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08.08
Phased
Retirement — The Time Has Come
By George
McClure
Sebastian
Junger's 1997 book, A Perfect Storm,
described the catastrophic confluence of three
storm systems in the north Atlantic. Today,
three elements are coming together to form
perfect storm scenario for retirees:
demographics, retirement security and greater longevity in
retirement. One element mitigating the storm for
engineers is the concept of phased retirement,
enacted in 2006, and available from 2007 onward
for companies that have amended their own
retirement plans to take advantage of it. Let’s
look at these elements in turn.
The National
Retirement Risk Index shows that there is
concern for the retirement security of today’s
new retirees — even at upper-income levels. The
criterion used is whether the replacement income
in retirement will be at least 90 percent of the
pre-retirement income (after work-related
expenses have been subtracted). For Late Boomers
and Generation X, 44 percent to 49 percent are
at risk of shortfall in retirement income; even
for the group in the top third of income, over a
third are at risk
[http://crr.bc.edu/images/stories/Briefs/ib_7-11.pdf?phpMyAdmin=43ac483c4de9t51d9eb41].
The Center for
Retirement Research suggests that the early
1990s were the “golden age” of retirement income
for workers aged 51 to 61. Defined benefit (DB)
pension plans were more prevalent then than now;
80 percent of those with pensions had defined
benefit plans then, whereas in 2004, for the
similar age group, only 65 percent did. By 2004,
the Normal Retirement Age had risen from
65 to 66. There were more single-earner couples
in the early 1990s, which resulted in higher
Social Security replacement rates (50 percent
for a non-working spouse, added to the full
worker benefit) than a decade later. The
subsequent decline in interest rates has reduced
the income stream derived from annuitizing part
of a retirement nest egg.
Shifts Made
Pension Plans Less Valuable
As the normal DB
pension plans were converted to cash balance
plans or defined contribution plans, retirement
income suffered. Final Average Pay, used
to calculate normal DB benefits, was converted
to Career Average Pay for cash balance
plans. Tax-deferred workplace savings plans
(401(k), 403(b), and 457 plans) did not have the
stimulus of automatic worker participation. But
more recently, automatic worker participation
has been encouraged (unless the worker
consciously reduced his level of participation
or opted out entirely) [http://assets.aarp.org].
The highest-paid employees typically have had
the highest participation in tax-deferred
savings plans, but sometimes were limited in
their contribution levels by anti-discrimination
rules that prevented plans from being “top
heavy.” With automatic participation, inertia
works for the plans and eases the discrimination
tests, since more lower-paid workers are
enrolled.
A Congressional
Budget Office report on growing disparities in
life expectancy by education and economic status
shows that men born in 2004 have almost ten
years greater life expectancy than men born in
1950. The gain for women is more than nine years
[www.cbo.gov/ftpdocs/91xx/doc9104/04-17-LifeExpectancy_Brief.pdf].
Between 1980 and
2000, the gain in longevity for those at age 65
was about 1.5 years. The inference is that,
while Baby Boomers have fewer resources for
retirement security than the previous
generation, they have to plan for a longer life
in retirement. The recent decline in housing
prices has reduced the return from reverse
mortgages, another source of retirement income.
The conclusion is
that there is a retirement savings crisis.
Benefit in
Delaying Retirement
One way to
mitigate the crisis is to delay retirement, so
that there will be fewer years during which the
nest egg plus social security will be the source
of replacement income. Working to age 70
maximizes the Social Security benefit under
current law. But with seniors being healthier
and living longer, they can be motivated to
continue working longer. One proposal is to
raise the age for maximum Social Security
benefit to 72. This would convert at least two
years from pay-out status to pay-in for Social
Security taxes, as well as enhanced income tax
revenues from the added earnings.
The Congressional
Budget Office has shown how retirement age
affects the assets needed to produce 80 percent
of pre-retirement after-tax income. For a
married couple at the 75th income percentile,
the assets needed at age 70 to produce that
income is less than 30 percent of the amount if
retirement age is 62.
[The complete
data are in Table 1,
www.cbo.gov/ftpdocs/54xx/doc5419/05-12-RetireAgeSaving.pdf]
Intellectual
Capital and Corporate Memory
For numerous
industries, including power generation and
aerospace, the engineering workforce is
bifurcated — many close to retirement age (or
already eligible for retirement), few in
mid-career, and some just starting their
careers, who need guidance, training and
mentoring. As reported in Today’s Engineer
in July 2008, based on a survey of U.S. electric
utilities, the Center for Energy Workforce
Development estimated that approximately 46
percent of all engineering jobs in the electric
and gas utility industries could become vacant
by 2012, due to retirement and other forms of
attrition [www.todaysengineer.org/2008/Jul/PES.asp].
One way to provide the support to junior
engineers, while preserving the intellectual
capital in the heads of the seniors, is to
provide overlap, through phased retirement of
the senior engineers. They cut back on their
working hours, but are available as mentors and
“corporate memory,” while drawing a pension
proportional to the hours they are not working.
When they end the partial work phase, their
corporate pension benefit steps up to its full
value. During the time they are working reduced
hours, they continue to accrue proportional
credits for their retirement.
The Proposal
for Phased Retirement
In 2004, the
Treasury Department and IRS issued proposed
regulations permitting private pension plans to
begin pension payments to employees as part of a
phased retirement program. The regulations would
have allowed employees who are age 59 ˝ to
receive a pro rata portion of their pension
annuity to the extent they choose to reduce
their work as part of a bona fide phased
retirement program.
"These
regulations are an important step to removing an
unnecessary barrier to the implementation of
programs that allow employers to retain the
services of older workers who want to phase down
their work in preparation for full retirement,"
said Greg Jenner, Treasury's Acting Assistant
Secretary for Tax Policy. "Phased retirement
permits an employer to retain the services of an
experienced employee, while also providing the
employee with the opportunity to continue active
employment at a level that also allows greater
flexibility and time away from work. People are
living longer, healthier lives, so we need to
encourage programs which not only reduce the
risk that individuals may outlive their
retirement savings, but also retain this
valuable and productive part of our workforce."
The proposed
regulations are detailed at
www.treas.gov/press/releases/js2094.htm.
IEEE-USA was one of 16 organizations that
commented earlier on the proposed regulations,
at
www.ieeeusa.org/policy/policy/2002/02Dec31.html.
The Pension
Protection Act of 2006 incorporated the
following explanation of changes to the
Employee Retirement Income Security Act (ERISA)
to permit phased retirement:
Explanation of Provision
Under the
provision, for purposes of the definition of
pension plan under ERISA, a distribution
from a plan, fund or program is not treated
as made in a form other than retirement
income or as a distribution prior to
termination of covered employment solely
because the distribution is made to an
employee who has attained age 62, and who is
not separated from employment at the time of
such distribution.
In addition,
under the Code, a pension plan does not fail
to be a qualified retirement plan solely
because the plan provides that a
distribution may be made to an employee who
has attained age 62, and who is not
separated from employment at the time of the
distribution.
Effective Date
The provision is
effective for distributions in plan years
beginning after 31 December
2006 [Technical Explanation of HR 4, Pension
Protection Act of 2006
www.house.gov/jct/x-38-06.pdf, page 242 in
the original, 252 in the pdf].
Conclusion
Phased retirement
provides a way for skilled workers to continue
to use their skills for long-time employers,
while still being covered by employment
benefits. The law is in place now, but
individual corporate policies need modification
to take advantage of it. Modifying Social
Security regulations to permit credits to accrue
for bigger benefits up to age 72 could benefit
both the Social Security system (by providing
motivation to work past age 70) and the phased
retiree (by increasing the size of the benefit
once it is started).
George McClure is Technology
Policy editor for IEEE-USA Today’s
Engineer and a member of IEEE-USA's Committee
on Transportation and Aerospace policy.
Comments may be submitted to
todaysengineer@ieee.org.
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