Education is key to comfortable retirement

Commentary by Pamela Villarreal

Source: Austin American Statesman

With the economy still meandering along and unemployment virtually unchanged, many recent college graduates have had a difficult time finding employment to match their skills. Unemployment is higher among 18- to 24-year-olds than any other age group. But not all of the news is dismal; college graduates do better in the long run, particularly during their retirement years when they most need income security.

No doubt that with the higher cost of education and the changing labor market, returns to a college education have diminished slightly over the decades. Nonetheless, more education still has a proven impact on lifetime income. The Bureau of Labor Statistics estimates that, in 2012, the median weekly earnings of individuals with bachelor’s degrees were about $400 higher than high school graduates. Workers with a professional degree earn the most, about $1,100 more than a high school graduate per week. The same Bureau of Labor Statistics data shows that the highly educated are more likely to be employed.

And this impact will continue to pay off 40 years down the road. Census data from 2000 to 2011 show that education increases the amount of retirement income (other than Social Security) that a person receives. College graduates on average receive $8,482 in annual retirement income other than Social Security, $6,500 more per year than high school graduates. Each additional year of education increases expected non-Social Security retirement income more than the previous year.

Other research shows this as well. The Federal Reserve’s Survey of Consumer Finances confirms that those with more education or income have more saved in retirement accounts and more financial assets than their less educated counterparts.

According to the Social Security Administration, there are 37 million retirees in the United States. Census data shows that a whopping 60 percent of today’s retired elderly have no retirement income independent of Social Security. This means there are 22.2 million nondisabled retirees who rely solely on Social Security. But each additional year of education reduces the likelihood of having no retirement income other than Social Security by 3 percent. If all of the elderly retirees had four additional years of education, a projected 4.4 million more people would have additional retirement income from savings.

A college education even reduces the likelihood of disability. Not surprisingly, as Americans age, the rate of disability among them rises. About one-fifth of individuals 65 years of age or older have independent living difficulties, such as difficulty performing basic activities alone outside of the home. A partially overlapping group of nearly 11 percent of seniors have self-care difficulties – long-term conditions that make it difficult for them to care for their own personal needs, such as bathing, dressing or getting around inside the home.

However, Census data show that within the elderly population, those with more education are likely to be healthier than those with lower levels of educational attainment. Among those older than 65, a college graduate is 6.2 percent less likely to have independent living difficulties than a high school graduate, and 21.8 percent less likely than someone with only an 8th grade education. Moreover, an individual with a master’s degree is 4.8 percent less likely than a high school graduate to have self-care difficulties.

Thus, there is an increasing return to education, at least with respect to health; each additional year of education reduces the likelihood of disability more than the previous year.

Educational attainment also influences the decision to retire. For an individual 65 years of age or older, each additional year of education beyond high school is associated with a 1 percent increase in the likelihood that they will be employed, controlling for age. A senior with an associate’s degree is 5 percent more likely to work than a senior with only an eighth-grade education. A college graduate is 4.3 percent more likely to be working than a senior with a high school diploma. People with more education are likely to be healthier, and because health is a determinant of disability rates, the more highly educated can continue to work longer.

So for those who are wringing their hands over student loan balances and job opportunities, take the long view. More education increases retirement savings, decreases dependence on government, improves health and increases employment at both a state and individual level. This is good news for the 21 million students across the country who attend college.

Villarreal is a senior fellow and Warne is a research associate with the National Center for Policy Analysis, based in Dallas.