BOSTON — June 7, 2004 — Many Massachusetts workers will face a stark choice in the coming years: Retire later or retire with less money, according to a new report published today by MassINC in collaboration with the Center for Retirement Research at Boston College and sponsored by Blue Cross Blue Shield of Massachusetts.

These changes occur as the Bay State confronts the challenges of an increasingly older population. In less than five years, many of the Commonwealth’s 1.9 million baby boomers – those born between 1946 and 1964 – will begin to retire (29% of the population). The Bay State is already one of the oldest in the country: 13.5% of the population is older than 65 (the 12 th oldest state), but that number jumps to 18% by the year 2025.

According to The Graying of Massachusetts: Aging, the New Rules of Retirement, and the Changing Workforce, powerful trends are converging at once: An aging population that has not saved enough for retirement is facing new Social Security rules that delay full benefits from the current age of 65 to 67 years. In addition, about one-third of full-time Bay State workers lack any form of pension coverage – including 401(k) plans – at their current workplace.

Those who have saved for retirement have not saved enough. Nationally, the average 401(k) balance of households approaching retirement with some savings is only $55,000 – not much to support a household for several decades. And the personal savings rate (including retirement funds) is slightly more than two percent – the lowest point since the Great Depression.

“If retirement is a three-legged stool – Social Security, retirement plans, and personal savings – then many Bay State families are about to hit the floor,” said Ian Bowles, President & CEO of MassINC.

These realities point to the reversal of a 20-year trend: Since the mid-1980s, American workers have been retiring in their early 60s. The average age of retirement for Massachusetts men has been steady at 64 years and for women at 62 – earlier than age 65 when workers were eligible for full Social Security benefits. As the eligibility age increases to 67, Bay State seniors will face the choice of working longer or getting by with less (Social Security remains the primary source of retirement income for most families).

At the same time, the nature of pension coverage – the other key source of retirement income – has also changed. According to the report, traditional pensions – those funded entirely by an employer above and beyond a salary – are increasingly being replaced by tax-deferred retirement accounts, such as the 401(k), into which employees deposit their own dollars and assume the risk for their investments. Since 1992, of those households with retirement plans, the percentage of Americans covered by traditional pensions has dropped from 40% to 20%, while those with tax-deferred accounts have jumped from 38% to 58%.

“The rules of retirement have changed radically in just a decade,” said Bowles. “Boomers will have to wait longer for Social Security, and a significant number of them are working in jobs that don’t offer retirement plans. They are looking at a future on the financial edge.”

The trend toward tax-deferred accounts also represents a fundamental shift in responsibility from employers to employees. Not only must employees make the choice to participate when a deferred compensation plan is available, but they must also select the amount to invest, along with the specific investment vehicle, such as a mutual fund. One-quarter of eligible workers do not participate in employer-sponsored plans.

“Employees are forced to navigate a complicated path to retirement,” said Alicia Munnell the Director of the Center for Retirement Research at Boston College and lead author of the report. “Not surprisingly, they make mistakes and poor choices at every step of the way, and that means fewer dollars and less security in retirement.”

One segment of the population at a particular disadvantage is older women, who tend to live longer and have low lifetime earnings compared to men. Since retirement income is based on work history, many women – who have fewer years in the workforce – are less likely to have adequate savings. In Massachusetts, 10,312 single women over 65 (28%) are poor or near poor.

The fact that older workers will have to stay on the job longer presents challenges and opportunities for the Massachusetts labor market, according to the study. While the number of older Bay Staters is projected to increase during the coming years, the number of prime age workers is projected to decline from 2,863,136 today to 2,599,192 in 2025, leaving a potential labor shortage in Massachusetts between 2010 and 2025. Traditional sources of labor, such as immigrants, women, and domestic migrants, are already tapped to their practical limits. Older workers looking to make up for retirement income shortfalls could fill this gap.

On the positive side, the study finds that Massachusetts residents may be better positioned to take on employment in their later years. Compared with their national peers, Bay State residents approaching retirement are healthier, better educated, and employed in jobs less physically demanding. One important disadvantage is homeownership, the primary asset for most families. Slightly less than 76% of Massachusetts households between the ages of 55 and 64 own their homes compared to 80% nationwide. The gap widens to 10 percentage points for household heads over age 65 (78% vs. 69%).

“These findings are a wake up call for Massachusetts.  All of us need to do a better job educating families about the new rules of retirement and preparing our communities for the state’s aging population,” said Peter Meade, Executive Vice President of Blue Cross Blue Shield of Massachusetts.  “Blue Cross Blue Shield of Massachusetts is proud to work with MassINC to begin this important conversation.”

The Graying of Massachusetts offers recommendations for meeting the challenges outlined by the data:

• Increase access to retirement savings accounts for full-time workers by utilizing the purchasing power of business associations and Massachusetts state government’s own 457 plan;
• Increase employee participation in existing retirement plans through improved workplace-based financial education;
• Increase awareness of workers’ low savings rate and the challenges facing communities as the Commonwealth’s population ages;
• Improve job training for older workers in anticipation of their increasingly important role in the state’s economy.

About MassINC: MassINC is a nonpartisan, evidence-based organization. Our mission is to develop a public agenda for Massachusetts that promotes the growth and vitality of the middle class. Our governing philosophy is rooted in the ideals embodied in the American Dream: equality of opportunity, personal responsibility and a strong commonwealth.

About the Center for Retirement Research at Boston College: The Center for Retirement Research at Boston College was established in 1998. The Center’s mission is to produce first-class research and forge a strong link between the academic community and decision-makers in the public and private sectors around an issue of critical importance to the nation’s future. To achieve this mission, the Center sponsors a wide variety of research projects, transmits new findings to a broad audience, trains new scholars, and broadens access to valuable data sources. Since its inception, the Center has established a reputation as an authoritative source of information on all major aspects of the retirement income debate.