Order Code RL30629
CRS Report for Congress
Received through the CRS Web
Older Workers: Employment
and Retirement Trends
Updated September 16, 2004
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 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 11 million between 2005 and 2025, the number of people who are 25 to 54
years old will grow by only 5 million. This trend could affect economic growth
because labor force participation begins to fall after age 55. In 2003, 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 57% of women ages 55 to 64 were either
working or looking for work in 2003.
Recent Census Bureau data show men and women working longer. From 1995
to 2004, while there was little change in the rate of employment among men age 55
to 61, the percentage of 62- to 64-year-old men employed in March of each year rose
from 42% to 48%. The percentage of 65- to 69-year-old men who were employed
increased from 27% to 31% during the same period. Among women age 55 to 61,
employment increased from 54% in 1995 to 60% in 2004. At the same time, the
percentage of 62- to 64-year-old women employed in March of each year rose from
31% to 38% and the percentage of 65- to 69-year-old women who were employed
increased from 18% to 25%.
The rate of employment among persons age 55 and older is influenced by
general economic conditions, eligibility for Social Security benefits, and the
prevalence and design of employer-sponsored pensions. Labor force participation
among people 55 and older could, for example, 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. Also, the repeal in 2000 of the Social
Security earnings test for individuals at or above the “full retirement age” (65 years
and 4 months in 2004), could induce more people to work beyond age 65.
As more workers reach retirement age 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 be allowed to limit
participation in the phased retirement arrangement 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.

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Contents
The Aging of the Labor Force: 2005 to 2025 . . . . . . . . . . . . . . . . . . . . . . . . 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
Employment among 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” . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Current Approaches to Phased Retirement . . . . . . . . . . . . . . . . . . . . . 14
Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Distributions from 401(k) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Flexibility versus Nondiscrimination . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Policy Responses to an Aging Population . . . . . . . . . . . . . . . . . . . . . . . . . . 19
List of Tables
Table 1. U.S. Population Age 25 and Older, 2005 and 2025 . . . . . . . . . . . . . . . . 2
Table 2. Labor Force Participation Rates, 1950 to 2003 . . . . . . . . . . . . . . . . . . . . 5
Table 3. Employment of Men Age 55 and Older, 1995 to 2004 . . . . . . . . . . . . . . 7
Table 4. Employment of Women Age 55 and Older, 1995 to 2004 . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 7. Social Security Retired Worker Benefit Awards, by Age . . . . . . . . . . . 12
Table 8. Social Security Retired Worker Beneficiaries, by Age . . . . . . . . . . . . . 13

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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. The retirement of older workers also can
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 will 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 their 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 2005 and 2025 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 among persons age 55 and older.
Employment trends among older workers are then discussed in the context of data
from the Social Security Administration on the proportion of workers who claim

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CRS-2
retired-worker benefits before the full retirement age (currently 65 years and 4
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: 2005 to 2025
As the members of the “baby boom” generation — people born between 1946
and 1964 — reach 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 12.3% in
2002 to 18.2% by 2025. The age-distribution those 25 to 64 years old already is
undergoing a substantial shift toward a greater number of older individuals and a
relative scarcity of young people entering the labor force.
The data presented in Table 1 show how the age profile of the U.S. population
will change between 2005 and 2025. According to estimates prepared by the U.S.
Bureau of the Census, there will be 193 million Americans age 25 or older in 2005.
By 2025, this number will increase by 22% to almost 236 million. However, the
number of people ages 25 to 54 — the ages when labor force participation rates are
at their highest levels — will increase by only 3.8%. At the same time, the number
of people between the ages of 55 and 64 is projected to increase by 11 million, or
more than 36%. In other words, while the number of people between the ages of 25
and 64 is projected to increase by about 16 million between 2005 and 2025, more
than two-thirds of the increase is projected to occur among people between the ages
of 55 and 64.
Table 1. U.S. Population Age 25 and Older, 2005 and 2025
(Numbers in thousands)
Age groups
Year
25 to 34
35 to 44
45 to 54
55 to 64
65 and up
Total
2005
Male
20,081
21,773
20,852
14,618
15,299
92,623
Female
19,608
21,878
21,589
15,758
21,398
100,231
Total
39,689
43,651
42,441
30,376
36,697
192,854
2025
Male
22,529
22,886
20,241
20,130
27,801
113,587
Female
21,906
22,512
20,485
21,290
35,724
121,917
Total
44,435
45,398
40,726
41,420
63,525
235,504
Change
4,746
1,747
-1,715
11,044
26,828
42,650
% change
12.0%
4.0%
-4.0%
36.4%
73.1%
22.1%
Source: U.S. Department of Commerce, Bureau of the Census.

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CRS-3
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 incentives 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 who are over the age of 55 are less likely to participate in the labor force
today than were their counterparts a half-century ago.1 According to data from the
Bureau of Labor Statistics, 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.2
(See Table 2). By 1985, only 2 out of 3 men in that age group participated in the
labor force. Most of the 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 69%, while the rate for
those ages 65 and older has increased modestly, from 16% to 19%.
From 1950 to the present, women’s labor force participation has steadily
increased. Among women ages 55 to 64, the labor force participation rate rose from
27% in 1950 to 45% in 1990, and to 57% in 2003. 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 — 2003 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
1 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.
2 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), chap. 1, pp. 4-14.

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CRS-4
now covers virtually all private-sector nonfarm workers in the United States.3 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 2003, 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, among 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. Among 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.4
3 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.
4 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, p. 63.

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Table 2. Labor Force Participation Rates, 1950 to 2003
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
2000
91.6
67.3
17.5
2001
91.3
68.1
17.7
2002
91.0
69.2
17.8
2003
90.6
68.7
18.6
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
2000
76.8
51.8
9.4
2001
76.4
53.0
9.7
2002
76.0
55.1
9.9
2003
75.6
56.6
10.6
Source: U.S. Department of Labor, 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. 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
National Compensation Survey indicates that in 2003, only 20% of workers in the
private sector participated in defined-benefit pension plans, which by law must offer
retirees the option to receive their pension as an annuity.5
Data collected by the Census Bureau indicate that from 1995 to 2004,
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,
72.6% were employed in 2004, compared to 72% in 1995. Employment among
women ages 55 to 61 rose from 54% in 1995 to 60% in 2004. Among both men and
women ages 62 to 64, employment rose steadily throughout the period. About 48%
of men were employed in 2004, compared to 42% in 1995. Among women ages 62
to 64, employment increased from 31% in 1995 to 38% in 2004.
Among men 65 to 69 years old, an average of 26.4% were employed each year
from 1995 through 1999. From 2000 to 2004, an average of 30.8% of men in this
age group were employed. Among women ages 65 to 69, employment also has
increased since 1995. An average of 17.9% of women in this age group were
employed in each year from 1995 through 1999. From 2000 through 2004, the
average rate of employment among women 65 to 69 years old was 21.1%. Among
both men and women age 70 and older, rates of employment changed little from 1995
through 2004. During this period, the employment rate averaged 11.6% among men
70 and older and 5.7% among women age 70 and older.
5 National Compensation Survey: Employee Benefits in Private Industry, Summary 04-02,
U.S. Department of Labor, Bureau of Labor Statistics, April 2004.
6 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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CRS-7
Table 3. Employment of Men Age 55 and Older, 1995 to 2004
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
2004
10,388
7,537
72.6
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
2004
3,143
1,517
48.3
81.6
18.4
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
2004
4,566
1,425
31.2
63.5
36.5
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
2004
10,230
1,264
12.4
50.4
49.6
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 2004
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
2004
11,206
6,696
59.8
77.4
22.6
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
2004
3,618
1,381
38.2
65.3
34.7
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
2004
5,252
1,303
24.8
48.7
51.3
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
2004
14,610
937
6.4
41.0
59.0
Source: CRS analysis of the annual March supplement to the Current Population Survey.

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Retirement Income among Older Workers
An important consideration for anyone contemplating retirement is whether
future sources of income will be adequate to maintain his or her desired standard of
living. Table 5 shows the proportion of men and women age 55 and older who
reported on the Census Bureau’s Current Population Survey (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 2003, only
18% of men ages 55 to 64 received income from a pension or other retirement plan.
Among those age 65 or older, 45% had income from pensions or retirement savings
plans. The patterns among women were similar: only 11.5% of 55- to 64-year-old
women received income from pensions or retirement savings plans in 2003, while
28% of those age 65 or older received such income.
The 18% of men ages 55 to 64 who were receiving pension income in 2003
represents a decline from 23% who received such income in 1994. Over the same
period, the proportion of men age 65 or older receiving pension income also fell
slightly, from 47% to 45%. The proportion of women ages 55 to 64 with pension
income was more stable, at 11% to 12% throughout the 1994 — 2002 period.
Among women 65 or older, 28% received income from pensions and retirement
savings plans in 2003, about the same as in 1994.
To study the relationship between employment rates and receipt of pension
distributions, 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 1994 to 2003, the
correlation between receipt of pension income and current employment was -0.79 for
men 55 to 64 years old and -0.73 for men 65 and older. However, the statistics do
not tell us 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 0.21 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.

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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
1994
9,872
2,303
23.3%
13,001
6,108
47.0%
1995
10,090
2,279
22.6
13,260
6,206
46.8
1996
10,256
2,177
21.2
13,404
6,316
47.1
1997
10,667
2,152
20.2
13,524
6,317
46.7
1998
10,959
2,195
20.0
13,727
6,457
47.0
1999
11,131
2,174
19.5
13,886
6,358
45.8
2000
11,249
2,124
18.9
14,179
6,099
43.0
2001
12,366
2,371
19.2
14,235
6,276
44.1
2002
13,149
2,372
18.0
14,527
6,414
44.2
2003
13,531
2,450
18.1
14,797
6,656
45.0
Women
1994
10,878
1,316
12.1%
18,264
5,252
28.8%
1995
10,991
1,164
10.6
18,398
5,025
27.3
1996
11,210
1,287
11.5
18,474
4,933
26.7
1997
11,580
1,253
10.8
18,559
5,114
27.6
1998
11,943
1,403
11.7
18,668
5,186
27.8
1999
12,250
1,439
11.7
18,735
5,513
29.4
2000
12,532
1,475
11.8
18,799
5,426
28.9
2001
13,501
1,525
11.3
19,535
5,412
27.7
2002
14,229
1,572
11.0
19,706
5,379
27.3
2003
14,824
1,705
11.5
19,862
5,610
28.2
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 year shown is the year when the income was received, which is the calendar

year preceding the March CPS interview.
Employment among 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 2003, 39.1% were employed either full or part time
in March 2004. Relatively few men age 65 or older who received income from
pensions or retirement savings plans also engage in paid employment: only 10% to
12% were employed, on average, at any point in the ten-year period shown in the
table. Women who receive pension income were 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 2003, 32.9% were employed in March 2004. Among
women age 65 or older who received income from a pension or retirement savings

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CRS-11
plan, only 6% to 8%, on average, were employed at any time during the ten-year
period in the table.
Table 6. Employment of Recipients of Employer Pensions and
Retirement Savings Plans
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
1994
2,303
864
37.5%
6,108
727
11.9%
1995
2,279
831
36.5
6,206
726
11.7
1996
2,177
832
38.2
6,316
724
11.5
1997
2,152
778
36.2
6,317
648
10.3
1998
2,195
870
39.7
6,457
706
10.9
1999
2,174
799
36.7
6,358
739
11.6
2000
2,124
797
37.5
6,099
721
11.8
2001
2,371
907
38.3
6,276
739
11.8
2002
2,372
827
34.9
6,414
745
11.6
2003
2,450
959
39.1
6,656
839
12.6
Women
1994
1,316
410
31.2%
5,252
326
6.2%
1995
1,164
324
27.9
5,025
281
5.6
1996
1,287
416
32.3
4,933
277
5.6
1997
1,253
363
29.0
5,114
404
7.9
1998
1,403
370
26.3
5,186
426
8.2
1999
1,439
442
30.7
5,513
401
7.3
2000
1,475
488
33.1
5,426
436
8.0
2001
1,525
439
28.8
5,412
393
7.3
2002
1,572
530
33.7
5,379
425
8.0
2003
1,705
560
32.9
5,610
454
8.1
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. In 2004, the “full retirement age” under Social
Security is 65 years and 4 months. Social Security retired-worker benefits are first
available at age 62, but benefits that begin before the full retirement age are
permanently reduced. In 2004, a worker who begins receiving Social Security at age
62 has his or her benefit permanently reduced by about 24% below the amount that
would be payable at the full retirement age. 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.

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CRS-12
Most people choose to begin receiving Social Security retirement benefits before
age 65. The data presented in Table 7 show that 77% of men and 81% of women
who began receiving Social Security retired worker benefits in 2002 applied for
benefits before age 65. In 2000, the distribution of benefit awards to retired workers
shifted temporarily, 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 and
4 months) or older, effective January 1, 2000.7 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 providing an incentive for older workers to remain in the labor force.
Table 7. Social Security Retired Worker Benefit Awards, by Age
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%
1995
614,700
76.1
144,400
17.9
48,700
6.0
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
2002
673,000
76.9
171,600
19.6
30,300
3.5
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%
1995
492,900
79.9
87,800
14.2
36,300
5.9
1999
524,800
79.1
92000
13.9
46400
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
2002
581,700
80.7
103,500
14.4
35,400
4.9
* The earnings test was repealed in 1990 for workers above the Social Security full retirement age.
Source: Annual Statistical Supplement to the Social Security Bulletin, various years.
Note:Initial awards exclude conversions from disabled worker benefits to retired worker
benefits.
7 In 2004 a Social Security recipient under the full retirement age can earn up to $11,640
without a benefit reduction. Benefits are cut by $1 for each $2 earned over that amount.

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CRS-13
Retired Worked Beneficiaries as a Percentage of Each Age
Category. The data presented in Table 8 show that in 2002 the proportion of men
ages 62 to 64 who were receiving Social Security retired worker benefits was 6.4
percentage points lower than in 1995. This decline coincided with the rising
employment rates among men in this age group. (See Table 4.) The decline in the
percentage of 62- to 64-year-old men receiving Social Security benefits during this
period could have several causes, including 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, the percentage of 62- to 64-year-olds who were receiving Social
Security retired worker benefits was generally stable over the period from 1990 to
2000 at about 36%, and then fell slightly in 2001 and 2002.
Among men ages 65 to 69, the proportion who were receiving Social Security
retired worker benefits rose abruptly from 84% in 1999 to 91% in 2000, coinciding
with the repeal of the earnings test for workers at or above the full retirement age.
Among women ages 65 to 69, the proportion who were receiving Social Security
retired worker benefits increased from 56% in 1990 to 63% in 2000. This trend is
consistent with the long-term increase in the 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 Age
(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
45.3%
3,898
83.8%
7,751
91.7%
1995
1,320
46.8
3,900
83.4
8,694
91.2
1999
1302
43.4
3790
84.3
9238
89.9
2000
1,330
43.2
4,076
90.8
9,366
90.3
2001
1,333
41.8
4,125
91.4
9,473
90.3
2002
1,333
40.4
4,198
91.0
9,578
91.1
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
35.9%
3,067
55.6%
7,607
55.9%
1995
1,128
36.8
3,058
56.7
8,570
57.7
1999
1,180
35.6
3,070
60.1
9,203
59.4
2000
1,223
36.0
3,209
63.1
9,302
59.7
2001 1,237
35.3
3,284
64.5
9,390
60.0
2002
1,246
34.4
3,369
63.2
9,480
59.6
Source: Annual Statistical Supplement to the Social Security Bulletin, various years.

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CRS-14
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 39% of men and 33% of women aged 55 to 64 who
received income from private pension plans in 2003 were employed in March 2004.
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.”8
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.
By law, the normal retirement age at any age cannot be greater than 65. 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.9 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.10
Current Approaches to Phased Retirement. 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.11 Of 232 employers surveyed by William M. Mercer, Inc. in 2001, 23%
8 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.
9 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.
10 See, for example, New Opportunities for Older Workers, issued by the Committee for
Economic Development, Washington, DC, 1999.
11 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-15
reported that they had adopted formal policies to accommodate phased retirement.12
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 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 sometimes rehire retired employees on a part-time or temporary basis,
or bring them back as contractors rather than as regular employees. 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
employer 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 a 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. 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.13 A plan that pays benefits to an employee who has not yet reached the plan’s
normal retirement age could lose its tax-qualified status.14 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.15 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
completed the required number of years of service stipulated by the plan. If a
participant has separated from the employer and has begun receiving 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
12 Anna M. Rappaport, “Employer Strategies for Changing Workforce: Phased Retirement
and Other Options,” Benefits Quarterly, volume 17 (4), Fourth Quarter 2001.
13 26 C.F.R. § 1.401-1(b)(1)(i).
14 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.
15 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-16
plan sponsor. In 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.”16
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 and the early retirement age is 55, the firm could reduce the normal retirement
age to some age between 55 and 62. 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 increase 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).17 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. 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.
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 2003, about 2.8 million workers in the United States received pension
payments from a former employer. Almost 1.8 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.
16 Vivian Fields and Robert Hutchens, “Regulatory Obstacles to Phased Retirement in the
For-Profit Sector” Benefits Quarterly, volume 18 (3), Third Quarter 2002.
17 Requirements for qualification of pension plans are defined at 26 U.S.C. § 401(a).

---

CRS-17
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. In-service distributions from defined
contribution plans that occur before the participant reaches age 59 1/2 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 fro 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 from 59 1/2 to 55.18 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
59 1/2 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 59 1/2 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
18 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.

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CRS-18
plan when the participant has either reached the plan’s normal retirement age,
reached age 59 1/2, 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 59 1/2. Neither bill was re-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.19 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.20 These tests consist of 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.
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 such cases, the only viable
option 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.21 A
phased retirement option that offered in-service distributions to all participants
19 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.
20 26 U.S.C. § 410(b).
21 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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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 calculations show the proportion of contributions
made or benefits paid on behalf of highly compensated employees. Some plan
sponsors 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 failed the mathematical tests for nondiscrimination
under current law might not fail if 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 was
referred to the Senate Committee on Health, Education, Labor, and Pensions.
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. The rules that govern
eligibility for Social Security benefits, for example, 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. In addition, 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 the decisions 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

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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 or above the full retirement age (65 and four months
in 2004), effective January 1, 2000. The earnings test remains in effect, however, for
beneficiaries who are under the full retirement age. In 2004, Social Security
recipients under age 65 have their benefits reduced by $1 for each $2 of earnings in
excess of $11,640.
Some employers have suggested that Congress amend the tax code to allow
them greater flexibility in designing phased retirement programs for their employees.
One proposed amendment would permit in-service pension distributions to
employees who have not yet reached the pension plan’s normal retirement age. This,
some 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 59 1/2, 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 question is whether
employers should be permitted to offer such an option only to specific categories of
workers.

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