Phased retirement (or gradual retirement) normally means that an older worker remains with his or her employer while gradually reducing effort and hours worked. The reduced work time is viewed as a step toward full retirement and can take the form of fewer hours per day, week, month, or year. The term phased retirement is sometimes used more broadly to include reduced work time associated with a change in employers, a move to self-employment, or even a reduction in the intensity of work without a change in hours. Here, however, the focus is on the narrower definition: reduced work time without a change of employers.
In terms of careers and career development, phased retirement obviously belongs to the final stages of a career. It enables workers to gradually reduce work activity while continuing to exercise skills developed at earlier points in the career. Workers can enjoy both the activities and social relationships that are central to a career while developing and pursuing other interests.
There are several potential benefits from phased retirement. Older workers can use phased retirement to make a smooth transition toward a less stressful schedule, a schedule that is perhaps less stressful than either full time work or full retirement, or a schedule that allows for maintenance of social networks, earnings, and a sense of efficacy but that also accommodates a possible age-related reduction in stamina or capacities. From an employer’s perspective, phased retirement can retain experienced employees with specialized knowledge of their job and of the larger organization. Finally, from the perspective of the larger society, phased retirement could extend the work life and thereby reduce pressure on private and public pensions (e.g., Social Security).
The idea of phased retirement is not new. It has been the subject of expert discussion for decades. Nor is it simply an academic idea; there is a long history of private sector employers permitting older workers to reduce their hours as they approach full retirement. Books written in the 1950s about employment of older workers often included discussions of companies with functioning phased retirement plans.
Given that the idea has been around for decades and that older employees often express interest in phased retirement, it is somewhat surprising that phased retirement is evidently quite rare. According to the Health and Retirement Survey, in 1996 more than half of the employed respondents age 55 to 65 preferred to gradually reduce their hours of work as they aged. Yet studies from the 1970s that followed a cohort of older workers as they moved to complete withdrawal from the labor market indicate that less than 10 percent took phased retirement; most people simply moved from full-time work to full-time retirement, and those who become part-timers frequently change employers. More recent data collected by the Health and Retirement Survey indicate no substantial change in these numbers.
Employers and Phased Retirement
Employers play a major role in determining who has an opportunity for phased retirement. A recent survey asked 950 establishments whether there were conditions under which they would be willing to permit an older full-time white-collar worker to take phased retirement. Interestingly, most of the establishments indicated that something could be worked out. They usually had in mind an informal arrangement that would depend on the establishment’s need for a part-time worker. Of those who were open to phased retirement, only about one-third had formal policies regarding phased retirement, and even those policies often make phased retirement a matter of employer discretion.
One particularly interesting form of phased retirement is called “retire-rehire.” In this case, full-time workers officially retire from their firm and then return as part-time workers. There are situations where the time interval between retirement and rehire is a matter of days. The survey of 950 establishments found that the great majority of employers who permit some form of phased retirement would allow it both before and after official retirement. A small minority of the establishments—only 7 percent—would prefer that the shift to part time always occur after official retirement.
Since phased retirements are often handled informally, one might expect them to also be offered selectively. The survey of 950 establishments confirms this. Within the same establishment, some older white-collar workers are more likely than others to have an opportunity for phased retirement. Opportunities for phased retirement tend to rise with age and job tenure. Moreover, employers were more likely to accommodate wishes for phased retirement from high-performing workers. In terms of worker performance, workers who require little supervision and who “make an extra effort to get the job done” are particularly likely to have opportunities for phased retirement.
That result holds, however, on average. Not all employers behave this way. As indicated by a well-executed recent study, there can be circumstances where employers use phased retirement to encourage retirement of low performers. In 1996, the University of North Carolina instituted a formal system-wide program of phased retirement for tenured faculty. The study used information on recent pay increases as a measure of performance. It found that the low performers—those with smaller recent pay increases— tended to enter phased retirement. The employees covered by the University of North Carolina program are, however, rather unusual employees. Since it is extremely difficult for universities to discharge or even reassign tenured faculty, and since mandatory retirement is illegal in the United States, a formal phased retirement program may be one of the few tools that universities have for inducing faculty to leave full-time positions. Thus, as noted by the authors, other employers may not use phased retirement the same way that universities do.
Why Don’t We See More Phased Retirements?
A prominent explanation for the small number of phased retirements focuses on defined benefit pensions. Defined benefit pensions base benefits on a formula; as such they are distinct from defined contribution pensions, which base benefits on the amount of money in a personal account at the time of retirement. Several authors have argued that in contrast to workers covered by defined contribution pensions (or no pension), workers with defined benefit pensions confront formidable obstacles to phased retirement.
There are two reasons why defined benefit pensions may impede phased retirement. First, under defined benefit pensions, a retired person’s pension benefit will sometimes depend on earnings in years just before retirement. In that case, an older person who chooses to work half time at half pay prior to retirement could lose as much as half of all future pension benefits. Indeed, one author calculates that in such a system, a 10 percent decrease in annual earnings can translate into a lifetime wealth loss of 150 percent of annual earnings. No rational worker would choose part-time employment under such a pension. The same problem does not arise with defined contribution pensions, since benefits are based on the amount of money in a personal account. In this case, a person who works half time in the final years before retirement makes lower contributions to the personal account and thereby receives lower benefits. But the decrease is small and nothing close to a lifetime wealth loss of 150 percent of annual earnings.
Second, regulations in the federal tax code can make it quite difficult for an active employee to receive pension benefits from a defined benefit plan that is operated by a current employer. Specifically, an active employee cannot receive benefits before the plan’s normal retirement age. To see the problem, consider a 63-year-old employee who takes phased retirement, receives reduced earnings, and wishes to supplement those earnings with pension benefits. If the employee’s pension is a defined benefit plan with a normal retirement age of 65, then that will not be possible. If, on the other hand, the pension is a defined contribution plan, the employer can establish policies so that an active employee can draw pension benefits. The major federal limitation on such payments from a defined contribution plan is that the employee must be over age 59.
Interestingly, in the above-noted survey of 950 employers, pensions did not play a major role in phased retirement policy. The results indicated that while defined benefit pensions are associated with reduced opportunities for phased retirement in simple cross-tabulations, when other determinants of phased retirement (e.g., industry, organizational size, and presence of a union) are controlled for, pension effects largely disappear. As such, the hypothesis that pensions play a crucial role in shaping opportunities for phased retirement should be viewed with skepticism.
An arguably more important determinant of an employer’s phased retirement policy is whether the employer permits employees to have flexible hours. If an establishment has part-time jobs, permits job sharing, and has a policy of flexible starting times, then the employer is much more likely to say that phased retirement can be accommodated. When employers say that they are open to phased retirement, in most cases they are also willing to accommodate hour reductions for younger workers. Alternatively stated, when employers say that they prohibit phased retirement, they are not usually singling out older workers; they would deny a similar reduction in hours to a young worker.
Given that most employers indicate that they would be open to working out phased retirement, why is phased retirement so rare? Of course, part of the answer may be that some workers are just not interested in phased retirement. For example, there is evidence that women are more interested in phased retirement than men, and that—at least for women—interest in phased retirement is greater if one’s spouse is not retired.
But given the previously noted survey data indicating that many older employees would like to reduce their working hours as they approach retirement, it is difficult to claim that the small number of phased retirements is due to lack of interest. While strong conclusions are not possible, there is reason to think that the terms of the employer’s offer of phased retirement may not be especially attractive to many older workers. The employer’s offer may require a shift to a new job in the establishment as well as a change in health insurance. Health insurance may be especially important; many employers offer health insurance to full-time workers but not to part-time workers. Older workers may reflect on such an offer and decide that they would rather not take phased retirement but would rather either remain full-time workers or become full-time retirees.
Phased Retirement and Government Policy
In part because it may reduce the incidence of early retirements, many national governments have sought to encourage phased retirement. The United States has not been a leader in this area. In the United States, the primary focus has been on promoting work at older ages. In particular, changes in the Social Security program such as the elimination of the earnings test or the gradual increase in the normal retirement age encourage all forms of work, including phased retirement. There have, however, been legislative proposals for changes in the rules regulating how defined benefit pension plans handle phased retirement. For example, the Phased Retirement Liberalization Act was introduced in Congress in 2000. It would have permitted active employees to receive benefits from a defined benefit pension plan prior to the plan’s normal retirement age. This legislation was controversial and did not become law.
European countries, including France, Germany, Sweden, Finland, and the Netherlands, have been more active than the United States in implementing government policies aimed at expanding opportunities for phased retirement. For example, Germany and the Netherlands grant older workers a limited legal right to a part-time job with their full-time employer, that is, if full-time older workers ask for part-time work, there are conditions under which their employer is obligated to provide it. To date little is known about the impact of such policies.
One country with notable success in encouraging phased retirement is Sweden. From 1976 to the late 1990s, Sweden had a partial pension program whereby older people who shifted to part-time work received a payment from the government equal to about half of the associated lost earnings. Before 1994 this benefit was available after age 60, and from 1994 on it was available to people after age 61. One estimate is that in some years as much as 27 percent of the eligible workers took advantage of the program. In most cases, workers stayed in the same job with the same employer. Due in part to the restructuring of the Swedish public pension system, this government-financed program was phased out in 2001.
All indications are that with the aging of the baby boom generation, more older people will be available for work. Moreover, changes in both Social Security and private pensions (in particular, the rise of defined contribution pensions) are increasing financial incentives for work. It is then likely that in coming years increasing numbers of older people will want to work, and many of them will want part-time work. Phased retirement could be a very good way to accommodate that desire.
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