Order Code RL30629
CRS Report for Congress
Received through the CRS Web
Older Workers: Employment and
Retirement Trends
September 14, 2005
Patrick Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service The Library of Congress Washington, DC 20540
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 2004, 91% of men
ages 25 to 54 and 75% of women in this age group participated in the labor force.
In contrast, just 69% of men ages 55 to 64 and 56% of women ages 55 to 64 were
either working or looking for work in 2004.
The rate of employment among persons age 55 and older is influenced by
general economic conditions, eligibility for Social Security benefits, the availability
of health insurance, and the prevalence and design of employer-sponsored pensions.
Labor force participation among people 55 and older may, for example, be affected
both by the trend away from defined-benefit pension plans that offer a monthly
annuity for life to defined contribution plans that typically pay a lump-sum benefit.
The declining percentage of employers that offer retiree health insurance also may
result in more people continuing to work until they are eligible for Medicare at 65.
Recent Census Bureau data show that men and women age 62 and older are
working more today than they were ten years ago. From 1996 to 2005, the
percentage of 62- to 64-year-old men who were employed in March of each year rose
from 43% to 51%. Throughout the period, about four-fifths of these men worked
full-time. The percentage of 65- to 69-year-old men who were employed increased
from 27% to 30% during the same period, and the percentage of employed 65 to 69
year-old men who worked full-time rose from 57% in 1996 to 68% in 2005. Among
women 62 to 64 years old, the rate of employment increased from 32% in 1996 to
37% in 2005, and the percentage of 62 to 64 year-old working women who were
employed full-time increased from 59% to 67%. At the same time, the percentage
of 65- to 69-year-old women who were employed rose from 17% to 23%, and the
percentage of working women in this age category who worked a full time schedule
rose from 40% to 51%.
As more workers reach retirement age, employers may try to induce some of
these workers to remain on the job, perhaps on a part-time basis. 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. Under current law,
however, a pension plan cannot pay benefits unless the recipient has either separated
from the employer or has reached the pension plan’s normal retirement age, which
in most plans is 65. Some employers would like to have the option to pay partial
pension distributions to workers who have reached the pension plan’s early
retirement age. This would require a change in federal law.
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
Distributions from 401(k) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Proposed Regulations on Phased Retirement . . . . . . . . . . . . . . . . . . . 17
List of Tables
Table 1. U.S. Population Age 25 and Older, 2005 and 2025 . . . . . . . . . . . . . . . . 2
Table 2. Labor Force Participation Rates, 1950 to 2004 . . . . . . . . . . . . . . . . . . . . 5
Table 3. Employment of Men Age 55 and Older, 1996 to 2005 . . . . . . . . . . . . . . 7
Table 4. Employment of Women Age 55 and Older, 1996 to 2005 . . . . . . . . . . . 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
Older Workers: Employment
and Retirement Trends
The retirement of older workers affects both their personal economic
circumstances and 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 and the average age at which people retire have implications for both the
growth of 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 be “retired.” Retirement is most often defined with reference
to two characteristics: whether an individual participates in the paid labor force, and
whether he or she receives income from a pension or Social Security. An individual
who does not work for compensation and who receives income only from pensions
or Social Security would be retired according to both parts of this definition, while
one who works for compensation and receives no income from pensions or Social
Security would not be retired according to either part of the definition.
Between these two extremes, however, are those who might be considered to be
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
retired-worker benefits before the full retirement age (currently 65 years and 6
CRS-2
months). The final section of the report discusses recent proposals to promote
“phased retirement,” a process that combines reduced hours of work with receipt 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 12.4% in
2005 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 the Bureau of the Census, there
are 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 25 to 54
years old — the ages when labor force participation rates are highest — 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.
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 a service-based
economy, 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 their counterparts of a half-century ago. 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.1
(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 age 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 56% in 2004. Among women age 65 and older,
however, the labor force participation rate has changed little over the last 50 years,
remaining between 8% and 11% over most of the 1950 — 2004 period.
1 Labor force participation rates are annual averages from the monthly CPS data. They are
published annually in the January issue of the BLS publication, Employment and Earnings.
CRS-4
Table 2. Labor Force Participation Rates, 1950 to 2004
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
2004
90.5
68.7
19.0
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
2004
75.3
56.3
11.1
Source: U.S. Department of Labor, Bureau of Labor Statistics.
CRS-5
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 state of the job market, the availability of health insurance,
eligibility for Social Security benefits, and both the prevalence and design of
employer-sponsored pensions. Labor force participation among people 55 and older
might, 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 in design and often
pay out a single lump sum at retirement. The National Compensation Survey
indicates that in 2005, only 21% 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.2
Data collected by the Census Bureau indicate that from 1996 to 2005,
employment remained generally steady among men 55 to 61 years old and rose
among women in this age group.3 (See Table 3 and Table 4). Of men ages 55 to 61,
72.6% were employed in March 2005, compared to 72.2% in March 1996.
Employment among women ages 55 to 61 rose to 61% in March 2005 from 54% in
March 1996. Among both men and women ages 62 to 64, employment rose steadily
throughout the period. Fifty-one percent of men were employed in March 2005,
compared to 43% in March 1996. Throughout the period, about four-fifths of these
men worked full-time. Among women ages 62 to 64, employment increased from
32% in March 1996 to 37% in March 2005. The percentage of 62 to 64 year-old
working women who were employed full-time increased from 59% to 67%.
Among men 65 to 69 years old, employment has risen modestly in the last ten
years. From 1996 through 2000, on average, 27.2% of men were employed in March
of each year. From 2001 to 2005, on average, 30.7% of men in this age group were
employed in March of each year. It is notable, however, that the percentage of
employed 65 to 69 year-old men who worked full-time rose from 57% in March 1996
to 68% in March 2005. Employment also has increased moderately among women
ages 65 to 69 over the past decade. An average of 18.3% of women in this age group
were employed in March of each year from 1996 through 2000. From 2001 through
2005, the average rate of employment among women 65 to 69 years old was 21.6%.
The percentage of 65- to 69-year-old working women who worked a full time
schedule rose from 40% in 1996 to 51% in 2005. Among both men and women age
70 and older, rates of employment changed little from 1996 through 2005.
2 National Compensation Survey: Employee Benefits in Private Industry, Summary 05-01,
U.S. Department of Labor, Bureau of Labor Statistics, August 2005.
3 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.
CRS-6
Table 3. Employment of Men Age 55 and Older, 1996 to 2005
Number
Employment:
Population
employed
Percent
Age in March:
(000s)
(000s)
employed
full-time
part-time
55 to 61
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
2005
10,554
7,666
72.6
92.1
8.0
62 to 64
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
2005
3,481
1,777
51.1
79.5
20.6
65 to 69
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
2005
4,814
1,428
29.7
67.5
32.5
70 and older
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
2005
10,337
1,379
13.3
50.8
49.2
Source: Congressional Research Service analysis of the Current Population Survey.
CRS-7
Table 4. Employment of Women Age 55 and Older, 1996 to 2005
Number
Employment:
Population
employed
Percent
Age in March:
(000s)
(000s)
employed
full-time
part-time
55 to 61
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
2005
11,650
7,086
60.8
78.9
21.1
62 to 64
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
2005
3,834
1,401
36.5
67.2
32.8
65 to 69
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
2005
5,311
1,193
22.5
51.4
48.6
70 and older
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
2005
14,752
1,041
7.1
37.1
62.9
Source: Congressional Research Service analysis of the Current Population Survey.
CRS-8
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 2004, 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 2004, 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 2004
represents a decline from 23% who received such income in 1995. 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 1995 — 2004 period.
Among women 65 or older, 28% received income from pensions and retirement
savings plans in 2004, about the same as in 1995.
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 negative correlation between receipt of
pension income and employment. Over the period from 1995 to 2004, the correlation
between current employment and receipt of pension income was -0.66 for men 55 to
64 years old and -0.72 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 to
make up for investment losses.
Among women, employment rates and the receipt of pension income are not
strongly correlated (0.27 for women 55-64 and 0.33 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-9
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
Men
people
recipients
Percentage
people
recipients
Percentage
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
2004
14,034
2,578
18.4
15,151
6,778
44.7
Women
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
2004
15,484
1,776
11.5
20,063
5,603
27.9
Source: Congressional Research Service analysis of 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 M arch 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 2004, 38.1% were employed either full or part time
in March 2005. 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 women 55 to 64 years old who received income from a pension or retirement
savings plan in 2004, 31.1% were employed in March 2005. Among women age 65
or older who received income from a pension or retirement savings plan, only 6% to
8%, on average, were employed at any time during the ten-year period in the table.
CRS-10
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
Men
recipients
employed
Percentage recipients
employed
Percentage
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
2004
2,578
982
38.1
6,778
836
12.3
Women
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
2004
1,776
553
31.1
5,603
416
7.4
Source: Congressional Research Service analysis of 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 2005, full retirement benefits under Social
Security are available at age 65 and 6 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 2005, a worker who begins receiving Social
Security at age 62 has his or her benefit permanently reduced by 25% 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 30% less than the amount that would be paid if
benefits were claimed at age 67.
CRS-11
Most people choose to begin receiving Social Security retirement benefits before
age 65. The data presented in Table 7 show that 76% of men and 79% of women
who began receiving Social Security retired-worker benefits in 2003 applied for
benefits before age 65. In 2000, a higher-than-average percentage of new benefits
were 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 or older,
effective January 1, 2000.4 The earnings test now applies only to 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 because their
earnings would have resulted in a benefit reduction had an incentive to apply for
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, providing an incentive for workers to remain employed.
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
2003 653,300
76.4
173,300
20.2
28,900
3.4
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
2003 582,400
78.9
111,000
15.1
44,300
6.0
* The earnings test was repealed in 2000 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 to retired worker benefits.
4 In 2005, a Social Security recipient under the full retirement age can earn up to $12,000
without a benefit reduction. Benefits are cut by $1 for each $2 earned over that amount.
CRS-12
Retired Worked Beneficiaries as a Percentage of Each Age
Category. The data presented in Table 8 show that in 2003 the proportion of men
ages 62 to 64 who were receiving Social Security retired worker benefits was 6.9
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%. By 2003, it had fallen slightly to 34.0%.
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 65% in 2003. 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 the
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
1,302
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
2003
1,331
39.9
4,255
91.8
9,667
91.9
62 to 64
65 to 69
70 and over
Percentage
Percentage
Percentage
Women
Number of age group
Number
of age group
Number
of age group
1990
1,167
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
2003
1,256
34.0
3,475
65.3
9,563
60.5
Source: Annual Statistical Supplement to the Social Security Bulletin, various years.
CRS-13
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 38% of men and 31% of women aged 55 to 64 who
received income from a pension in 2004 were employed in March 2005.
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.”5
Under current law, an employee can take distributions from an employer’s
defined benefit pension only after having separated from the employer or after
reaching the pension plan’s normal retirement age. By law, the normal retirement
age cannot be greater than 65. Some employers have suggested phased retirement
would be embraced by more firms if pension distributions could be paid to
employees at a plan’s early retirement age. Employers could offer in-service
distributions to employees who have not reached the pension plan’s normal
retirement age only if the Internal Revenue Code and the Employee Retirement
Income Security Act (ERISA) were amended to allow such early distributions.
Current Approaches to Phased Retirement. Employers have devised a
number of strategies to retain the services of 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.
5 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.
CRS-14
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.6 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.7 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.8 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
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.”9
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
6 26 C.F.R. § 1.401-1(b)(1)(i).
7 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.
8 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).
9 Vivian Fields and Robert Hutchens, “Regulatory Obstacles to Phased Retirement in the
For-Profit Sector” Benefits Quarterly, volume 18 (3), Third Quarter 2002.
CRS-15
retirement age (or some age between the early and normal retirement ages).10 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.
Amending the Internal Revenue 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 59½ are subject to
a 10% tax penalty 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 from 59½ to 55.11 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
10 Requirements for qualification of pension plans are defined at 26 U.S.C. § 401(a).
11 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.
CRS-16
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.
Proposed Regulations on Phased Retirement. On November 9, 2004,
the Treasury Department issued a proposed regulation for in-service pension
distributions under phased retirement arrangements. Under the proposed regulation,
phased retirement arrangements would be optional for employers and voluntary for
employees. The phased retirement program would have to be included in the
employer’s written retirement plan documents. The proposed regulation would
permit employees to receive a proportional share of their accrued benefit based on
the percentage reduction in their hours worked. Hours worked under a phased
retirement arrangement could not exceed 80% of the employee’s full-time work
schedule. According to the proposed regulation, the maximum benefit distributed
during a phased retirement period would be equal to the employee’s total accrued
benefit on the date that the phased retirement begins, multiplied by the percentage
reduction in the employee’s hours of work. The proposed regulation would require
the employee’s full-time compensation to be imputed – with a proportionate
reduction based on the employee’s actual service – to ensure that a participant is not
disadvantaged by having chosen phased retirement. The proposed regulation also
would:
!
prohibit lump sum or rollover distributions as part of a phased retirement plan;
!
allow phased retiree participants to continue accruing additional pension
benefits on a full-time basis;
!
allow phased retiree participants to receive the same benefits upon full
retirement as similarly situated employees who did not elect phased retirement;
!
maintain the status of highly compensated employees who elect phased
retirement;
!
direct that an employee’s final retirement benefit is comprised of the phased
retirement benefit and the balance of the accrued benefit under the plan; and
!
require periodic testing to ensure that employees in phased retirement programs
are working reduced hours.
Document Outline