Aging has been associated with declined performance in tasks that rely on working memory (WM). Because attention and WM are tightly coupled, declined performance on a WM task in older adults could be due to deficits in attention, memory capacity, or both. We used alpha (8-14 Hz) power modulations as an index to assess how changes in attention and memory capacity contribute to decreased WM performance in older adults. We recorded the magnetoencephalogram in healthy older (60-76 years) and younger adults (18-28 years) while they performed a lateralized WM task. At matched difficulty, older adults showed significantly lower memory spans than younger adults. Alpha lateralization during retention was nearly absent in older adults due to a bilateral reduction of alpha power. By contrast, in younger adults alpha power was reduced only contralateral to the attended hemifield. Surprisingly, during the cue interval, both groups showed equal alpha lateralization. The preserved alpha lateralization during attentional cueing, and lack thereof during retention, suggests that reduced WM performance in older adults is due to deficits in WM-related processes, not deficits in attentional orienting, and that a compensatory mechanism in aging permits significant residual WM performance in the absence of alpha lateralization.