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The Benefit of Working Longer

The earlier people retire, the sooner their cognitive functions begin to decline.

France Pension Reform

Mental Retirement: The Benefit of Working Longer

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Back near the start of this decade, my daughter Chloe spent her freshman year studying at the American University of Paris. She learned a lot, both from her teachers and from the experience of living in an apartment for the first time (the school has no housing). But she also learned something about the French work ethic, namely that many French people often prefer not to … they’d rather talk, eat, drink, smoke, or even go on strike.

I was reminded of this last week when I read about the strikes by major French unions, which disrupted regular service on planes, trains, buses and even at the Eiffel Tower. Also participating were many postal workers, teachers and workers at all major oil refineries.

And all for what?

To protest the government’s plan to raise the retirement age from 60 to 62, and the age of full state pensions from 65 to 67, as part of a plan to reduce the country’s huge budget deficit.

Sacré bleu!

Even after the change, France would still have one of the lowest retirement ages in the developed world. But French workers have a long history of antipathy towards management. And changing this culture won’t be easy.

Which is why I suggest that instead of simply presenting the economic argument, those in power should present some of the other benefits that come from working longer.

I’m thinking specifically of last week’s paper, published in The Journal of Economic Perspectives, titled “Mental Retirement.”

To get right to the point, the conclusion of the paper is this: The earlier people retire, the sooner their cognitive functions begin to decline.

Authored by Susan Rohwedder and Robert Willis, the paper builds its case by referring first to the work of Gruber and Wise, who in 1999 showed that “Most of the cross-country variation in early retirement is due to variation in public policies related to taxes and social security, pension, and disability benefits that create large differences in the incentive to continue working in different countries.”

Because pension and Social Security reforms are rare (note the French protesters), they provide a stable reference scale that allows the comparison of large data sets from a variety of countries.

Illustrating the effect of these policies, which Gruber and Wise call the “tax force,” is this chart, which plots the unused labor capacity between ages 55 and 65 in each country vs. the average tax on earnings between age 55 and 69. The greater the tax, or implied tax (for example, if the government reduces your pension payments if you keep working), the greater the unused labor capacity.

Table 1

As a result, countries with relatively low taxes on older workers (the U.S., Japan and Sweden) see those workers remain in the workforce longer, while countries like France and Italy, which penalize older workers—both to reward those who’ve worked for decades and to open up jobs for young workers—see workers retire earlier.

In the same vein is the following chart, which shows the percent of 60-64 year-olds not working versus the percent eligible for early public pension benefits.

Table 2

The more people are paid not to work, the more likely it is that they won’t work.

Now we come to the part where cognitive scores of memory get involved. The basic memory test used is this: An interviewer reads a list of 10 words to the subject, who is then asked to repeat them, in any order. The interviewer then spends five minutes asking the subject other survey questions … and then asks the subject to recall the same 10 words. With one point per word per occasion, the possible scores range from 0 to 20.

So returning to the same data set used above, we find the highest cognitive scores of 60-64 year-olds in countries where there is less eligibility for pension benefits.

Table 3

Looking at the data of people who are actually not working (for pay), we find a similar story.

Table 4

In countries where a larger percentage of 60-64 year-olds are working for pay, the average 60-64 year-old scores higher on the cognitive scale.

If you want to keep your brain acting younger, keep working!

But what exactly accounts for this effect? What is it about working that keeps a brain young?

To answer, we must tramp a while in the muddy field of intelligence.

According to the authors, the types of intelligence that evolve over a lifetime have can be divided into “fluid intelligence” and “crystallized intelligence.” Fluid intelligence captures the thinking part of ability, including memory, abstract reasoning and executive function. Crystallized intelligence is the knowing part of ability, encompassing the main accumulation of knowledge gleaned from education and lifetime experience.

For the average person, fluid intelligence peaks at age 23, while crystallized intelligence peaks at 35!

Note: I’m not saying your crystallized intelligence peaked at 35. That fact that you’ve read this far, combined with the fact that you’re interested in investing your own money, suggest that you’re well above average in mental engagement. But if you think back to all the kids in your first grade class … and imagine what some of them are doing now, the data make sense.

And WHY does brain function drop off? Well that’s a tough one. The authors’ favored theory is the “processing-speed” theory of Timothy Salthouse (1996). They write, “increased age in adulthood is associated with a decrease in the speed with which many processing operations can be executed and that this reduction in speed leads to impairments in cognitive functioning because of what are termed the “limited time mechanism” and the “simultaneity mechanism.”

“The limited time mechanism is that a combination of slower speed and limited storage capacity can mean that the brain loses information in working memory that is needed as an intermediate product for completion of a stepwise mental task. Within the simultaneity mechanism, speed helps the brain orchestrate and coordinate parallel tasks, such as those involved in executive function or cognitive control. Salthouse argues that it is the slower speed of activating or processing information, rather than a faster rate of information loss or decay, that is primarily responsible for the age-related consequences mediated by the simultaneity mechanism.”

Maybe. There’s clearly a lot more to be learned there.

But the facts are clear, the average person’s brain is diminishing in capability long before retirement begins … and retirement—as well as the prospect of retirement—simply accelerates the process.

The final chart—and the most damning of the French system—depicts the difference in employment rates of 60-64 year-olds versus 50-54 year-olds (note the nearly-90% difference in France, versus the nearly-30% difference in the U.S.) and compares it with the cognitive performance of the older men relative to the younger men.

Table 5

In France, those older men have lost roughly 20% of their cognitive power, while in the U.S., they’ve lost just 5%!

So why does retirement cause cognitive decline?

The authors suggest two main causes.

The first is not surprising. It’s simply that work environments provide more cognitively challenging and stimulating environments than non-work environments … like watching TV or fishing. They call this the “unengaged lifestyle hypothesis.”

The second, based on the theory of human capital, is less intuitive, but more interesting, because it explains why even the anticipation of retirement can bring a reduction in cognitive skill. In short, it’s because the worker stops investing in himself, and in the skills that make him valuable to his employer. As he begins coasting into retirement, and losing interest in his work, his cognitive abilities lose vitality, too. The authors call this the “on-the-job” retirement effect.”

The good news is that average retirement rates around the world are slowly increasing … mainly out of financial necessity.

The bad news is that so many people are fighting the trend.

In France, they’re striking against raising the retirement age, and here in the U.S., any politician who suggests raising the retirement age to save Social Security risks the wrath of the AARP.

Understandably, people who dislike their jobs crave the day they can quit for good. But for the sake of their brains, they’re better off working.

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Cabot Wealth Advisory

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.