Contrary to recent reports in the media, the current recession will not significantly affect the age at which people retire, according to a study performed by a research team including two Dartmouth economists.
Most families have invested a large portion of their wealth in stable assets like homes or Social Security, study author and Dartmouth economics professor Alan Gustman said .
"For a lot of people, a reduction, even a nontrivial amount of reduction in stock market assets, probably wouldn't affect their decision to retire by a big margin," co-author Thomas Steinmeier, an economics professor at Texas Tech University, said in an interview with The Dartmouth. "Part of the reason is that a lot of their assets are in Social Security and are not affected that much by the stock market."
About 40 percent of a median household's wealth is in Social Security, the study found. Because Social Security and traditional pensions are stable assets, they provide a cushion for many families, Gustman said.
The study also contradicted media reports that the stock market crash affected individuals approaching retirement age the most, Gustman said.
The average household with at least one member between the ages of 51 and 56 has only 15 percent of its wealth invested in the stock market, providing insulation from even large market declines, Gustman said. If the stock market fell by a third, the total wealth of the average household would change by only 5 percent.
Houses with median total wealth were even more strongly insulated from declines in the stock market, the authors found. Families in the median 10 percent of the sample invested only 9.2 percent of their assets in the stock market, meaning that they would lose 3 percent of their total wealth if the stock market fell by a third, according to 2006 data.
"There are some people who are going to be in bad trouble, but most people are not going to have to change their lifestyles as a result," Gustman said.
The authors predicted using a model of retirement behavior that the dot-com bubble burst would lead those people approaching retirement age to defer their retirements by only one or two months on average.
"Since those who lose their jobs often retire earlier because they cannot obtain a position paying near their previous wage, the recession may actually lead to earlier retirement rather than later retirements," Gustman said.
The authors' analysis is based on the Health and Retirement Study, a longitudinal survey of more than 20,000 respondents over the age of 50 who represent a cross-section of the U.S. population. The study a large effort based at the University of Michigan collects information on the earnings, savings, social security benefits, pensions and other sources of income and wealth of each household, according to Gustman.
"[The new study] is quite important because it sheds analytical light on a popular myth that turns out to be not well supported," David Autor, the editor-in-chief of the Journal of Economic Perspectives, said in an interview with The Dartmouth.
The study will be published in the winter 2010 issue of the Journal of Economic Perspectives, as well as in the authors' forthcoming book, Pensions in the Health and Retirement Study, as part of a series on changes in retirement trends.
Nahid Tabatabai, an economics research associate at Dartmouth, was also a co-author on the study.