The Future of Phased Retirement
In the U.S., employers and politicians are showing a growing interest in the concept of "phased retirement," wherein older employees reduce their work hours as they make the transition into full retirement. Various groups advocate it as a way of retaining valued, experienced workers in a tight labor market. Some critics are, however, skeptical of phased retirement, saying its primary goal may be to reduce pension liabilities.
Advocates of phased retirement say that it's needed in order to keep many of the most talented "Baby Boomers" in the workforce. As of 2000, the oldest members of this huge demographic group were 54 and the youngest were 36. U.S. labor force participation rates are highest between the ages of 25 and 54, largely because early retirement programs often kick in at age 55. Therefore, over the next ten years, Boomers will become increasingly likely to leave the labor force. Moreover, even as the 55-to-64 age group grows by a whopping 47.2%, the 35-to-44 age group will actually shrink by 13.7% this decade. If lots of Boomers do, in fact, retire in the next decade, it may leave many companies with a dire shortage of experienced workers.
Another problem, from the perspective of companies abandoned by early retirees, is that some of these workers are bound to take new jobs with competitors, where they will seem like bargains. After all, many will already have health insurance and pension income and, therefore, be able to work for less compensation.
Many employers (and employees) would prefer a system in which workers are given the chance to work reduced hours and supplement their incomes with pensions. Part of the problem is that there are legal obstacles to doing this in the private sector. Some rules prohibit employers from giving pensions to workers under normal retirement age. Other rules require companies to distribute pensions equitably, making it risky for companies to offer such retirement options only to the skilled employees they wish to retain.
A few firms are trying to find ways around these obstacles. The New York Times recently reported that Avaya, a spinoff of Lucent Technologies, "offered cash bonuses to encourage older workers to exchange their job security and full-time compensation for a novel blend of work and retirement." Other companies working out phased retirement programs include Monsanto, PepsiCo, and Lockheed Martin. "What you're seeing now are ad hoc arrangements," says Eric Lofgren of consulting group Watson Wyatt, quoted in the Times. "What's really needed is a legislative fix."
In fact, such a fix might be in the works. The Phased Retirement Liberalization Act was introduced in the U.S. Congress during the last session and is expected to reemerge soon this year. As written, it would have amended the Internal Revenue Code to allow preretirement distributions from a defined benefit or defined contribution plan when the participant has reached the plan's normal retirement age, reached 59 1/2, or completed 30 years of service.
Skeptics of such proposals worry that if pension laws are relaxed, employees might be encouraged to take their retirement benefits in middle age and wind up with inadequate funds as they grow old. They think employers have a motivation besides talent retention. "I'm very suspicious that some companies are reducing the overall pension benefit that they would have to pay out," says Allen C. Engerman of the National Center for Retirement Benefits, a Chicago law firm. In the Wall Street Journal, Ellen E. Schultz writes that "like many of the retirement proposals in Washington that are portrayed as enhancing the retirement security of workers, phased retirement primarily helps companies save money." She claims that in some phased retirement programs, "The employer saves from the reduced pension and other benefits, and also can pay less in FICA tax and 401(k) contributions."
Judging from such criticisms, phased retirement could become a more controversial and politicized issue in the near future. On the other hand, it will also remain a very attractive option given today's demographic trends and the desire to keep talented Boomers in the workforce.
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A good overview of the phased retirement situation can be found in "Older Workers: Employment and Retirement Trends," an article in Monthly Labor Review Online. Abstracts and excerpts can be found at
http://www.i4cp.com/V2T6Xn.
A full-text PDF version can be found at
http://www.i4cp.com/xrnoWa.
For a Watson Wyatt piece called "Phased Retirement: A Work in Progress," see
http://www.i4cp.com/Nnh3fg
For the Department of Labor's "Working Group Report on Phased Retirement," please see
http://www.i4cp.com/8kDTAM
Mary Williams Walsh's article "No Time To Put Your Feet Up as Retirement Comes in Stages" is in the April 15, 2001, edition of the New York Times. Would-be readers may need to register at the NYT Web site:
http://www.i4cp.com/17Xx0N
To learn more about the Phased Retirement Liberalization Act, please see the PDF versions of the legislation proposed during the last congressional session at
http://www.i4cp.com/9kEImB http://www.i4cp.com/Xeb9X4
Ellen Schultz's article "'Phased Retirement' Option for Workers Is Mainly a Boon for Their Employers" is in the July 27, 2000, edition of the Wall Street Journal. The Journal's homepage is at
Retirement Benefits. Also see HRI's comprehensive report called Graying of Society. In the White Papers section of the site, please see A Future Silver or Gray: Scenarios for an Aging Society.
Advocates of phased retirement say that it's needed in order to keep many of the most talented "Baby Boomers" in the workforce. As of 2000, the oldest members of this huge demographic group were 54 and the youngest were 36. U.S. labor force participation rates are highest between the ages of 25 and 54, largely because early retirement programs often kick in at age 55. Therefore, over the next ten years, Boomers will become increasingly likely to leave the labor force. Moreover, even as the 55-to-64 age group grows by a whopping 47.2%, the 35-to-44 age group will actually shrink by 13.7% this decade. If lots of Boomers do, in fact, retire in the next decade, it may leave many companies with a dire shortage of experienced workers.
Another problem, from the perspective of companies abandoned by early retirees, is that some of these workers are bound to take new jobs with competitors, where they will seem like bargains. After all, many will already have health insurance and pension income and, therefore, be able to work for less compensation.
Many employers (and employees) would prefer a system in which workers are given the chance to work reduced hours and supplement their incomes with pensions. Part of the problem is that there are legal obstacles to doing this in the private sector. Some rules prohibit employers from giving pensions to workers under normal retirement age. Other rules require companies to distribute pensions equitably, making it risky for companies to offer such retirement options only to the skilled employees they wish to retain.
A few firms are trying to find ways around these obstacles. The New York Times recently reported that Avaya, a spinoff of Lucent Technologies, "offered cash bonuses to encourage older workers to exchange their job security and full-time compensation for a novel blend of work and retirement." Other companies working out phased retirement programs include Monsanto, PepsiCo, and Lockheed Martin. "What you're seeing now are ad hoc arrangements," says Eric Lofgren of consulting group Watson Wyatt, quoted in the Times. "What's really needed is a legislative fix."
In fact, such a fix might be in the works. The Phased Retirement Liberalization Act was introduced in the U.S. Congress during the last session and is expected to reemerge soon this year. As written, it would have amended the Internal Revenue Code to allow preretirement distributions from a defined benefit or defined contribution plan when the participant has reached the plan's normal retirement age, reached 59 1/2, or completed 30 years of service.
Skeptics of such proposals worry that if pension laws are relaxed, employees might be encouraged to take their retirement benefits in middle age and wind up with inadequate funds as they grow old. They think employers have a motivation besides talent retention. "I'm very suspicious that some companies are reducing the overall pension benefit that they would have to pay out," says Allen C. Engerman of the National Center for Retirement Benefits, a Chicago law firm. In the Wall Street Journal, Ellen E. Schultz writes that "like many of the retirement proposals in Washington that are portrayed as enhancing the retirement security of workers, phased retirement primarily helps companies save money." She claims that in some phased retirement programs, "The employer saves from the reduced pension and other benefits, and also can pay less in FICA tax and 401(k) contributions."
Judging from such criticisms, phased retirement could become a more controversial and politicized issue in the near future. On the other hand, it will also remain a very attractive option given today's demographic trends and the desire to keep talented Boomers in the workforce.
====================================================
A good overview of the phased retirement situation can be found in "Older Workers: Employment and Retirement Trends," an article in Monthly Labor Review Online. Abstracts and excerpts can be found at
http://www.i4cp.com/V2T6Xn.
A full-text PDF version can be found at
http://www.i4cp.com/xrnoWa.
For a Watson Wyatt piece called "Phased Retirement: A Work in Progress," see
http://www.i4cp.com/Nnh3fg
For the Department of Labor's "Working Group Report on Phased Retirement," please see
http://www.i4cp.com/8kDTAM
Mary Williams Walsh's article "No Time To Put Your Feet Up as Retirement Comes in Stages" is in the April 15, 2001, edition of the New York Times. Would-be readers may need to register at the NYT Web site:
http://www.i4cp.com/17Xx0N
To learn more about the Phased Retirement Liberalization Act, please see the PDF versions of the legislation proposed during the last congressional session at
http://www.i4cp.com/9kEImB http://www.i4cp.com/Xeb9X4
Ellen Schultz's article "'Phased Retirement' Option for Workers Is Mainly a Boon for Their Employers" is in the July 27, 2000, edition of the Wall Street Journal. The Journal's homepage is at
Retirement Benefits. Also see HRI's comprehensive report called Graying of Society. In the White Papers section of the site, please see A Future Silver or Gray: Scenarios for an Aging Society.