Order Code RL30629
CRS Report for Congress
Received through the CRS Web
Older Workers: Employment
and Retirement Trends
Updated October 8, 2003
Patrick J. Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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 large 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 55 and 64 will grow by
about 17.8 million between 2000 and 2020, the number of people who are 25 to 54
years old will not grow at all. This trend could have important effects on wage rates
and economic growth because the labor force participation rate (the percentage of
people either employed or unemployed but looking for work) begins to fall steadily
after age 55. In 2002, 91% of men ages 25 to 54 and 76% of women in this age
group participated in the labor force. In contrast, just 69% men ages 55 to 64 and
55% of women ages 55 to 64 were either working or looking for work in 2002.
Recent employment trends among older Americans vary by age and sex. Census
Bureau data indicate that from 1995 to 2003, employment remained steady among
men 55 to 61 years old and rose among women in this age group. Of men ages 55
to 61, 71% were employed in 2003, compared with 72% in 1995. Employment
among women ages 55 to 61 rose from 54% in 1995 to 61% in 2003. Among both
men and women ages 62 to 64, employment rose throughout the period. About 47%
of men ages 62 to 64 were employed in 2003, compared with 42% in 1995. Among
women 62 to 64, employment increased from 31% in 1995 to 37% in 2002.
Factors influencing the rate of employment among persons aged 55 years and
older, include the rate of economic growth, eligibility for Social Security benefits,
and both the prevalence and design of employer-sponsored pensions. P.L. 106-182,
enacted on April 7, 2000, eliminated the Social Security earnings test for people at
or above the “full retirement age” (currently 65 years and 2 months), effective
January 1, 2000. Labor force participation among people 55 and older might also be
affected by the trend away from defined-benefit pension plans, which often include
early-retirement subsidies and pay a guaranteed benefit for life, toward defined
contribution plans, which are age-neutral and often pay a lump sum at retirement.
As more workers reach retirement age over the next several years, employers
may try to induce some to remain on the job, perhaps on a part-time schedule. This
is sometimes referred to as “phased retirement.” Several approaches to phased
retirement – 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 would like to
pay partial pension distributions to workers at the plan’s early retirement age and to
limit participation to workers in particular occupational categories.
However,
targeted participation could cause a pension plan to violate the provisions of the tax
code that prohibit retirement plans from discriminating in favor of highly-
compensated employees.

Contents
The Aging of the Labor Force: 2000 to 2020 . . . . . . . . . . . . . . . . . . . . . . . . 2
Long-Term Trends in Labor Force Participation Rates . . . . . . . . . . . . . . . . . 3
Recent Employment Trends Among People Age 55 and Older . . . . . . . . . . . 6
Retirement Income Among Older Workers . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Work by Recipients of Retirement Income . . . . . . . . . . . . . . . . . . . . . 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
List of Tables
Table 1. U.S. Population Age 25 and Older, 2000 and 2020 . . . . . . . . . . . . . . . . 2
Table 2. Labor Force Participation Rates, 1950 to 2010 . . . . . . . . . . . . . . . . . . . . 5
Table 3. Employment of Men Age 55 and Older, 1995 to 2003 . . . . . . . . . . . . . . 7
Table 4. Employment of Women Age 55 and Older, 1995 to 2003 . . . . . . . . . . . 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 year . . . . . . . . . . . 13
Table 8. Social Security Retired Worker Beneficiaries, by year . . . . . . . . . . . . . 14

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 2020 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

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of data from the Social Security Administration on the proportion of workers who
claim retired-worker benefits before the full retirement age (currently 65 years and
2 months). 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 2020
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.
The data presented in Table 1 show how the age profile of the U.S. population
will change between 2000 and 2020. According to estimates prepared by the U.S.
Bureau of the Census, there were 182 million Americans age 25 or older in 2000. By
2020, this number will increase by almost 20% to 218 million. However, the number
of people ages 25 to 54 – the ages when labor force participation rates are at their
highest levels – will fall slightly. At the same time, the number of people between
the ages of 55 and 64 is projected to increase by 17.8 million, or more than 73%. In
other words, while the number of people between the ages of 25 and 64 is projected
to increase by about 17.5 million between 2000 and 2020, the entire increase is
projected to occur among people between the ages of 55 and 64.
Table 1. U.S. Population Age 25 and Older, 2000 and 2020
(Numbers in thousands)
Age groups
Year
25 to 34
35 to 44
45 to 54
55 to 64
65 and up
Total
2000
Male
20,121
22,448
18,498
11,646
14,410
87,123
Female
19,772
22,701
19,181
12,630
20,582
94,866
Total
39,893
45,149
37,679
24,276
34,992
181,989
2020
Male
21,271
20,146
18,991
20,315
23,548
104,271
Female
21,523
20,564
19,846
21,792
30,185
113,910
Total
42,794
40,710
38,837
42,107
53,733
218,181
Change
2,901
-4,439
1,158
17,831
18,741
36,192
% change
7.3%
-9.8%
3.1%
73.5%
53.6%
19.9%
Source: U.S. Department of Commerce, Bureau of the Census.
1 U.S. Bureau of the Census, “Resident Population Projections by Sex and Age,” reproduced
in the Statistical Abstract of the United States: 2001, table 13, page 15.

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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 sex.
Moreover, labor force participation rates have changed over time as people have
responded to economic developments and as the norms and values of society have
changed with respect to the employment of women and the retirement of older
workers.
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 paramount, 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 has become the rule rather than the exception it was 30 or 40
years ago. Finally, with near universal coverage by Social Security and about half
of all workers participating in an employer-sponsored pension or retirement savings
plan, many workers now 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
– in the 1950s, 5 out of 6 men ages 55 to 64 participated in the labor force – that is,
they were either working or actively looking for work.3 (See Table 2). By 2000,
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, the labor force participation rate among men ages 55 to 64
years has remained in the range of 66% to 68%, while the rate for those ages 65 and
older has increased modestly, from 16% to 18%.
From 1950 to the present, women’s labor force participation has steadily
increased. Among women ages 55 to 64, the rate rose from 27% in 1950 to 45% in
1990, and to 55% in 2002. Among women 65 and older, however, the labor force
participation rate has changed very little over the last 50 years, remaining between
8% and 10% over most of the 1950–2002 period.
The stability of labor force participation rates among men ages 55 and older
since the mid-1980s is likely attributable to several factors. First, Social Security
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.
3 Labor force participation rates are annual averages from the monthly CPS data. 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.

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now covers virtually all private-sector nonfarm workers 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 an employer-
sponsored retirement plan in 2002, 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 Department of Labor’s National
Compensation Survey
, of employees in the private sector who participated in a
defined benefit pension in 2000, 23% were covered by plans that did not allow early
retirement, and 67% were in plans that specified a minimum age requirement for
early retirement benefits. Of workers whose pensions specified a minimum age for
early retirement, 79% of were covered by plans that had a minimum retirement age
of 55 years or older.5
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 U.S. Department of Labor, National Compensation Survey: Employee Benefits in
Private Industry in the United States, 2000
, Bulletin 2555 (January 2003), table 70, page 63.

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Table 2. Labor Force Participation Rates, 1950 to 2010
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%
2001
91.3%
68.1%
17.7%
2002
91.0%
69.2%
17.8%
*2010
90.9%
67.0%
19.5%
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%
2001
76.4%
53.0%
9.7%
2002
76.0%
55.1%
9.9%
*2010
80.4%
55.2%
11.1%
Source: U.S. Department of Labor, Bureau of Labor Statistics.
*Estimated by the Bureau of Labor Statistics.

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Recent Employment Trends Among People Age 55 and Older
Factors that influence the rate of employment among persons aged 55 years and
older include the rate of economic growth, eligibility for Social Security benefits, and
both the prevalence and design of employer-sponsored pensions.
P.L. 106-182,
enacted on April 7, 2000, eliminated the Social Security earnings test for people at
or above the “full retirement age” (currently 65), effective January 1, 2000.6 Labor
force participation among people 55 and older might also be affected by the trend
away from defined-benefit pension plans, which often include early-retirement
subsidies and pay a guaranteed benefit for life, toward defined contribution plans,
which are age-neutral in design and often pay out a single lump sum at retirement.
The Employee Benefits Survey 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%, while the proportion of
employees who were covered by defined-contribution plans rose from 49% to 57%.7
Data collected by the Census Bureau indicate that from 1995 to 2003,
employment remained generally steady among men 55 to 61 years old and rose
among women in this age group.8 (See Table 3 and Table 4). Of men ages 55 to 61,
71% were employed in 2003, compared with 72% in 1995. Employment among
women ages 55 to 61 rose from 54% in 1995 to 61% in 2003. Among both men and
women ages 62 to 64, employment rose steadily throughout the period. About 47%
of men were employed in 2003, compared with 42% in 1995. Among women ages
62 to 64, employment increased from 31% in 1995 to 37% in 2003.
Among men 65 to 69 years old, an average of 26.4% were employed each year
from 1995 through 1999. From 2000 to 2003, an average of 30.7% of men in this
age group were employed. Among women ages 65 to 69, the increase in employment
since 1995 has been smaller. An average of 17.9% of women in this age group were
employed in each year from 1995 through 1999. From 2000 through 2003, the
average rate of employment among women 65 to 69 years old was 20.1%. Among
both men and women age 70 and older, rates of employment changed little from 1995
through 2002. During this period, the employment rate averaged 11.5% among men
70 and older and 5.6% among women age 70 and older.
6 Beneficiaries under age 65 have their Social Security benefits reduced if their earnings
exceed the threshold specified in law. In 2003 a Social Security recipient under age 65 has
his or her benefits cut by $1.00 for each $2.00 earned in excess of $11,520.
7 See Employee Benefits in Medium and Large Private Establishments, 1993, Bulletin 2456
(BLS, November 1994) table 1, page 8; and Employee Benefits in Medium and Large
Private Establishments, 1997
, Bulletin 2517 (BLS, September 1999) table 1, page 5 .
8 The labor force participation rates discussed in the previous section were based on annual
averages of monthly data. The employment data in this section are from the March
supplement to the CPS, and show employment in the week prior to the 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.

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Table 3. Employment of Men Age 55 and Older, 1995 to 2003
Number
Employment:
Population
employed
Percent
Age in March
(000s)
(000s)
employed
full-time
part-time
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%
2002
9,307
6,608
71.0%
91.9%
8.1%
2003
9,870
7,050
71.4%
92.0%
8.0%
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%
2002
3,059
1,491
48.7%
78.1%
21.9%
2003
3,279
1,539
46.9%
79.7%
20.3%
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%
2002
4,451
1,358
30.5%
60.0%
40.0%
2003
4,318
1,385
32.1%
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%
2002
9,785
1,141
11.7%
51.1%
48.9%
2003
10,210
1,209
11.8%
54.2%
45.8%
Source: CRS analysis of the annual March supplement to the Current Population Survey.

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Table 4. Employment of Women Age 55 and Older, 1995 to 2003
Number
Employment:
Population
employed
Percent
Age in March
(000s)
(000s)
employed
full-time
part-time
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%
2002
10,023
5,881
58.7%
76.7%
23.3%
2003
10,677
6,529
61.2%
78.2%
21.8%
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%
2002
3,479
1,306
37.6%
61.9%
38.1%
2003
3,552
1,307
36.8%
62.1%
37.9%
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%
2002
5,146
982
19.1%
49.6%
50.4%
2003
5,121
1,152
22.5%
51.7%
48.3%
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%
2002
14,388
850
5.9%
38.0%
62.0%
2003
14,585
896
6.1%
40.7%
59.3%
Source: CRS analysis of the annual March supplement to the Current Population Survey.

CRS-9
Retirement Income Among Older Workers
An important consideration for anyone who is deciding whether to retire is
whether the 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 2002, only 18% of men ages 55 to 64 received
income from a pension or other retirement plan; among those 65 years and older,
however, 44% had income from pensions or retirement savings plans. The patterns
among women are similar: only 11% of 55- to 64-year-old women received income
from pensions or retirement savings plans in 2002, while 27% of those aged 65 years
and older received such income.
The 18% of men ages 55 to 64 who were receiving pension income represents
a decline from 23% in 1994. Over the same period, the proportion of men ages 65
and older receiving pension income fell from 47% to 44%. The proportion of women
ages 55 to 64 with pension income was more stable, at 11% to 12% throughout the
1994–2001 period. Among women 65 and older, 27% received income from
pensions and retirement savings plans in 2002, about one percentage point less than
in 1994.
To study the relationship between the employment rates shown in Tables 3 and
4 and the data on receipt of pension distributions shown in Table 5, we grouped the
men and women into two age groups, 55 to 64 and 65 and older and calculated the
correlation coefficient between employment and receipt of pension income. Among
men, there is a strong negative correlation between receipt of pension income and
employment. Over the period from 1995 to 2003, the correlation between receipt of
pension income and current employment was -0.75 for men 55 to 64 years old and
-0.74 for men 65 and older. These statistics no not tell us, however, why employment
has risen among men 55 and older while the receipt of pension income has fallen.
One possible explanation is that each year a smaller percentage of workers are
covered by defined benefit plans, which often have generous early retirement
subsidies and pay a monthly benefit that is guaranteed for life. Workers whose main
retirement plan is a defined contribution plan (such as a 401(k)) might be choosing
to delay retirement in order to build up larger account balances – or in the wake of
recent declines in the stock market – to make up for investment losses.
Among women, employment rates and the receipt of pension income are not
strongly correlated (0.16 for women 55-64 and 0.20 for women 65 and older). This
is partly due to the fact that the rate of labor force participation among women under
age 65 has been rising steadily over many years. Thus, one reason that the percentage
of all women 55 and older who receive pension income has not fallen along with that
of men is that an increasing percentage of women have earned retirement benefits
through their own employment. This could mask a decline in the percentage of
working women who are (or will be) eligible to receive pension distributions.

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%
2002
12,366
2,371
19.2%
14,235
6,276
44.1%
2003
13,149
2,372
18.0%
14,527
6,414
44.2%
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%
2002
13,501
1,525
11.3%
19,535
5,412
27.7%
2003
14,229
1,572
11.0%
19,706
5,379
27.3%
Source: CRS analysis of the March supplement to the Current Population Survey.
Notes: Retirement plans may include a traditional pension, a retirement savings plan, or both.
The income year is the year when the income was received, which is the calendar
year preceding the March CPS interview.
Work by Recipients of Retirement Income. The data displayed in Table
5 show the number and percentage of people 55 and older who received pensions or
distributions from retirement accounts. The data in Table 6 show that, among men
ages 55 to 64 who received income from a pension or retirement savings plan during
2002, 34.9% were employed either full or part time in March 2003 – a decrease of
3.4 percentage points from the 38.3% who were employed in 2002. Relatively few
men age 65 or older who receive income from pensions or retirement savings plans
also engage in paid employment: only 10% to 12% were employed, on average, over
the 1995–2003 period. Women who receive pension income are less likely than men
to be employed. Among 55- to 64-year–old women who received income from a
pension or retirement savings plan in 2002, 33.7% were employed in March 2003,
an increase of 4.9 percentage points from the level of March 2002. The average rate
of employment for these women from 1995 to 2003 was 30.3%. Among women age
65 or older who received income from a pension or retirement savings plan, only 6%
to 8%, on average, were employed during the 1995–2003 period.

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%
2002
2,371
907
38.3%
6,276
739
11.8%
2003
2,372
827
34.9%
6,414
745
11.6%
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%
2002
1,525
439
28.8%
5,412
393
7.3%
2003
1,572
530
33.7%
5,379
425
8.0%
Source: CRS analysis of the March 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 years and 2 months. 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 be paid if not for the early retirement
reduction.

CRS-12
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 2001 applied for benefits before age 65. The percentage of awards to
women age 65 and older increased in 1997 and 1998. This was the result of 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.
In 2000, the distribution of benefit awards to retired workers shifted
substantially, with a higher-than-average percentage of new benefits awarded to
persons 65 and older. This was mainly attributable to the repeal of the Social
Security earnings test for workers who are at or above the Social Security normal
retirement age. Prior to 2000, the earnings test reduced the Social Security benefits
of recipients under age 70 whose earnings exceeded specific thresholds. P.L. 106-
182 eliminated the earnings test for people at the full retirement age (currently 65)
or older, effective January 1, 2000.9 The earnings test now applies only to Social
Security beneficiaries who are under the normal retirement age. With the repeal of
the earnings test for people age 65 and older, workers who had deferred receipt of
Social Security benefits because their earnings would have resulted in a benefit
reduction had an incentive to apply for Social Security benefits. Workers who delay
receipt of benefits until they are beyond the full retirement age remain eligible for the
delayed retirement credit, which permanently increases their benefits, thus creating
an incentive for older workers to remain in the labor force.
9 In 2003 a Social Security recipient under age 65 can earn up to $11,520 without having
his or her benefit reduced, but benefits are cut by $1.00 for each $2.00 earned in excess of
that amount.

CRS-13
Table 7. Social Security Retired Worker Benefit Awards, by year
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
637,100
74.4%
158,300
18.5%
60,800
7.1%
1991
656,000
73.7%
171,400
19.3%
62,300
7.0%
1992
661,000
74.7%
164,500
18.6%
58,900
6.7%
1993
664,500
75.8%
158,100
18.0%
54,400
6.2%
1994
625,800
76.5%
144,600
17.7%
47,100
5.8%
1995
614,700
76.1%
144,400
17.9%
48,700
6.0%
1996
597,100
76.3%
133,700
17.1%
51,300
6.6%
1997
604,500
76.0%
134,900
17.0%
56,400
7.0%
1998
605,500
76.2%
133,800
16.8%
55,200
7.0%
1999
623,800
75.9%
139,200
16.9%
58,700
7.2%
2000
637,000
64.5%
226,000
22.9%
124,800
12.6%
2001
650,000
75.1%
179,000
20.7%
36,700
4.2%
62 to 64
65
Over 65
Percentage
Percentage
Percentage
Women
Awards
of all awards
Awards
of all awards
Awards
of all awards
1990
494,800
80.0%
85,900
13.9%
37,700
6.1%
1991
497,800
79.3%
95,200
15.2%
34,600
5.5%
1992
519,500
80.6%
88,800
13.8%
36,300
5.6%
1993
514,400
80.1%
95,900
14.9%
32,100
5.0%
1994
513,700
81.9%
81,700
13.0%
31,600
5.0%
1995
492,900
79.9%
87,800
14.2%
36,300
5.9%
1996
496,700
80.9%
85,300
13.9%
32,000
5.2%
*1997
495,300
67.2%
85,300
11.6%
156,400
21.2%
*1998
506,100
76.4%
90,700
13.7%
65,900
9.9%
1999
524,800
79.1%
92,000
13.9%
46,400
7.0%
2000
574,700
74.5%
118,700
15.4%
77,700
10.1%
2001
556,200
78.5%
102,000
14.4%
50,100
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. The data presented in Table 8 show that in 2001 the proportion of men
ages 62 to 64 who were receiving benefits was three percentage points lower than in
1995. This decline coincided with the rising employment rates among men in this age
group. The decline in the percentage of 62- to 64-year-old men receiving Social

CRS-14
Security benefits during this period could have several causes including, general
business cycle trends, the move away from defined benefit plans to defined
contribution plans among employers in the private sector, and the desire among
workers under age 65 to remain covered under an employer-sponsored health
insurance plan until they become eligible to participate in Medicare at age 65. Among
women ages 62 to 64, the proportion who were receiving Social Security benefits
rose steadily from 1990 to 2001, rising from 55.6% in 1990 to 64.5% in 2001. This
trend is consistent with the long-term increase in the labor force participation rate
among women, and the growing proportion of women who are eligible for Social
Security benefits based on their own earnings histories rather than as spouses of
retired workers.
Table 8. Social Security Retired Worker Beneficiaries, by year
(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%
2000
1,330
42.7%
4,076
90.8%
9,366
90.3%
2001
1,333
41.6%
4,125
91.4%
9,473
90.3%
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%
2000
1,223
36.1%
3,209
63.1%
9,302
59.7%
2001
1,237
35.9%
3,284
64.5%
9,390
60.0%
Source: Annual Statistical Supplement to the Social Security Bulletin, various years.

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 process of retiring often occurs gradually over several 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. The data in
Table 6, for example, show that 35% of men and 34% of women aged 55 to 64 who
received income from private pension plans in 2002 were employed in March 2003.
As members of the baby-boom generation begin to retire, 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 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.”10
Advocates of phased retirement contend that many people 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.11 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.12
Current Approaches to Phased Retirement.
Recent surveys of
employers indicate that few have adopted formal phased retirement programs. A
study conducted by Watson Wyatt Worldwide in 2000 found that 16% of the 586
firms participating in the survey offered some form of phased retirement to their
employees.13 Of 232 employers surveyed by William M. Mercer, Inc. in 2001, 23%
10 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.
11 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.
12 See, for example, New Opportunities for Older Workers, issued by the Committee for
Economic Development, Washington, DC, 1999.
13 Laurene A. Graig and Valerie Paganelli, “Phased Retirement: Reshaping the End of
Work,” Compensation and Benefits Management, vol. 16 no. 2 (Spring 2000).

CRS-16
reported that they had adopted formal policies to accommodate phased retirement.14
Although the firms participating in these surveys might 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.
Employers have devised a number of strategies to retain the services of valued
employees who are eligible for retirement and who might be lost to the firm if the
only options available were full-time employment or full-time retirement. Some
firms allow retirement-eligible employees to work fewer days per week or fewer
hours per day. Some also permit employees to reduce their workload through job-
sharing. Firms will sometimes rehire retired employees on a part-time or temporary
basis, or bring them back as contractors rather than as employees of the firm. Note
that two of these 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.
Phased Retirement and Pension Distributions. Unless an employee has
reached the pension plan’s normal retirement age, 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.15 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.16 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.17 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. In
14 Anna M. Rappaport, “Employer Strategies for Changing Workforce: Phased Retirement
and Other Options,” Benefits Quarterly, volume 17 (4), Fourth Quarter 2001.
15 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.
16 Code of Federal Regulations, § 1.401-1(b)(1)(i).
17 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).

CRS-17
order to retain the plan’s tax-qualified status, however, the employer may be required
to demonstrate to the Internal Revenue Service that “both a bona fide retirement (or
other termination of employment) and a legitimate rehire have occurred.”18
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. 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 employer’s point of view,
there would be at least two potential drawbacks to such an approach. First, 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. Second, 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).19 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 2002, about 2.5 million workers in the United States received pension
payments from a former employer. More than 1.3 million of these workers were
under age 65. (See Table 6.) Current law allows an individual who has separated
from a 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 Internal Revenue Code. However, plan sponsors
currently have the option of setting the normal retirement age at any age not greater
18 Vivian Fields and Robert Hutchens, “Regulatory Obstacles to Phased Retirement in the
For-Profit Sector” Benefits Quarterly, volume 18 (3), Third Quarter 2002.
19 Requirements for qualification of pension plans are defined at 26 U.S.C. § 401(a).

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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 to permit 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 older employees. The net effect of these changes in labor
force participation and hours worked would be almost impossible to predict. Some
workers who otherwise would 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%.20 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 1990.21
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. 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 from
59½.22 The effect on labor force participation of such a change in tax policy would
20 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).
21 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.
22
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
(continued...)

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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. Neither bill has been introduced in the 108th
Congress.
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.23 The tax code defines
specific tests that must be applied to a pension plan to determine whether or not it
discriminates in favor of highly compensated employees in terms of either benefits
or employer contributions.24 These tests consist mainly of mathematical computations
of the percentage of plan participants who are highly compensated employees and the
percentage of contributions to the plan or benefits paid by the plan that are made on
behalf of highly compensated employees.
22 (...continued)
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.
23
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.
24 26 U.S.C. § 410(b).

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It is a relatively common practice for firms to establish separate nonqualified
retirement plans for company owners and senior executives. However, if a plan that
was originally established as a tax-qualified plan were 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.25 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 14, 2003, the House of Representatives passed H.R. 1000, the Pension
Security Act of 2003 by a vote of 271-157. Among many other pension reforms, this
bill would have authorized the Secretary of the Treasury in some cases to employ a
test based on facts and circumstances in testing for nondiscrimination. The bill has
been referred to the Senate Committee on Health, Education, Labor, and Pensions.
25 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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Policy Responses to an Aging Population
The federal government influences employers’ decisions about whether to offer
benefits like pensions and health insurance through direct regulation, such as ERISA
and the Age Discrimination in Employment Act; 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. In turn, workers’
decisions about where they will work and how much they will work are directly
affected by employers’ decisions about the amount and type of compensation that
they offer to employees.
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
(DRC) 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. 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 P.L. 106–182, the earnings
test was eliminated for people at the full retirement age (currently 65 years) or older,

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effective January 1, 2000. The earnings test remains in effect, however, for
beneficiaries who are under the full retirement age. In 2003, Social Security
recipients under age 65 have their benefits reduced by $1 for each $2 of earnings in
excess of $11,520.
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.