A Strategic Argument for Phased Retirement
Besides, it’s been shown that working is just plain good for a person’s health. The UCLA Center on Aging Events found that the key components of successful aging include the ability to stay physically active and mentally engaged. Staying connected to the workforce is one of the best ways of doing that. But those reasons don’t address why employers should care about the social good of phased retirement—especially in today’s downturned economy, when getting expensive workers off the books is a matter of some urgency for many businesses.
The typical answer to such a question is "Because it’s the right thing to do." But that isn’t really good enough. Instead, the argument in favor of phased retirement is a strategic one: The pool of skilled, knowledgeable and experienced workers will shrink as the baby boomers retire, and losing that institutional knowledge, those skills and all of that customer-relations prowess is always a risk. It may not seem to matter in the short term, but once the economy rebounds, and it always does, companies short on talent will be in a competitive bind. So the correct answer becomes "It’s good for business."
Of course, employers have long believed that the value gained by retaining older workers isn’t worth the cost and have hired new, young employees instead. But it’s easy to argue that if you invest in 23-year-olds, you are likely training them for their next job. In fact, the average 20- to-30-year-old worker changes jobs every three years. Older workers are statistically less likely to job hop.
All of this argues more than ever for a phased-retirement option, referring specifically to a spectrum of opportunities that allow retirees to phase into full retirement by reducing their work hours (either in their current job or another area) with or without the ability to draw on their retirement income, along with opportunities for employers to hire retirees in a part-time capacity.
In order for employers to have a successful phased-retirement program, however, the plan must be aligned with a company’s benefits program in such a way that retirement benefits are not negatively affected and employees are not penalized for working past normal retirement age. It’s also important to provide these part-time employees with the health care benefits afforded to active, full-time employees. While there are no barriers per se to adopting policies to encourage phased retirement, there are obstacles to coordinating such a program with a company’s existing benefits structure.
Indeed, prior to enactment of the Pension Protection Act of 2006, a pension plan could not commence payment of benefits prior to normal retirement, typically at age 65, to an employee who had not separated from service, regardless of how few hours a week an employee worked. However, a plan that provided unreduced retirement benefits upon retirement at an earlier age, such as 60 or 62, could define normal retirement age as such. Thus, even under prior law, such plans could commence benefits at this earlier age while an individual was still employed, although the IRS has recently placed new restrictions on plans with normal retirement ages under 62.
The Pension Protection Act merely added a provision to the effect that a pension plan can commence payment of benefits for an individual who is still working at any time after age 62. A pension plan would need to be amended to add such a provision and would need to specify under what conditions payments would be made. The provision would need to apply to all employees who meet the criteria, not just those handpicked by the employer. Since many employees interested in this option generally want to begin part-time work prior to age 62, this provision is not particularly helpful to most employers.
While this provision of law became effective January 1, 2007, most employers are hesitant to implement this capability without IRS guidance. The IRS has indicated that it is considering whether it should impose restrictions on the treatment of early retirement subsidies when benefits commence while an employee is still working. Presumably, the IRS will also specify how the plan should calculate the pension benefit when the employee ultimately retires. These are issues that plans will need to address.
Despite the complexities, it would seem that the time is right for companies to address them. And far-sighted organizations are doing just that, taking significant actions to retain and recruit older employees, going beyond mere changes to benefits programs and creating long-term workforce planning strategies that combine phased retirement, flexible work arrangement, rehiring retired employees through third-party temporary agencies or as consultants, and even creating "retiree reservist pools" for short-term projects.
Ultimately, visionary organizations that implement HR strategies and policies to meet the phased-retirement desires of employees will have a strategic advantage over other employers. To the extent that phased retirement has been perceived to be mired in complexity, it’s been all too easy for employers to simply avoid it. But as demographic and business forces align—baby-boomer departures, the clear need for purposeful work and income among older Americans, and employers’ need to retain skills and stay competitive—the creative power of phased retirement can be a genuine solution for some of America’s looming challenges.