retirement

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Olivia S. Mitchell argues that financial planning can take the worry out of extra retirement years as life expectancy increases.
Interview with Mitchell conducted by F&D contributor Rhoda Metcalfe; article in F&D Magazine by Bruce Edwards, September 2024.
Mitchell is professor of business economics and executive director of the Pension Research Council at the University of Pennsylvania’s Wharton School and is described as a founder of modern academic pension research.

Longer life expectancy creates a “longevity dividend” if accompanied by health improvements, producing “millions more healthy productive person-years.”
Aging populations (falling fertility and rising longevity) mean societies will have to care for a larger number of frail elderly people.
Economic consequences highlighted:
- Social Security, “the first pillar of US retirement security, will run short within 10 years.”
- Economic growth around the world is likely to slow as older folks start to draw down their assets.
- The global balance of power may shift from older, richer developed economies toward the emerging world.

Health and Retirement Study (launched in 1992):
- Surveys people “aged 50 and over” and follows them “every two years until they pass away.”
- With respondents’ permission, the study merges Social Security records, benefit records, and medical records into a rich database.
Key behavioral findings:
- A significant number of older individuals “never planned for retirement, never saved for retirement,” and were not well versed in their longevity risk (chances of living to 80, 90, 100).
- People who don’t understand tail risk tend to “not save enough and tend to retire too soon.”

Workplace and retirement system changes:
- Shift away from employer-provided defined-benefit plans and greater worker mobility means individuals are more responsible for retirement planning.
- COVID and remote work are among factors changing how people work and plan careers.
Financial products and risks:
- Concern about young people engaging with cryptocurrency and complex financial products via apps, leading to potential fraud or large losses.
- Fraud is also “mounting” among the older population.

Individual-level advice:
- Adopt Barbara Judge’s mantra: “Work longer, save more, and expect less.”
- “If you are healthy enough to stay on the job, I’d say keep working as long as you can.”
Policy and system-level suggestions:
- Governments should push longevity awareness so people understand how long they might live and the associated tail risks.
- Encourage saving through incentives and behavioral innovations (example: the UK’s lottery saving system, where “for every pound people deposit in their bank accounts, they earn a lottery ticket for a monthly draw”).
- Expand financial literacy: in the US, “21 states now mandate financial literacy classes in high school,” which improves planning, budgeting, and saving behavior.
- Economists should communicate more with policymakers so academic research can inform policy and policymakers’ questions can guide research.

“Labor is cheaper than capital.”
“Work longer, save more, and expect less.”
Description of UK lottery saving: “for every pound people deposit in their bank accounts, they earn a lottery ticket for a monthly draw.”

“30 or 40 years ago” (reference to comparison with parents’ generation).
Social Security projected to run short “within 10 years.”
Health and Retirement Study launched in “1992.”
Surveys people “aged 50 and over” and follows them “every two years until they pass away.”
“21 states” in the US mandate financial literacy classes in high school.

F&D Magazine; Bruce Edwards; September 2024

Worry-Free Retirement
- Worry-Free Retirement (Markdown version)
- Worry-Free Retirement (PDF)