Order Code RL30629
CRS Report for Congress
Received through the CRS Web
Older Workers: Employment and
Retirement Trends
Updated October 26, 2001
Patrick J. Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Older Workers: Employment and Retirement Trends
Summary
As the members of the “baby boom” generation – people born between 1946 and
1964 – approach retirement, the demographic profile of the U.S. workforce will
undergo a substantial shift: a greater number of older workers will be joined by
relatively few new entrants to the labor force. According to the U.S. Bureau of the
Census, while the number of people between the ages of 25 and 64 will grow by about
18.4 million between 2000 and 2015, an estimated 86% of this increase will occur
among people ages 55 to 64.
The labor force participation rate (the percentage of people either employed or
unemployed but looking for work) among men 55 and older is lower today than it was
a half-century ago. Most of the decline, however, occurred over a brief period from
about 1970 to the mid-1980s. At the same time, the labor force participation rate
among women ages 55 to 64 has risen steadily from 27% in 1950 to 52% in 2000.
Data collected by the Census Bureau indicate that during the period from 1995 to
2001, employment remained generally steady among men 55 to 61 years old and rose
among women in this age group. Of men ages 55 to 61, 72% were employed in 2001,
the same percentage as in 1995. Employment among women ages 55 to 61 rose from
54% in 1995 to 58% in 2001. Among men ages 62 to 64, 46% were employed in
2001, compared with 42% in 1995, while among women ages 62 to 64, employment
increased from 31% in 1995 to 37% in 2001.
Labor force participation declines both with increasing age and with the receipt
of pension income. Among men ages 55 to 64 who received income from a private
pension or retirement savings plan during 2000, 38% were employed either full-time
or part-time in March 2001. Among women 55 to 64 years old who received income
from a private pension or retirement savings plan in 2000, 33% were employed in
March 2001. Among people 65 or older, only 12% of men and 8% of women who
had private pension income in 2000 were employed in March 2001.
As millions of workers reach retirement age over the next several years,
employers might wish to induce some of those who would otherwise retire to remain
on the job, perhaps on a part-time schedule. This is sometimes referred to as “phased
retirement.” Several approaches to phased retirement – such as job-sharing, reduced
work schedules, and rehiring retired workers on a part-time or temporary basis – can
be accommodated under current law. Some of these approaches, however, require
the individual to separate from the firm before returning under an alternative work
arrangement. Under current law, a pension plan cannot pay benefits unless the
recipient has either separated from the employer or reached the pension plan’s normal
retirement age. Some employers see the statutory prohibition on in-service pension
distributions as an obstacle to establishing phased retirement plans. They would
prefer that employers be permitted to begin partial pension distributions to workers
when they reach the company pension plan’s early retirement age. In addition, they
would like to be able to limit participation to workers in particular occupational
categories. However, targeted participation could cause the plan to violate the
provisions of the Internal Revenue Code that prohibit pension plans from
discriminating in favor of highly-compensated employees in terms of benefits.

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Contents
The Aging of the Labor Force: 2000 to 2015 . . . . . . . . . . . . . . . . . . . . . . 2
Long-term Trends in Labor Force Participation Rates . . . . . . . . . . . . . . . . 3
Recent Employment Trends Among People Age 55 and Older . . . . . . . . . . 6
Pensions Among Older Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Work by Pension Recipients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Social Security Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Age when benefits begin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Retired worked beneficiaries as a percentage of each age category . . 13
Older Workers and “Phased Retirement” . . . . . . . . . . . . . . . . . . . . . . . . . 15
Current approaches to phased retirement . . . . . . . . . . . . . . . . . . . . . 15
Policy issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Distributions from 401(k) plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Flexibility versus nondiscrimination . . . . . . . . . . . . . . . . . . . . . . . . . 19
Policy Responses to an Aging Population . . . . . . . . . . . . . . . . . . . . . . . . . 21
References: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
List of Tables
Table 1. U.S. Population Age 25 and Older, 2000 and 2015 . . . . . . . . . . . . . . . 3
Table 2. Labor Force Participation Rates, 1950 to 2008 . . . . . . . . . . . . . . . . . . 5
Table 3. Employment of Men Age 55 and Older, 1995 to 2001 . . . . . . . . . . . . . 7
Table 4. Employment of Women Age 55 and Older, 1995 to 2001 . . . . . . . . . . 8
Table 5. Receipt of Income From Employer Pensions and Retirement
Savings Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 6. Employment of Recipients of Employer Pensions and
Retirement Savings Plans, Age 55 and Older . . . . . . . . . . . . . . . . . . . . . . 11
Table 7. Social Security Retired Worker Benefit Awards by Age and
Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 8. Social Security Retired Worker Beneficiaries by Age and Gender . . . 14

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Older Workers: Employment
and Retirement Trends
Deciding when to retire is a choice that will affect an individual’s economic
circumstances for the rest of his or her life. In addition to affecting the lives of
individuals, the retirement decisions of older workers have an impact on the nation’s
economy. The number of people retiring each year affects the size of the labor force,
which has a direct impact on the economy’s capacity to produce goods and services.
Other things being equal, fewer retirements in any given year would result in a greater
supply of experienced workers available to employers and fewer people relying on
savings, pensions, and Social Security as their main sources of income. Consequently,
changes in the age-profile of the population or the average age at which people retire
have implications for both national income and the size and composition of the federal
budget.
To understand the factors that affect the retirement decision, one must first know
what it means to “retire.” Retirement is most often defined with reference to two
characteristics: nonparticipation in the paid labor force, and receipt of income from
pensions, Social Security, and other retirement plans. An individual who does not
work for compensation and who receives income only from pensions, Social Security,
and financial assets, would meet this definition of retirement. An individual who
works for compensation and receives no income from pensions or Social Security
would not be retired according to this definition.
Between these two extremes, however, are those who might be considered to
have “retired” based on one part of the definition but not the other. For example,
individuals who have retired from careers in law-enforcement or the military – both
of which typically provide pensions after 20 years of service – often work for many
years at other jobs, while also receiving a pension from prior employment. In such
cases, having retired from a particular occupation does not necessarily mean that one
has retired from the workforce. On the other hand, many people who retire from full-
time employment continue to work part-time to supplement the income they receive
from pensions and Social Security. If the majority of their income is provided by
Social Security, pensions, and savings, economists typically classify them as retired,
even though they continue to engage in paid employment. As these examples suggest,
not everyone who receives pension income is retired, and some people who work for
pay actually are retired.
This report begins by describing the change in the age distribution of the U.S.
population that will occur between 2000 and 2015 and summarizing the historical data
on the labor force participation of older workers. This discussion is followed by an
analysis of data from the Census Bureau’s Current Population Survey on employment
and receipt of pension income in recent years among persons age 55 and older.
Employment trends among older workers are then discussed in the context of data

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CRS-2
from the Social Security Administration on the proportion of workers who claim
retired-worker benefits before the full retirement age (currently age 65). The final
section of the report discusses recent proposals to promote “phased retirement”
through amendments to the sections of the Internal Revenue Code that govern the
taxation of pension income.
The Aging of the Labor Force: 2000 to 2015
As the members of the “baby boom” generation – people born between 1946 and
1964 – approach retirement age, the demographic profile of the American population
will undergo a profound change. According to the Bureau of the Census, the
proportion of the U.S. population age 65 and older will increase from 12.6% in 2000
to 20% by 2030.1 The age profile of the working-age population, however, already
is undergoing a substantial shift toward a greater number of older workers and a
relative scarcity of new entrants to the labor force. In 2001, the oldest baby boomers
will turn 55, while the youngest members of the group will be 37 years old. These 77
million individuals comprise approximately 53% of the U.S. population between the
ages of 25 and 64 in 2001. Their sheer numbers suggest that the impact on labor
markets could be substantial if this generation chooses to retire earlier – or to remain
in the workforce longer – than did previous generations.
The data presented in Table 1 show how dramatically the age profile of the U.S.
population will change between 2000 and 2015. According to estimates prepared by
the U.S. Bureau of the Census, there were 178 million Americans age 25 or older in
2000. By 2015, this number will increase by about almost 17% to 208 million.
However, the number of people ages 25 to 54 – the ages when labor force
participation rates are at their highest levels – is projected to increase by only 2.5
million (2.1%) by 2015. At the same time, the number of people between the ages of
55 and 64 is projected to increase by 15.9 million, or more than 66%. In other
words, while the number of people between the ages of 25 and 64 is projected to
increase by about 18.4 million between 2000 and 2015, an estimated 86% of this
increase is expected to occur among people between the ages of 55 and 64.
1 U.S. Bureau of the Census, “National Population Projections – Summary Tables,”
reproduced in the Statistical Abstract of the United States: 2000, table 14, page 17.

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CRS-3
Table 1. U.S. Population Age 25 and Older, 2000 and 2015
(Numbers in thousands)
Age groups
Year
25 to 34
35 to 44
45 to 54
55 to 64 65 and up
Total
2000
Male
18,558
22,289
18,174
11,443
14,474
84,938
Female
18,882
22,605
18,992
12,558
20,363
93,400
Total
37,440
44,894
37,166
24,001
34,837
178,338
2015
Male
20,500
19,139
20,600
19,205
19,929
99,373
Female
20,748
19,649
21,386
20,714
26,030
108,527
Total
41,248
38,788
41,986
39,919
45,959
207,900
Change
3,808
-6,106
4,820
15,918
11,122
29,562
% change
10.2%
-13.6%
13.0%
66.3%
31.9%
16.6%
Source: U.S. Department of Commerce, Bureau of the Census, Current Population Reports, Series
P-25.
Long-term Trends in Labor Force Participation Rates
The labor force participation rate – the percentage of the population that is
either employed or unemployed and looking for work – varies by age and gender.
Moreover, within age and gender categories, labor force participation rates have
changed over time as people have responded to economic developments and as the
norms and values of society with respect to the employment of women and the
retirement of older workers have changed. Also, as the United States has moved
from an economy based on “smokestack industries” such as mining and manufacturing
to one in which producing and distributing information is perhaps the most important
industry, there has been an increase in demand for highly-educated workers and
relatively less demand for workers who are able to perform physically demanding
labor. At the same time that the economy has been producing jobs that can be done
by workers of more varied physical abilities, the two-earner couple and the “working
mom” have become the rule rather than the exception they were 30 or 40 years ago.
With near universal coverage by Social Security and widespread participation in
pensions and retirement savings plans, more workers can anticipate retirement as an
opportunity for leisure and recreation rather than as a time of financial dependency on
their children.
Men aged 55 and older are less likely to participate in the labor force today than
were their counterparts a half-century ago.2 According to data from the Current
Population Survey (CPS) – a monthly survey conducted by the Bureau of the Census
2 For more information, see Retirement Patterns and Bridge Jobs in the 1990s by Joseph F.
Quinn, Issue Brief 206, Employee Benefit Research Institute, Washington, DC, February
1999.

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CRS-4
for the Bureau of labor Statistics – in the 1950s, about 5 in 6 men aged 55 to 64
participated in the labor force – that is, they were either working or actively looking
for work.3 (See Table 2). By the 1990s, only 2 in 3 men in that age group
participated in the labor force. Most of the historical decline occurred over a
relatively brief period, from about 1970 to the mid-1980s. Among men 65 and older,
the decline in labor force participation began earlier, but it also appears to have ended
around 1985. Between 1950 and 1985, the labor force participation rate among men
65 and older fell from 46% to about 16%. Since the mid-1980s, Labor force
participation rates among men aged 55 to 64 years have remained in the range of 66%
to 68%, while the rate for those aged 65 and older has remained between 16% and
18%.
From 1950 to the present, women’s labor force participation rates have moved
steadily upward. Among women aged 55 to 64, the rate rose from 27% in 1950 to
45% in 1990, and 52% in 2000. Among women 65 and older, however, the labor
force participation rate has changed very little over the last 50 years, remaining
between 8% and 11% over the 1950–2000 period.
The stability of labor force participation rates among men aged 55 and older
since the mid-1980s is likely attributable to several factors. First, Social Security
coverage has been expanded and now covers virtually all private sector nonfarm
employment in the United States.4 The earliest age of eligibility for Social Security
retired worker benefits was set at 62—for women in 1956 and for men in 1961—and
has not changed since. Second, in the private sector, the expansion in pension
coverage that occurred in the 1950s and 1960s had ended by 1980—about half of all
workers were covered by a pension plan in 2000, virtually the same percentage as
were covered in 1980. Finally, most traditional defined-benefit pension plans have
minimum age and length-of-service requirements that must be met before pension
benefits can be paid. These provisions, in effect, establish a minimum age below which
retirement is not a viable option for most workers. According to the BLS Employee
Benefits Survey, more than 90% of employees in medium and large firms who had
pension coverage in 1997 were covered by a plan with a minimum age requirement
for retirement benefits, and more than 80% of these workers were covered by plans
that had a minimum retirement age of 55 years or older.5
3 Labor force participation rates are annual averages from the monthly CPS data. The CPS,
a scientifically designed survey of about 50,000 households, is conducted monthly by the
Bureau of the Census on behalf of the Bureau of Labor Statistics. Using data derived from
the CPS, the BLS publishes numerous labor force statistics by a variety of economic, social,
and demographic characteristics. For more information on the CPS, see the BLS Handbook
of Methods, Bulletin 2490 (Bureau of Labor Statistics, April 1997), ch. 1, pages 4-14.
4 Approximately one-quarter of the employees of State and local governments—about 5
million people—work for governments that have elected not to participate in Social Security.
This is the only remaining large group of workers not covered by Social Security.
5 See Employee Benefits in Medium and Large Private Establishments, 1997, Bulletin 2517
(September 1999), tables 136 and 137, pages 108 and 109.

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CRS-5
Table 2. Labor Force Participation Rates, 1950 to 2008
Men
Age groups
Year
25 to 54
55 to 64
65 and up
1950
96.5%
86.9%
45.8%
1955
97.4%
87.9%
39.6%
1960
97.0%
86.8%
33.1%
1965
96.7%
84.6%
27.9%
1970
95.8%
83.0%
26.8%
1975
94.4%
75.6%
21.6%
1980
94.2%
72.1%
19.0%
1985
93.9%
67.9%
15.8%
1990
93.4%
67.8%
16.3%
1995
91.6%
66.0%
16.8%
1996
91.8%
67.0%
16.9%
1997
91.8%
67.6%
17.1%
1998
91.8%
68.1%
16.5%
1999
91.7%
67.9%
16.9%
2000
91.6%
67.3%
17.5%
*2008
91.3%
69.4%
17.8%
Women
Age groups
Year
25 to 54
55 to 64
65 and up
1950
36.8%
27.0%
9.7%
1955
39.8%
32.5%
10.6%
1960
42.9%
37.2%
10.8%
1965
45.2%
41.1%
10.0%
1970
50.1%
43.0%
9.7%
1975
55.1%
40.9%
8.2%
1980
64.0%
41.3%
8.1%
1985
69.6%
42.0%
7.3%
1990
74.0%
45.2%
8.6%
1995
75.6%
49.2%
8.8%
1996
76.1%
49.6%
8.6%
1997
76.7%
50.9%
8.6%
1998
76.5%
51.2%
8.6%
1999
76.8%
51.5%
8.9%
2000
76.8%
51.8%
9.4%
*2008
79.7%
57.7%
9.1%
Source: U.S. Department of Labor, Bureau of Labor Statistics.

*Estimated by the Bureau of Labor Statistics.

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CRS-6
Recent Employment Trends Among People Age 55 and Older
Data collected by the Census Bureau indicate that during the period from 1995
to 2001, employment remained generally steady among men 55 to 61 years old and
rose among women in this age group.6 (See Table 3 and Table 4). Of men ages 55
to 61, 72% were employed in 2001, the same percentage as in 1995. Employment
among women ages 55 to 61 rose from 54% in 1995 to 58% in 2001. Among men
ages 62 to 64, 46% were employed in 2001, compared with 42% in 1995, while
among women ages 62 to 64, employment increased from 31% in 1995 to 37% in
2001.
Much of the increase in employment among persons aged 55 years and older
during the mid- to late-1990s probably was due to the strength of the economy during
these years. Between 1995 and 2000, for example, the unemployment rate for
workers of all ages declined from 5.6% to 4.0%. Over the same period, the Nation’s
real gross domestic product (GDP) grew at an average annual rate of 4.4%.7 It is
possible, however, that at least part of the increase in employment was due to the
trend of workers choosing to remain in the labor force rather than taking early
retirement, as well as the effects of long-term trends away from defined-benefit
pension plans, which often include early-retirement subsidies, toward defined
contribution plans, which are age-neutral in their design. The Employee Benefits
Survey, for example, indicates that between 1993 and 1997, the proportion of full-
time employees in medium and large private establishments who were covered by a
defined-benefit pension plan fell from 56% to 50%. At the same time, the proportion
of employees in these firms who were covered by defined-contribution plans rose
from 49% to 57%.8
6 The labor force participation rates discussed in the previous section were based on annual
averages of monthly data. The employment data analyzed in this section are from the March
supplement to the CPS. They show employment in the week prior to the March CPS
interview. The March CPS files were used for this analysis because they include detailed data
about sources of income in the previous year. CRS used information about current labor
force status rather than information about labor force status in the previous year because an
individual who reported that he or she both worked and received pension income during the
previous year might have worked and received pension income consecutively rather than
concurrently.
7 Economic Report of the President (Council of Economic Advisers, January 2001), table B-
42 page 324 and table B-2, page 276.
8 See Employee Benefits in Medium and Large Private Establishments, 1993, Bulletin 2456
(Bureau of Labor Statistics, November 1994) table 1, page 8; and Employee Benefits in
Medium and Large Private Establishments, 1997, Bulletin 2517 (Bureau of Labor Statistics,
September 1999) table 1, page 5 .

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Table 3. Employment of Men Age 55 and Older, 1995 to 2001
Number
Employment:
Population
employed
Percent
full-time
part-time
Age in March
(000s)
(000s)
employed
55 to 61

1995
6,993
5,035
72.0%
91.5%
8.5%
1996
7,409
5,349
72.2%
91.2%
8.8%
1997
7,523
5,404
71.8%
90.6%
9.4%
1998
7,855
5,664
72.1%
91.4%
8.7%
1999
8,174
5,990
73.3%
91.7%
8.3%
2000
8,204
5,849
71.3%
92.3%
7.7%
2001
8,479
6,138
72.4%
91.6%
8.4%
62 to 64


1995
2,879
1,206
41.9%
79.0%
21.0%
1996
2,681
1,159
43.2%
77.8%
22.2%
1997
2,733
1,255
45.9%
79.2%
20.8%
1998
2,812
1,283
45.6%
80.9%
19.1%
1999
2,785
1,297
46.6%
78.4%
21.6%
2000
2,927
1,380
47.2%
77.9%
22.1%
2001
2,771
1,284
46.3%
77.2%
22.8%
65 to 69

1995
4,395
1,169
26.6%
54.7%
45.3%
1996
4,522
1,237
27.3%
56.7%
43.3%
1997
4,321
1,150
26.6%
56.8%
43.2%
1998
4,286
1,085
25.3%
57.0%
43.0%
1999
4,298
1,136
26.4%
55.7%
44.3%
2000
4,376
1,330
30.4%
60.5%
39.5%
2001
4,449
1,328
29.9%
63.2%
36.8%
70 and older

1995
8,607
970
11.3%
44.9%
55.1%
1996
8,738
989
11.3%
44.2%
55.8%
1997
9,083
1,063
11.7%
45.7%
54.3%
1998
9,238
970
10.5%
48.0%
52.0%
1999
9,429
1,030
10.9%
44.8%
55.2%
2000
9,510
1,169
12.3%
48.5%
51.5%
2001
9,730
1,198
12.3%
48.1%
51.9%
Source: CRS analysis of the annual March demographic supplement to the Current Population
Survey.

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Table 4. Employment of Women Age 55 and Older, 1995 to 2001
Number
Employment:
Population
employed
Percent
full-time
part-time
Age in March
(000s)
(000s)
employed
55 to 61

1995
7,716
4,196
54.4%
74.1%
25.9%
1996
7,947
4,314
54.3%
74.5%
25.5%
1997
8,142
4,582
56.3%
77.1%
22.9%
1998
8,515
4,896
57.5%
77.7%
22.9%
1999
8,743
4,904
56.1%
76.8%
23.2%
2000
9,041
5,250
58.1%
77.2%
22.8%
2001
9,296
5,365
57.7%
77.3%
22.7%
62 to 64

1995
3,162
975
30.8%
58.3%
41.7%
1996
3,044
968
31.8%
59.3%
40.7%
1997
3,069
1,047
34.1%
62.5%
37.5%
1998
3,065
1,040
33.9%
61.2%
38.8%
1999
3,199
1,102
34.4%
60.1%
39.9%
2000
3,209
1,109
34.6%
61.4%
38.6%
2001
3,236
1,185
36.6%
62.6%
37.4%
65 to 69


1995
5,263
919
17.5%
36.3%
63.7%
1996
5,224
865
16.6%
40.4%
59.6%
1997
5,180
936
18.1%
42.1%
57.9%
1998
5,075
941
18.5%
44.5%
55.5%
1999
5,022
941
18.7%
40.9%
59.1%
2000
4,976
983
19.7%
44.2%
55.8%
2001
4,933
947
19.2%
42.3%
57.7%
70 and older


1995
13,001
650
5.0%
30.4%
69.6%
1996
13,174
681
5.2%
30.3%
69.7%
1997
13,294
639
4.8%
32.8%
67.2%
1998
13,484
740
5.5%
31.9%
68.1%
1999
13,646
807
5.9%
35.0%
65.0%
2000
13,759
816
5.9%
36.3%
63.7%
2001
13,866
840
6.1%
39.3%
60.7%

Source: CRS analysis of the annual March demographic supplement to the Current Population
Survey.

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CRS-9
Pensions Among Older Workers
An important consideration for an individual who is deciding whether to retire
from the workforce is whether the sources of income available in retirement will be
adequate to maintain his or her desired standard of living. Table 5 shows the
proportion of men and women aged 55 and older who reported on the CPS that they
received pension income of some kind during the calendar year prior to the survey.
In this table, “pension income” includes employer-sponsored pensions (including
military retirement), veterans’ pensions; and periodic payments from annuities,
insurance policies, individual retirement accounts, 401(k) accounts, and Keogh plans
for the self-employed.
Not surprisingly, the proportion of men and women who receive income from
a pension or other retirement plan increases with age. In 2000, only 19% of men aged
55 to 64 received any income from a pension or other retirement plan; among those
65 years and older, however, 43% had income from private pensions or retirement
savings plans. The patterns among women are similar: only 12% of 55- to 64-year-old
women received income from private pensions or retirement savings plans in 2000,
while 29% of those aged 65 years and older received such income.
The proportion of men aged 55 to 64 years who were receiving pension income
declined from 23% in 1994 to 19% in 2000. Over the same period, the proportion
receiving pension income fell from 47% to 43% among men aged 65 and older. The
proportion of women aged 55 to 64 years with pension income was more stable, at
11% to 12% throughout the 1994–2000 period. Among women 65 and older, 29%
received income from private pensions and retirement plans in 2000, the same
percentage as in 1994.

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CRS-10
Table 5. Receipt of Income From Employer Pensions and
Retirement Savings Plans
All individuals age 55 and older (000s)
Individuals 55 to 64 years old
Individuals age 65 and older
Number of
Number of
Number of Number of
people
recipients
people
recipients
Men
Percentage
Percentage
1995
9,872
2,303
23.3%
13,001
6,108
47.0%
1996
10,090
2,279
22.6%
13,260
6,206
46.8%
1997
10,256
2,177
21.2%
13,404
6,316
47.1%
1998
10,667
2,152
20.2%
13,524
6,317
46.7%
1999
10,959
2,195
20.0%
13,727
6,457
47.0%
2000
11,131
2,174
19.5%
13,886
6,358
45.8%
2001
11,249
2,124
18.9%
14,179
6,099
43.0%
Women
1995
10,878
1,316
12.1%
18,264
5,252
28.8%
1996
10,991
1,164
10.6%
18,398
5,025
27.3%
1997
11,210
1,287
11.5%
18,474
4,933
26.7%
1998
11,580
1,253
10.8%
18,559
5,114
27.6%
1999
11,943
1,403
11.7%
18,668
5,186
27.8%
2000
12,250
1,439
11.7%
18,735
5,513
29.4%
2001
12,532
1,475
11.8%
18,799
5,426
28.9%
Source: CRS analysis of the annual income supplement to the Current Population Survey.
Note: Retirement plans may include a traditional pension, a retirement savings plan, or both.
The income year is the year prior to the survey.
Work by Pension Recipients. Among men aged 55 to 64 who received
income from a private pension or retirement savings plan during 2000, 37.5% were
employed either full or part time in March 2001 – the same percentage as in 1995.
(See Table 6). Relatively few men aged 65 or older who receive income from private
pensions and retirement savings plans also engage in paid employment: only 10% to
12% were employed, on average, over the 1995–2001 period. Women who receive
pension income are even less likely than men to be employed. Among 55- to 64-
year–old women who received income from a private pension or retirement savings
plan in 2000, just 33% were employed in March 2001. Among women aged 65 years
and older, only 6% to 8%, on average, were employed during the 1995–2001 period.

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CRS-11
Table 6. Employment of Recipients of Employer Pensions and
Retirement Savings Plans, Age 55 and Older
Retirement income recipients age 55 and older (000s)
Recipients, age 55 to 64
Recipients, age 65 and older
Number of
Number
Number of
Number
recipients
employed
recipients
employed
Men
Percentage
Percentage
1995
2,303
864
37.5%
6,108
727
11.9%
1996
2,279
831
36.5%
6,206
726
11.7%
1997
2,177
832
38.2%
6,316
724
11.5%
1998
2,152
778
36.2%
6,317
648
10.3%
1999
2,195
870
39.7%
6,457
706
10.9%
2000
2,174
799
36.7%
6,358
739
11.6%
2001
2,124
797
37.5%
6,099
721
11.8%
Women
1995
1,316
410
31.2%
5,252
326
6.2%
1996
1,164
324
27.9%
5,025
281
5.6%
1997
1,287
416
32.3%
4,933
277
5.6%
1998
1,253
363
29.0%
5,114
404
7.9%
1999
1,403
370
26.3%
5,186
426
8.2%
2000
1,439
442
30.7%
5,513
401
7.3%
2001
1,475
488
33.1%
5,426
436
8.0%
Source: CRS analysis of the annual income supplement to the Current Population Survey.
Note: Retirement plans may include a traditional pension, a retirement savings plan, or both.
The income year is the year prior to the survey. Employment is in current year.
Social Security Retirement Benefits
Age when benefits begin. Currently, the “full retirement age” under Social
Security is 65. Social Security retired-worker benefits are first available at age 62, but
benefits that begin before the full retirement age are subject to a permanent actuarial
reduction equal to 5/9% for each month under age 65. At age 62, this results in a
benefit equal to 80% of the amount that the worker would have received without the
reduction. As a result of the Social Security Amendments of 1983 (P.L. 98-21), the
Social Security full retirement age is being increased to 67 incrementally over a
22-year period. Reduced benefits will continue to be available as early as age 62, but
when the full retirement age reaches 67, the benefit payable at 62 will be just 70% of
the amount that would have been paid if not for the early retirement reduction.
Most people choose to begin receiving Social Security retirement benefits before
age 65. The data presented in Table 7 show that approximately 75% of men and
80% of women who began receiving Social Security retired worker benefits between
1990 and 1999 applied for benefits before age 65. Among women, this percentage

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CRS-12
has remained steady over the past 10 years,9 while among men, there was a slight
increase in the proportion of applicants younger than 65 years.
The data presented in Table 3 and Table 4 indicate that the proportion of 55 to
64 year-olds engaged in paid employment rose during the mid- to late- 1990s. The
data also show, however, that a much smaller proportion of 62- to 64-year-olds were
employed than were among those aged 55 to 61. One reason for the sharp decline is
that age 62 is the earliest age of eligibility for Social Security retirement benefits.10
The availability of (actuarially reduced) Social Security benefits at 62 allows many
people who otherwise would have continued working to retire from the labor force.
The Social Security system also affects labor force participation through the
delayed retirement credit and the earnings test. The delayed retirement credit
provides a permanent increase in benefits for workers who delay their receipt of
Social Security benefits until after age 65 – thus creating an incentive for older
workers to remain in the labor force. The earnings test reduces the Social Security
benefits of recipients under the normal retirement age (currently 65) whose earnings
exceed specific thresholds.11 In 2001 a Social Security recipient under age 65 can
earn up to $10,680 without having his or her benefit reduced, but benefits are cut by
$1.00 for each $2.00 earned in excess of that amount. This creates a financial
incentive for these individuals to reduce their earnings below the threshold. Congress
has at times altered both the delayed retirement credit and the earnings test to
encourage workers to stay in the labor force.
9 The percentage of awards to women age 65 and older increased temporarily in 1997 and
1998 due to an outreach effort by the Social Security Administration to convert non-disabled
widow beneficiaries to the higher benefits to which they were entitled as retired workers.
10 Sixty-two also is the normal retirement age in about one-quarter of private pension plans.
11 The Senior Citizens’ Freedom to Work Act (P.L. 106-182, April 7, 2000) eliminated the
earnings test for people at the “full retirement age” (currently age 65) or older, effective
January 1, 2000. See CRS Report 98-789, Social Security: Proposed Changes in the
Earnings Test, by Geoffrey Kollmann.

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CRS-13
Table 7. Social Security Retired Worker Benefit Awards by Age
and Gender
Age in year when retired worker benefits began
62 to 64
65
Over 65
Percentage
Percentage
Percentage
Men
Awards
of all awards
Awards
of all awards
Awards
of all awards
1990 618,900
73.8% 160,300
19.1%
58,900
7.0%
1991 639,800
73.3%
172,200
19.7%
61,300
7.0%
1992 641,800
74.2%
166,100
19.2%
57,600
6.7%
1993 646,100
75.3%
159,400
18.6%
52,100
6.1%
1994 607,600
76.1%
145,500
18.2%
45,600
5.7%
1995 596,500
75.6%
145,900
18.5%
47,000
6.0%
1996 581,900
76.0%
135,200
17.7%
48,300
6.3%
1997 586,300
75.4%
137,300
17.7%
53,800
6.9%
1998 586,800
75.7%
136,300
17.6%
52,100
6.7%
1999 606,100
75.6%
140,500
17.5%
55,000
6.9%
62 to 64
65
Over 65
Percentage
Percentage
Percentage
Women
Awards
of all awards
Awards
of all awards
Awards
of all awards
1990 487,800
79.6%
86,900
14.2%
38,200
6.2%
1991 489,100
79.0%
95,400
15.4%
34,400
5.6%
1992 510,600
80.1%
89,900
14.1%
36,600
5.7%
1993 502,800
79.5%
97,100
15.4%
32,200
5.1%
1994 504,600
81.5%
82,600
13.3%
31,600
5.1%
1995 486,200
79.5%
88,900
14.5%
36,300
5.9%
1996 488,100
80.4%
86,500
14.3%
32,200
5.3%
*1997 486,500
66.7%
86,500
11.9%
156,600
21.5%
*1998 497,500
75.9%
92,500
14.1%
65,800
10.0%
1999 514,300
78.6%
93,300
14.3%
46,400
7.1%
Source: Annual Statistical Supplement to the Social Security Bulletin, various years.
*Note: Special outreach programs by the Social Security Administration resulted in an above-
average number of conversions of non-disabled widows to retired worker benefits in 1997 and 1998.
Initial awards exclude conversions from disabled worker benefits to retired worker benefits.
Retired worked beneficiaries as a percentage of each age category.
If more workers chose to delay receipt of Social Security benefits until age 65, this
delay would eventually show up as a declining percentage of 62- to 64-year-olds who
are receiving such benefits. The data presented in Table 8 show that there was a
decline of about two percentage points between 1995 and 1999 in the proportion of
men aged 62 to 64 who were receiving benefits. This coincided with the rising
employment–population ratio among men in this age group. The lower rate among
62- to 64-year-old men during this period may have been caused by robust economic

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CRS-14
growth, or it may reflect a trend toward later retirement, independent of economic
conditions. More time will be needed before firm conclusions can be drawn. Among
women aged 62 to 64, the proportion who were receiving Social Security benefits
rose slightly from 1990 to 1999, which is reflected in the 5-year averages for the first
half and second half of the decade. From 1990 through 1994, an annual average of
34% of women aged 62 to 64 years received Social Security retired worker benefits.
For the 5 years from 1995 through 1999, the annual average was 35.3%.
Table 8. Social Security Retired Worker Beneficiaries by Age
and Gender
(Retired worker beneficiaries, in thousands)
62 to 64
65 to 69
70 and over
Percentage
Percentage
Percentage
Men
Number
of age group
Number
of age group
Number
of age group
1990
1,336
43.7%
3,898
83.8%
7,751
91.7%
1991
1,345
43.7%
3,896
84.0%
7,985
91.8%
1992
1,351
43.9%
3,937
84.5%
8,186
91.9%
1993
1,350
44.5%
3,946
84.5%
8,354
91.7%
1994
1,353
44.8%
3,906
83.6%
8,536
91.3%
1995
1,320
44.7%
3,900
83.4%
8,694
91.2%
1996
1,293
44.6%
3,871
83.1%
8,848
90.6%
1997
1,278
43.0%
3,836
83.8%
9,012
90.6%
1998
1,286
42.6%
3,783
83.5%
9,138
90.2%
1999
1,302
42.5%
3,790
84.3%
9,238
89.9%

62 to 64
65 to 69
70 and over
Percentage
Percentage
Percentage
Women
Number
of age group
Number
of age group
Number
of age group
1990
1,167
34.2%
3,067
55.6%
7,607
55.9%
1991
1,150
33.7%
3,062
55.7%
7,836
56.4%
1992
1,137
33.7%
3,098
56.4%
8,037
56.7%
1993
1,126
33.9%
3,104
56.7%
8,218
57.1%
1994
1,139
34.5%
3,065
56.5%
8,404
57.4%
1995
1,128
35.0%
3,058
56.7%
8,570
57.7%
1996
1,126
35.6%
3,046
57.0%
8,715
57.8%
1997
1,131
35.1%
3,053
58.1%
8,972
58.9%
1998
1,156
35.3%
3,036
58.8%
9,112
59.3%
1999
1,180
35.6%
3,070
60.1%
9,203
59.4%
Source: Annual Statistical Supplement to the Social Security Bulletin, various years.

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CRS-15
Older Workers and “Phased Retirement”
In the traditional view of retirement, a worker moves from full-time employment
to complete withdrawal from the labor force in a single step. In fact, however, some
workers choose to continue working after they have retired from their “career” jobs.
The data in Table 6, for example, show that 38% of men and 33% of women aged
55 to 64 who received income from private pension plans in 2000 were employed in
March 2001. The process of retiring often occurs gradually over a number of years,
with many workers retiring from year-round, full-time employment and moving to
part-time or part-year work at another firm, often in a different occupation.
As members of the baby-boom generation begin retiring in the coming decades,
millions of skilled and experienced workers will exit the labor force. As this occurs,
employers may find it necessary to alter their employment practices and pension plans
to induce some of those who would otherwise retire completely to remain on the job,
perhaps on a part-time or part-year schedule. This process is sometimes referred to
as phased retirement. No statutory definition of phased retirement exists, but one
analyst has described it as “the situation in which an older individual is actively
working for an employer part time or [on] an otherwise reduced schedule as a
transition into full retirement. [It] may also include situations in which older
employees receive some or all of their retirement benefits while still employed.”12
Advocates of phased retirement contend that more pension-eligible individuals
would choose to continue working if employers could offer them the opportunity to
collect pension benefits while still on the employer’s payroll. Under current law, this
option can be offered only to employees who have reached a pension plan’s normal
retirement age. Some employers have suggested phased retirement would be
embraced by more firms if this option could be offered to employees at the plan’s
early retirement age. Employers generally would prefer to offer the option of
receiving these “in-service” distributions only to selected categories or classifications
of plan participants.13 In order for either of these actions to be taken, however, the
Internal Revenue Code and the Employee Retirement Income Security Act (ERISA)
would need to be amended.14
Current approaches to phased retirement. A study conducted by the
benefits consulting firm Watson Wyatt Worldwide found that 16% of the 586 firms
participating in the survey offered some form of phased retirement to their
employees.15 The firms surveyed by Watson Wyatt described a number of strategies
that employers can use to retain the services of valued employees who are eligible for
12 Testimony of Wilma K. Schopp on behalf of the Association of Private Pension and
Welfare Plans before the U.S. Senate Special Committee on Aging, April 3, 2000.
13 This discussion refers to in-service distributions under defined benefit pension plans. In-
service distributions under defined contribution plans are discussed later in this report.
14 See, for example, New Opportunities for Older Workers, issued by the Committee for
Economic Development, Washington, DC, 1999.
15 Laurene A. Graig and Valerie Paganelli, “Phased Retirement: Reshaping the End of Work,”
Compensation and Benefits Management, vol. 16 no. 2 (Spring 2000).

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CRS-16
retirement and who might be lost to the firm if the only options available are full-time
employment or full-time retirement. Although the firms participating in the survey
may not be representative of all employers, their practices with respect to phased
retirement offer some insights into the strategies that firms have been able to employ
under current law and regulations to promote phased retirement among their
employees.16
According to the data collected by Watson Wyatt, many firms rehire retired
employees on a part-time or temporary basis: 75% of the firms that reported having
a phased retirement arrangement said that they rehire employees after they retire,
usually as part-time or temporary workers. In addition, 42% of firms with phased
retirement said they contracted with retired employees to be consultants. (Some firms
had both kinds of arrangements with retired employees). Of the firms with phased
retirement, 60% said that their approach included allowing retirement-eligible
employees to work fewer days per week or fewer hours per day. Other policies
include allowing employees who are not ready to retire fully to transfer to other jobs
within the firm (32% of firms had such policies), extended leaves of absence (23%),
and job sharing (19%).
As the variety of these arrangements indicates, several approaches to phased
retirement can be accommodated under current law. It is important to note, however,
that two of the most popular arrangements—hiring retired former employees on a
part-time or temporary basis and hiring retirees as contractors—require the individual
to separate from the firm before returning under an alternative work arrangement.
This introduces considerable uncertainty into the process for both the retiree and the
employer, because once the employment relationship is severed, neither party is
legally bound to renew it.
Another popular approach to phased retirement is to allow employees to reduce
the number of days per week or hours per day that they work for a period of months
or years before they cease employment altogether. Unless the employee has reached
the pension plan’s normal retirement age, however, the plan cannot pay retirement
benefits to the individual while he or she remains employed by the firm, even if only
on a part-time basis. A plan that pays benefits to an employee that has not yet reached
the plan’s normal retirement age could lose its tax-qualified status.17 In order to
qualify for the favorable tax status granted to tax-qualified pension plans, the plan
must pay benefits only on condition of death, disability, termination of employment,
plan termination, or at the normal retirement age.18
16 The 586 firms that participated in the survey represent only about 6% of the 9,500
employers to whom the survey materials were sent. Thus, caution should be used when
interpreting the results of the survey.
17 In a “tax-qualified” plan, employer contributions to the plan are deductible business
expenses for the firm and neither the employer contributions nor investment earnings on those
contributions are counted as income to the employee in the years that they occur; instead,
pensions are taxed as income when the benefits are paid to plan participants in retirement.
Usually, retirees are taxed at a lower marginal tax rate than when they worked.
18 Code of Federal Regulations, § 1.401-1(b)(1)(i).

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CRS-17
An employee who has reached the pension plan’s normal retirement age can
begin to receive distributions from the plan, even if he or she continues to be
employed by the firm.19 Likewise, an employee who has reached the plan’s early
retirement age can begin to receive distributions from the plan upon separation from
the firm, provided that he or she has met the required number of years of service
stipulated by the plan. If a participant has separated from the employer and has begun
to receive distributions from the plan at the early retirement age, he or she can
continue to receive these distributions, even if at some future date the participant
becomes re-employed by the plan sponsor.
Policy issues. Some employers see the statutory prohibition on making in-
service pension distributions to employees who have not yet reached normal
retirement age as an obstacle to establishing phased retirement plans because some
older workers would find it financially impractical to cut back to a part-time or part-
year work schedule if they were unable to supplement their earnings with pension
income. One way for a firm to offer phased retirement to these workers under current
law, without jeopardizing the tax-qualified status of its pension plan, would be to
lower the normal retirement age. For example, if the normal retirement age under the
plan is 62 years and the early retirement age is 55 years, the firm could reduce the
normal retirement age to some age between 55 and 61. From the an employer’s point
of view, there would be at least two potential drawbacks to such an approach. It
could result in an unintended exodus of workers into retirement, because all eligible
plan participants would be able to receive full pension benefits at an earlier age than
previously, and it could result in a dramatic increase in the cost of funding the plan,
because full benefits would be payable at a younger age.
Rather than reduce the normal retirement age in their pension plans, some
employers would prefer that Congress amend the Internal Revenue Code to allow in-
service pension distributions to employees who have reached the plan’s early
retirement age (or some age between the early and normal retirement ages).20 Some
observers believe, however, that such a policy would be contrary to the main purpose
of pension plans, which is to replace wage income during retirement. These critics say
that if employers were permitted to pay pension benefits to individuals still engaged
in gainful employment, the benefits would become a tax-subsidized supplement to
wages, paid to individuals who are still able to work. They argue that pension
benefits are intended to be a substitute for wages and should be paid only to retired
workers. Permitting in-service distributions to current employees who have not
reached the plan’s normal retirement age might allow employers to compensate
current employees with pension funds, effectively reducing their operating expenses
by shifting some costs that would otherwise be paid as wages to the pension fund.
In 2000, about 2.4 million workers in the United States received pension
payments from a former employer. More than a million of these workers were under
age 65. (See Table 6.) Current law allows an individual who has separated from a
19 If a plan participant continues to work for an employer beyond the plan’s normal retirement
age, the plan must meet the statutory requirements for continued benefit accruals; see 26
U.S.C. § 411(b)(1)(H).
20 Requirements for qualification of pension plans are defined at 26 U.S.C. § 401(a).

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CRS-18
firm and is receiving pension distributions under an early retirement provision of the
plan to become re-employed by that firm, while continuing to receive those benefits.
Some employers have argued that it should be permissible to allow eligible employees
to receive partial distributions under an early retirement provision without first having
to separate from the employer and then be rehired. Such an option would require an
amendment to the tax code. However, plan sponsors currently have the option of
setting the normal retirement age at any age not greater than 65, and the early
retirement age at any age under the normal retirement age, provided that the plan
complies with the statutory requirements with respect to benefit accrual, vesting of
benefits, nondiscrimination on the basis of age, and other plan characteristics.
An amendment to the tax code permitting in-service distributions at the early
retirement age would alter incentives to work or retire, as well as how much to work
and for whom to work. Consequently, it would affect both labor force participation
and hours worked among affected employees. The net effect of these changes in labor
force participation and hours worked would be almost impossible to predict. Some
workers who would otherwise have fully retired before the plan’s normal retirement
age would choose instead to continue working for their current employer on a
reduced schedule, because they would be able to take partial pension distributions
while still employed. This would tend to increase labor force participation. Other
workers who would have taken early retirement and then sought other employment
might choose instead to remain with their current employer on a reduced schedule.
The effect of this change in behavior on hours worked might be close to neutral,
depending on the wages available from alternative employment and the income
received from pension distributions. Finally, some employees who otherwise would
have chosen to continue working until reaching the plan’s normal retirement age
might instead reduce their work schedule and supplement their earnings with partial
distributions from the retirement plan. This would tend to reduce total hours worked.
Distributions from 401(k) plans. Coverage under defined contribution
plans, such as those authorized under section 401(k) of the Internal Revenue Code,
grew rapidly during the 1990s. Between 1991 and 1997, the proportion of workers
in medium and large private-sector establishments (those with 100 or more
employees) who participated in defined contribution retirement plans increased from
49% to 57%.21 The trend among small establishments (those with fewer than 100
employees) was similar. In 1996, 38% of employees in small private establishments
participated in defined contribution retirement plans, compared with 28% in 1990.22
In-service distributions from defined contribution plans that occur before the
participant reaches age 59½ are subject to a 10% excise tax in addition to ordinary
income taxes. Distributions may begin as early as age 55, however, if the employee
separates from his employer under an early retirement plan. Distributions in the form
21 Employee Benefits in Medium and Large Private Establishments, Bulletin 2422 (Bureau
of Labor Statistics, May 1993) and Employee Benefits in Medium and Large Private
Establishments, Bulletin 2517 (Bureau of Labor Statistics, September 1999).
22 Employee Benefits in Small Private Establishments, Bulletin 2388 (Bureau of Labor
Statistics, September 1991) table 1, page 5; and Employee Benefits in Small Private
Establishments, Bulletin 2507 (Bureau of Labor Statistics, April 1999), table 1, page 5.

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CRS-19
of a lifelong annuity are permissible at any age. Some advocates of phased retirement
arrangements have suggested that the minimum age for in-service distributions from
defined contribution plans should be lowered to age 55.23 The effect on labor force
participation of such a change in tax policy would likely be very similar to the effect
of allowing in-service distributions from a defined benefit plan at the plan’s early
retirement age. Some workers who might have fully retired from the labor force
earlier than age 59½, so that they could begin taking distributions from the plan,
would be induced to work longer. Others who would have taken early retirement and
then sought work elsewhere would remain with their current employers, because they
would be able to combine wages from part-time work with distributions from the
retirement plan. Finally, some employees who otherwise would have chosen to
continue working until age 59½ or later would reduce their work schedules and
supplement their earnings with distributions from the retirement plan.
H.R. 4837 and S. 2853 of the 106th Congress, both titled the Phased Retirement
Liberalization Act would have amended the Internal Revenue Code to permit in-
service (preretirement) distributions from a defined benefit or defined contribution
plan when the participant has either reached the plan’s normal retirement age, reached
age 59½, or has completed 30 years of service, whichever comes first. Currently, such
distributions cannot be made from a defined benefit plan before the participant has
reached the plan’s normal retirement age or from a defined contribution plan before
age 59½.
Flexibility versus nondiscrimination. Pension plans that provide benefits
mainly to the owners of a firm or to highly paid employees do not qualify for
favorable tax treatment under the Internal Revenue Code.24 The tax code defines
specific tests that must be applied to a pension plan to determine whether or not it
meets these requirements for nondiscrimination in favor of highly compensated
employees.25 These tests consist mainly of mathematical computations of the
percentage of plan participants who are highly compensated employees and the
23 It might also seem reasonable that if legislation were passed to allow in-service
distributions from an employer’s defined benefit plan at the plan’s early retirement age, then
distributions from the employer’s defined contribution plan should be permitted at the same
age (perhaps with a lower limit of 55). However, such a policy would suffer from at least two
drawbacks. First, the minimum age for in-service distributions from defined contribution
plans, which is now the same for all such plans, would differ from firm to firm, thus making
the retirement planning process even more confusing for workers and their families. Second,
it would be administratively difficult—and in some cases, perhaps, impossible—to tie the
minimum age for in-service distributions in the defined contribution plan to the early
retirement age specified in the employer’s defined benefit plan.
24 26 U.S.C. § 401(a)(4) states that a qualified pension trust is one in which “the
contributions or benefits provided under the plan do not discriminate in favor of highly
compensated employees (within the meaning of section 414(q)).” The term “highly-
compensated employee” is defined at 26 U.S.C. § 414(q) as a person who is at least a 5-
percent owner of the firm or is paid compensation of at least $85,000 and is among the top
20 percent of employees in the firm with respect to compensation.
25 26 U.S.C. § 410(b).

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percentage of contributions to the plan or benefits paid by the plan that are made on
behalf of highly compensated employees.
It is a relatively common practice for firms to establish separate nonqualified
retirement plans for the company owners or senior executives. However, if a plan that
was originally established as a tax-qualified plan is subsequently found to discriminate
in terms of coverage or benefits in favor of highly compensated employees, it could
lose its tax-qualified status. In most of these cases, the only viable options available
to the plan sponsor would be to remove the discriminatory provisions of the plan or
terminate the plan. Covering rank-and-file employees under a nonqualified plan
usually would not be practical because of the substantial tax liability that would result
for both the plan sponsor and plan participants.
In general, employers would prefer the flexibility to offer phased retirement to
some—but not all—pension plan participants. Some analysts have suggested that,
even if Congress were to amend the Internal Revenue Code to allow in-service
distributions from pension plans before the normal retirement age, it would do little
to spur the growth of phased retirement unless employers also were permitted to limit
eligibility for this benefit to employees with particular skills or abilities. However, a
phased retirement option that offered in-service distributions only to managerial or
professional employees could result in the plan failing to meet the nondiscrimination
requirements of the Internal Revenue Code by altering the distribution of benefits
among plan participants in a way that favored the highly compensated group.26 In
contrast, a phased retirement option that offered in-service distributions to all
participants meeting specified age and length-of-service requirements would not
conflict with the IRC anti-discrimination requirements.
Section 410(b) of the Internal Revenue Code prescribes specific tests for
determining if a pension plan’s coverage or benefits discriminate in favor of highly
compensated employees. These tests are mathematical calculations that reveal the
proportion of plan participants who are highly compensated employees and the
proportion of contributions or benefits that are made on behalf of highly compensated
employees. Some plan sponsors who would like to implement phased retirement
programs would prefer to have these tests for nondiscrimination replaced by the more
subjective method of testing that was in effect until 1994, which was based on the
“facts and circumstances” surrounding the operation of the plan. In some cases, a
phased retirement option that fails the mathematical tests for nondiscrimination that
are required under current law might not fail if it could be tested under the earlier
(pre-1994) approach.
On May 2, 2001, the House of Representatives passed H.R. 10, the
Comprehensive Retirement Security and Pension Reform Act of 2001. Among many
other pension reforms, this bill would have authorized the Secretary of the Treasury
26 Employers whose approach to phased retirement does not affect eligibility for pension
distributions are less likely to violate the IRC nondiscrimination provisions. Examples would
be phased retirement plans that involve only reductions in hours of work, job sharing,
transfers to other duties, or that are based on rehiring retired former employees. These are
conditions of employment rather than characteristics of the pension plan.

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in some cases to employ a test based on facts and circumstances in testing for
nondiscrimination. A similar provision was included in S. 742, the Retirement
Security and Savings Act of 2001. While many provisions of these two bills were
incorporated in H.R. 1836, the Economic Growth and Tax Relief Act of 2001 (P.L.
107-16), the sections dealing with flexibility in nondiscrimination testing were not
included in the final version.
Policy Responses to an Aging Population
In a free market economy, individual employers decide how much compensation
to offer and whether that compensation will include benefits like pensions and health
insurance. Employees decide whether they will work, where they will work, and how
much they will work at least in part on the basis of the compensation offered by
prospective employers. The terms of these labor market transactions can be
influenced through direct regulation—such as ERISA, the Age Discrimination in
Employment Act, and minimum wage legislation—through social insurance
programs—such as Social Security and Medicare—and through the financial
incentives created for both employers and employees by the Internal Revenue Code.
Social insurance programs and the tax code differ from direct regulation in that their
primary objectives are, respectively, to provide benefits to individuals and to collect
revenue for government operations. Nevertheless, both Social Security and the tax
code affect the labor market behavior of employers and workers by establishing
financial rewards or sanctions for certain actions. Given that the aging of the
population and the impending retirement of the baby-boom generation are likely to
affect the supply of labor and the productive capacity of the economy, both the Social
Security Act and the tax code may be amended to provide incentives for people to
work longer.
The rules that govern eligibility for Social Security benefits can have a substantial
influence on workers’ decisions about when to retire. Empirical evidence indicates
that more retirements occur at age 62—the earliest age at which reduced retired
worker benefits are available—and age 65—the earliest age at which full retired
worker benefits are available—than at other ages. The “earnings test,” which reduces
benefits for some Social Security beneficiaries who work, and the “delayed retirement
credit,” which increases benefits for workers who defer their benefits until after age
65, also may influence one’s decision to work (and how much to work) after
becoming eligible for Social Security. At times, each of these provisions has been
amended to provide greater incentives for individuals who are eligible for Social
Security to continue working.
The Social Security Amendments of 1983 mandated a gradual increase in the age
at which individuals are eligible for full retirement benefits from its current level of 65
years to 67 years in 2022. As a result, the actuarial reduction in Social Security
benefits for those who retire at 62 will increase from 20% to 30%, creating a financial
incentive to delay receipt of Social Security and continue working. The 1983
amendments also provided for an increase in the delayed retirement credit for workers
who defer their application for Social Security benefits until after age 65. In 1977,
Congress set the DRC at 3 percent, meaning that benefits were permanently increased
by 3% for each year that a worker delayed receipt of Social Security beyond age 65.
The 1983 amendments provided for a gradual increase in the DRC beginning in 1990.

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When fully phased-in, the DRC will be 8% per year for people who turn age 65 in
2008 or later, which will result in a DRC that is close to being “actuarially fair” for
the average worker.
In April of 2000, the Social Security Act was amended to repeal the earnings test
for beneficiaries who are 65 or older. As a result of Public Law 106–182, the earnings
test has been eliminated for people at the full retirement age (currently 65 years) or
older, effective January 1, 2000. The earnings test remains in effect, however, for
beneficiaries who are under the full retirement age. In 2001, Social Security recipients
under age 65 have their benefits reduced by $1 for each $2 of earnings in excess of
$10,680.
Some employers are calling on Congress to amend the tax code to allow
employers greater flexibility in designing phased retirement programs for their
employees. One proposed amendment would permit pension in-service distributions
to employees who have not reached the pension plan’s normal retirement age. This,
employers say, would allow them to offer older employees the chance to cut back
their work schedules to part time, while supplementing their reduced salaries with
pension income. Under current law, such an arrangement would be permissible only
for plan participants who have reached the plan’s normal retirement age.
Allowing in-service pension distributions to begin when a participant has reached
the earliest of a plan’s normal retirement age, age 59½ , or the completion of 30 years
of service might promote continued employment among older workers who—if given
the choice between working full time and taking early retirement—would otherwise
have chosen to retire. A more complicated issue is whether employers should be
permitted to offer such an option only to specific categories of workers.

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References:
Committee for Economic Development, Research and Policy Committee. New
Opportunities for Older Workers. Committee for Economic Development, 2100
L Street NW, Washington DC 20036 (1999).
Fullerton, Howard N. Labor Force Projections to 2008: Steady Growth and
Changing Composition. Monthly Labor Review, v. 122, no. 11, November 1999.
Graig, Laurene A. and Valerie Paganelli. Phased Retirement: Reshaping the End of
Work. Compensation and Benefits Management, v. 16, no. 2, spring 2000.
Herz, Diane E. Work After Early Retirement: An Increasing Trend Among Men.
Monthly Labor Review, v. 118, no. 4, April 1995.
Paganelli, Valerie and Jim Isbell. Aging Boomers Prompt Alternative Workplace
Arrangements. The Seattle Post-Intelligencer, March 5, 2000.
Quinn, Joseph F. Retirement Patterns and Bridge Jobs in the 1990s. EBRI Issue
Brief Number 206. Employee Benefit Research Institute, Washington, DC.
February 1999.
Social Security Advisory Board. Implications of Raising the Social Security
Retirement Age, October 1998. [http://www.ssab.gov/Report8.html]
U.S. Congress. Congressional Budget Office. Raising the Earliest Eligibility Age
for Social Security Benefits. CBO Paper. January 1999.
U.S. Library of Congress. Congressional Research Service. CRS Report RS20423,
Social Security: Fact Sheet on Changes in the Retirement Age, by Geoffrey C.
Kollmann.
U.S. Library of Congress. Congressional Research Service. CRS Report 98-863,
Social Security Reform: The Potential Impact of Changing the Eligibility Age
and the Earnings Test on the Decision to Retire, by Gail McCallion.
U.S. General Accounting Office. Social Security Reform: Implications of Raising the
Retirement Age. GAO/HEHS-99-112. August 1999.

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