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Time is Running Out for Older Workers Trying to Build Their Retirement Nest Eggs - Results from a New Employment Hardship Indicator

by Leroy O. Stone

The pace of on-going economic recovery in earnings opportunities for the older population is an issue of national importance, now that this population is dominated by the massive baby boom generation. Why?

Everyone knows that the stages of life where one is aged 55 to 64 provide the final opportunities to use employment earnings to contribute heavily towards one's financial retirement nest egg. And for many persons, these are the only the years in which they are sufficiently free of family building responsibilities to have any opportunity to create a decent pool of financial capital to support their hoped-for good life in retirement. Thus, the statement that the older population has a huge stake in the speed of recovery of opportunities in the labor market could be the "understatement of the month".

What is the status of this labor market recovery from the perspective of older workers? Some pertinent data are shown in Chart 1, which makes use of a broad measure that tracks the level of employment hardship in that demographic segment. The message of this indicator is that the hardship level skyrocketed between 2008 and 2010, and since then it has retraced less than one half of that jump as of June 2013.

The black line represents the overall index (use the scale on the right). The red line represents the proportion of older workers who had either long-term unemployment, involuntary part-time work for economic reasons, or substandard wages for full-time work. (A substandard wage was measured in terms of a wage below the median wage for full-time workers in a given demographic segment defined in terms of age, education and race.) The red line shows that about 7% of those aged 55 to 64 could be said to have experienced employment hardship in June 2008, and that by June 2010 the figure had nearly doubled, reaching close to 13%.

The red and black lines differ in that the black line makes use of statistical weights that reflect the relative sizes of the demographic segments that were exposed to contributing to each of long-term unemployment, involuntary part-time work, and substandard wage as a full-time worker. The blue line reflects the impact of unemployment, and the green line brings in an additional impact from involuntary part-time work. (Note a slight distortion in the horizontal scale in that the distance between the last two points in time is too large.)

As of June 2013, our indicator that points to employment hardship among older workers was still at least 50% above its pre-crisis level. Coupling this with the persistence of extremely low rates of return on fixed-income financial assets and an annual rate of price increases of 3% or higher in the older population (see Chart 2), the situation can scarcely be considered a good-news story despite the progress in economic recovery. (And there's no point sending most older workers to the stock market to get better returns; because they can't buy enough stocks for this to make a difference. Also let's not forget the risk of major capital losses in that market -- to a good degree it tends to be a zero-sum game, so only a fraction of players can make substantial long-term inflation-adjusted gains from trading stocks.)

Are older workers worse off than the overall labor force in terms of the sluggishness of recovery of the labor market from its depressed state in 2010? The Bureau of Labor Statistics data suggest that on the whole, the older population has shared a general recovery from the depths reached in 2010. I reiterate, however, that the sharing of this slow recovery has a more somber significance for older workers than it does for the general work force; because the former are rapidly running out of time to have labor earnings as a major source of their retirement nest egg.

In closing, there is concern about some not-well-favored key subgroups ("key demographics") witin the older population -- those that are faring significantly worse than the national averages shown in Chart 1.

Technical annex:

It's arguable that this blog over-blows its message because at worst in 2010, we were looking at 13% indicated to be having employment hardship. What about the other 87%?

Keep in mind that this statistic is a general indicator that points to real-life circumstances that go well beyond the particular variables measured. Many people not counted in our measure would still be under economic pressure (having a hard time to make ends meet). Note, for example, that here "standard wages" are measured relative to the median for a demographic segment, and that for many segments even wages above that median would not support the build-up of financial capital for retirement. Also, our measures deal only with labour revenues, leaving out of consideration the costs people must address in trying to get to a place where they have savings that they can set aside for retirement. And when they set aside those savings, purchasing power is relentlessly eroded by inflation, except for the lucky few who enjoy superior returns in the capital markets.

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