Entrepreneurship, Self-Employment and Retirement

The prolongation of life expectancy, concomitant with the shrinking of the younger population, has brought about a shift in old-age dependency ratios and placed an unprecedented level of pressure on already fragile pension systems in many developed economies (Watkins-Mathys 2012; OECD 2013). In the context of a rapidly ageing workforce, impending skills shortages, a tightening labour market, upwards shifts in the minimum age at which individuals become eligible for pensions and the gradual degradation of both private and public pension schemes and in an effort to avert the impeding “pensions crisis”, governments have adopted strategies such as encouraging delayed retirement (Orenstein 2011; Watkins-Mathys 2012). For instance, in the United Kingdom, the Default Retirement Age (DRA) was fully abolished in 2011 (Flynn et al. 2014), while the Japanese government has raised the mandatory retirement age twice since the 1990s (Wood, Robertson and Wintersgill 2010). Such developments have in turn brought about considerable debate in academic and policy circles on ways to prolong the working life of productive older workers (Taylor et al. 2012; Baruch, Sayce and Gregoriou 2014).

Retirement planning is a broad concern for individuals and policymakers alike, particularly as a larger proportion of the population is nearing and passing traditional retirement age. In particular, little is known about the financial literacy of small business owners and how they prepare for retirement compared to their waged and salaried counterparts. We use a publicly available panel data set from the United States to examine the retirement savings decisions of self-employed and non-self-employed individuals nearing retirement age.

Policymakers and scholars have increasingly drawn attention to the growing challenges emerging from the ageing of populations, particularly in advanced economies (OECD 2006; Finlayson 2009; Platman 2003; Weber and Shaper 2004; Wainwright and Kibler 2014). In the British context, one of the more visible policy interventions has been to increase the state pensionable age (SPA), in addition to promoting the extension of people’s working lives through the removal of ageist legislation and the implementation of the 2010 Equality Act (BIS 2011). Scholars have also observed how governments, particularly in Anglo-American economies, have started to transfer retirement planning from the state, placing more responsibility upon individuals to plan their financial activities and secure a comfortable retirement (Langley 2006; Finlayson 2009). While these interventions can be viewed as a reaction to manage the increased costs associated with ageing populations (Morris and Mallier 2003), working in retirement age beyond the SPA often brings difficulties to older employees who can face age-related discrimination in organisations (Porcellato et al. 2010), in addition to health problems (Black 2008) and the need to meet caring responsibilities (Walker et al. 2007).

Despite being a relatively recent construct, retirement has been very successfully sold to working people (Freedman 2007). The established pattern of winding down or ending full-time work around the age of 65 (or earlier) to enjoy a life of hobbies and interests is part of the modern life plan for many people, and there is an expectation to let go gracefully accompanying visions of what a normal working life resembles (Kotter 1985). The normative effects of retirement exert influence long before paid work is left for good; retirement reaches back into working lives in pension planning or other provision and creates assumptions over what older people want from paid work and for how long. Dispositions concerning working life have consequently been adapted and propagated: with old age comes economic disengagement (Beckhard 1977). For these reasons, the transition to retirement is best considered a complex process rather than a discrete event (Zissimopoulos and Karoly 2009). But how do the processes and expectations associated with approaching retirement affect those who are self-employed? What are the experiences of entrepreneurship in a context of pending retirement?

Self-employment and entrepreneurship among older age groups is rising (Wang, Zhan, Liu and Shultz 2008). This trend seems related to a broader development in older workers work-retirement and life-cycle career choices. Considerable research has established that retirement can be characterised as a process which can take multiple forms (Beehr and Bennett 2007). Many older adults engage in some form of transitional employment (so-called bridge jobs) between their career employment and complete labour force withdrawal, combining earnings and the receipt of retirement benefits. The importance of these bridge jobs, including self-employment, is likely to increase in the future (Cahill, Giandrea and Quinn 2013).

Despite the collision of the recent large-scale economic downturn and the entrance of the first baby boomer cohort into wage-and-salary retirement ages, self-employment rates among older adults continue to be an important alternative to retirement in later life (Cahill, Giandrea, and Quinn 2013).¹ The prevalence of self-employment increases substantially with age, both because self-employed people work longer and many wage-and-salary workers² — that is, those working for others — turn to self-employment in later life. In fact, in the United States, approximately 18 per cent of employed persons over 65 are self-employed (Hippie 2010).

This chapter addresses the situation of those who begin an entrepreneurial venture in their mid-career. Defining exactly when mid-career begins and ends is a challenging exercise as it seems to be mostly understood as a period without specific boundaries that lies somewhere between the first few years of employment, when one is considered to still be a relative newcomer, and the final few years prior to retirement. One attempt by Saunders (2008) placed it as not less than ten years’ working experience and not less than ten years prior to retirement. Others (e.g. Reining 2004; Winkle man 2007) have defined it largely in terms of a state of mind, associated with a period of stagnation or career plateau in between stages of career advancement. More recently Lindstrom (2011) classified career stages based on earlier work by Super (1957), and a combination of previous empirical studies have divided careers into four stages largely underpinned by age, though to a lesser extent still associated with the conditions underpinning upward progress. These stages consist of new career entrants up to age 20, early career people in the 20–34 range, mid-career 35–49, and late career people 50–65. Equating mid-career with age would place mid-career employees in the broad 35–50 range, but these categories are only guidelines given that chronological age is a convenient and easy way to select which people fall into the category of mid-career incumbents.

Life expectancy has been increasing over time in Canada and other developed countries. In 1979, life expectancy at birth in Canada was 71.4 years for men, 78.8 for women.¹ By 2011, it had increased to 79.3 and 83.6 years, respectively, for men and women (Statistics Canada 2013). Life expectancy at age 65 has also gone up and now stands at 18.8 years for men and 21.7 for women. On the other hand, the fertility rate has been declining over time. It decreased from a high of 3.9 in 1959 to 1.6 in 2011.² The increase in life expectancy and a below-replacement fertility rate coupled with the ageing of the baby boom generation (those born between 1946 and 1965) are accelerating population ageing. In 1971, the median age in Canada was 26.2 years, meaning that half of the population was older than that and half younger.³ By 2011, it had increased to 39.9 years. In 2011, approximately five million Canadians were 65 or older. It is projected that this number will double over the next 25 years, such that by 2036, approximately 24 per cent of the population will be 65 or older (Statistics Canada 2010).

Hybrid entrepreneurship represents a surprisingly large part of economic activities in many countries. For example, it has been estimated that in Finland as much as 4 per cent of the employed workforce and 4 per cent of the non-employed population (e.g., students, pensioners) are involved in entrepreneurial activities on a part-time basis (Akola et al. 2007; Entrepreneurship Review 2010). Hybrid entrepreneurs (HEs) also represent a significant share of all entrepreneurial activities (Folta, Delmar and Wennberg 2010; Lith 2010). According to one study, full-time entrepreneurs were outnumbered by individuals who engaged simultaneously in self-employment and wage work (Burke, FitzRoy and Nolan 2008). Hybrid entrepreneurship also seems to be an interesting option for starting a new business. At least, over 50 per cent of nascent entrepreneurs — individuals in the process of starting a new venture — are simultaneously engaging in wage-employment (Acs et al. 2005; Reynolds et al. 2004; Gelderen, van Thurik and Bosma 2005; Bosma and Harding 2007).

Among the occupational life-cycle career choices that individuals can make, the decision whether to become self-employed so as to engage in entrepreneurial activity is particularly important and has received corresponding academic interest. Selection into self-employment and entrepreneurial start-up has been investigated in a number of contributions (e.g., Evans and Jovanovich 1989; Blanchflower and Oswald 1998), as has survival in self-employment (Holtz-Eakin et al. 1994; Taylor 1999). Much less is known about labour market choices and retirement behaviour of the self-employed when the end of the working life cycle draws nearer.