With health care improving and life expectancies growing longer, Congress should examine ways to help older Americans work during their retirement years should they choose to do so.
At a hearing of the Senate Special Committee on Aging, witnesses told lawmakers that several steps could be taken to encourage workers to continue working after they reach the retirement age, most notably through the use of “phased retirement” programs that would gradually reduce the time and workload of older workers.
Government Accountability Office Education, Workforce and Income Security Director Barbara Bovbjerg said encouraging Americans to continue working through their retirement years would ease the potential labor shortage that will be created as the “baby boom” generation leaves the workforce and is replaced by the smaller younger generation.
“Federal policymakers may want to consider creating incentives for older Americans who are able to work to remain in the workforce and ensuring that federal policies do not discourage the choice to work longer,” she said. “Doing so could enhance future supplies of skilled workers, bolster economic growth and help many people secure adequate retirement income.”
Doug Holbrook, vice president and secretary/treasurer of the American Association of Retired Persons, also noted the potential positive effects on the workforce of encouraging phased retirement programs, as well as those for the individual workers and employers themselves. “This approach could also expand work options for older workers, as well as allow them to ease into retirement before completely exiting the labor force,” he said. “Employers would benefit from phased retirement programs that help retain hard-to-replace, experienced workers, especially if anticipated labor shortages materialize.”
There are obstacles for phased retirement plans, according to Valerie Paganelli, a senior consulting actuary for Watson Wyatt Worldwide, the most glaring of them being federal rules and regulations.
There are two types of plans that generally affect an employee’s retirement decision, she said, qualified retirement plans and health and welfare retirement plans. The tax laws for these types of plans differ greatly, she noted, with employers being given tax advantages for participation in qualified retirement plans, but disincentives for all but a nominal contribution for a retiree health plan. “As a result, pay-as-you-go funding is the predominant funding method for retiree health benefits,” she said.
For qualified retirement plans, she said, the burden has been that plans are barred from dispensing benefits until an employee has ceased to work for the employer.
“One of the most significant barriers to formal, broad-based phased retirement arrangements is the prohibition against pension distributions to actively working employees who have not attained normal retirement age,” she said. “The foundation of the restriction is the regulatory definition of a pension plan as providing for the payment of benefits ‘after retirement.’ This requirement has resulted in a restriction against pension plans distributing benefits to participants prior to severance of employment or attainment of normal retirement age.”
The IRS has proposed new rules to allow for some payments in phased retirement programs, but these proposals, she said, “would impose significant administrative burdens and limited flexibility such that very few employers have expressed interest in providing such a benefit to older workers.”
To improve the situation, Paganelli offered a series of suggestions, including allowing for distributions from pension plans and coordinating the actions of federal agencies to better deal with the changing retirement landscape. Additionally, she said, the government should endorse defined benefit plans. “Phased retirement benefits can be supplemented by the employer under a defined benefit plan in ways that simply are not possible in a defined contribution plan,” Paganelli added.
Flexibility, she noted, will play an important role in the future of retirement plans and should be a priority for lawmakers as they try to change the system.
“The form and construct of our current retirement programs, as shaped by demands of the most recent decades, does not adequately contemplate changing forces,” she said. “It is imperative we allow for the flexible unfolding of alternative profiles of retirement. The concept of phased retirement and any supporting regulations, legislation or laws are an integral part of the changing landscape; it sets the foundation for a new meaning of retirement in our country.”