Faced with a reduced (but recovering—so far) portfolio, children still in college, and not a clue what else I would rather do, I’ve given some thought to simply working forever. Not a bad plan, if I can manage it.

Many people think they’ll have to work forever—and they aren’t particularly happy about the prospect. By 2020, most baby boomers will be in their 60s, and about half of them think they will delay retirement beyond age 65. (We haven’t yet seen much evidence that the first wave of boomers to reach their 60s are choosing to delay retirement, but time will tell.)

Before the introduction of Social Security, the burden of lifetime financial support rested squarely on the shoulders of workers and their families (except for the lucky few with pension plans). Many people didn’t stop working until failing health gave them no other choice. Social Security introduced partial income replacement for a broad swath of the American work force. (The value of this income replacement is measured by what’s known to Social Security administrators and financial planners as the replacement ratio.) Today, the key to being able to retire, assuming you’re in good health, is a combination of income replacement and personal savings.

The rapid decline of traditional pensions has altered the picture once again. Factor in Social Security’s increase in the “full retirement age”—which lowers the replacement ratio at any given age—and you have to wonder if workers will continue to elect early Social Security benefits. Will they instead keep working, in order to improve that replacement ratio? The answer, of course, depends on how much workers save, Social Security policy changes, the economic environment, and a host of other factors, some of which are unpredictable.

I was reading a research paper from the Center for Retirement Research at Boston College recently. It discusses the impact on Social Security checks of:

• An increase in the Social Security full retirement age, from 65 to 67.

• Rising Medicare Part B premiums.

• Higher income tax on Social Security benefits, a growing likelihood.

The paper used data from 2002, and some of the numbers are probably outdated. But the concept holds. Combine these three factors, and you’re looking at a tsunami.

A “medium earner” who fully retires at age 65 has a lower replacement ratio than someone who retires at 67. In 2006, the difference was about 8.9%. But in the future, the factors I mentioned above will increase the gap even more. To fill that gap, we’ll need to work longer. The question is, how much longer?

Based on the same research paper, and not taking into account any unforeseen changes to Social Security (those other than the three listed above), someone retiring in 2030 would need to work approximately 3½ additional years to achieve the same replacement ratio that’s available to those who take full retirement benefits today. That means that instead of retiring at 65, boomers born in 1965 will need to work until about age 68½.

If a medium earner accumulated substantial savings in a 401(k) or other accounts, the picture brightens considerably. The researchers assumed savings sufficient to purchase an annuity income stream equal to a replacement rate of 20%. This shaved the additional work time to just over two years—a significant improvement.

I don’t believe any of these numbers are precisely accurate. That’s not possible. But they do raise an essential question: If there hasn’t been a fundamental shift in your personal savings, what other choice do you have but to work longer?


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