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In Focus
"The demographic clock is ticking," declares a recent report on phased (gradual) retirement from the Urban Institute in Washington, D.C. "Many people in many countries may spend half their adult life in retirement, if the current patterns of retirement persist," states another new study on this issue from the University of Massachusetts, Boston (UMass Boston). Despite estimates that the boomer generation will inherit at least $1 trillion over the next decade, approximately half of the boomer generation will fall somewhere between economic comfort and poverty--and many of them will "have to work part time to make ends meet," according to an article titled "Great Expectations" published in American Demographics (May 1, 2003).
PART-TIME WORK
The two reports represent growing concern among a wide spectrum of experts on retirement who believe that current tax, age-discrimination and pension policies have fallen behind the demographic curve. Penner and colleagues stress that starting in 2010, the enormous boomer generation will begin to retire, to be replaced in the workforce by the smaller "baby dearth" generation. As a result, they say, labor-force growth between 2010 and 2020 is expected to fall to one-third of the annual rate (1.1%) that prevailed in the 1990s. Some professions, such as nursing and teaching, will be hit with particularly severe shortages. Enabling older workers to continue working longer would help offset these shortages, both reports assert.
ALL-OR-NOTHING SYSTEM
Chen and Scott explain that, for decades, retirement policies were structured to move older employees out of the workforce in order to make room for younger workers. For example, current law does not permit those with traditional defined-benefit pension plans to shift to part-time work and begin receiving partial pension benefits. A worker must terminate employment and apply for full pension benefits. Employees can be hired back for part-time work, but Internal Revenue Service (IRS) rules require them to stay away for as long as six months to demonstrate they are truly retired. Many who cannot afford to wait retire and seek other income. Although the rules are intended to prevent employers from rehiring workers without providing them benefits, Chen and Scott believe that legal and regulatory changes can still safeguard employees while opening the way to the gradual retirement that many desire. Chen and Scott call for the United States to adopt a "partial pension for partial retirement" system similar to the one established in Sweden. They also believe a more flexible pension system could help obviate pressure to raise the age at which Social Security pays full benefits by reducing the long-term shortfall projected in the program. Penner and his colleagues at the Urban Institute explain that the key objectives of phased-retirement plans are flexible compensation for older workers in terms of both pensions and benefits; reasonable and predictable costs and administrative responsibilities for employers; protections for employees against blanket application of age-discrimination rules in legitimate phased-retirement situations; full disclosure and informed consent for employees about the risks and benefits of continued part-time work; and maintenance of current legal protections for workers, "particularly for those who must work out of financial necessity." Among the public-policy recommendations, the Urban Institute study calls for the following: Final Average Pay. Because defined-benefit pension plans calculate pension benefits based on an average of the most recent years of employment, many workers are deterred from shifting to part-time work for the same company out of worry that the lower pay will cut their later benefits. "It is critical that the IRS disclose and publicize the legal basis" for its recent ruling suggesting that such a reduction is impermissible. Pension Distributions. Because so many people wish to begin retirement before the age at which most traditional pension plans will release benefits, usually 65, employees should be allowed to begin drawing benefits without terminating their jobs after they reach either age 59 1/2 or 30 years of service. The Urban Institute report also calls for eased restrictions on distributions of defined-contribution pensions such as 401(k) plans. They also urge federal authorities to lift the 10% penalty tax added to regular income tax on distributions made to employees before age 59 1/2. Phased-Retirement Statute. Congress should enact legislation explicitly authorizing the creation of phased-retirement plans. This law would use the federal Age Discrimination in Employment Act of 1967 as a model but would take into account more recent innovations. For example, for two decades, public-sector employers such as state governments and public colleges have offered deferred-retirement option plans that make gradual retirement easily available. Also, private institutions of higher learning "have been leaders in developing phased-retirement programs," the Urban Institute authors state. Penner and his coresearchers believe a broader phased-retirement statute should expand on these innovations. Reduced Employee Benefits. Penner and colleagues express concern that "phased retirees frequently find that by reducing their hours they lose a disproportionate share of their employee benefits." They call for changes in the Employment Retirement Income Security Act of 1974 that would be more favorable to part-time older workers. Chen and Scott urge that gradual retirement should be made as widely available as possible. "In other words," they write, "this policy change should aim to popularize, universalize and democratize a practice that is heretofore available only to higher-paid white-collar professionals." They recommend "combined efforts by employers, unions, government, as well as older workers themselves." The Urban Institute report, "Legal and Institutional Impediments to Partial Retirement and Part-Time Work by Older Workers," is available at www.urbaninstitute.org.
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