Order Code RL30629 Older Workers: Employment and Retirement Trends Updated September 15, 2008 Patrick Purcell Specialist in Income Security Domestic Social Policy Division 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 Census Bureau, 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 2007, 91% of men and 75% of women aged 25 to 54 participated in the labor force. In contrast, just 70% of men and 58% of women aged 55 to 64 were either working or looking for work in 2007. 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. Census Bureau data show that the percentage of men and women age 62 and older who work in paid employment has risen over the past several years. In March 2008, 52% of men aged 62 to 64 were employed, compared with 43% in 1995 and 42% in 1990. Of men aged 65 to 69, 33% were employed in March 2008, compared with 27% in 1995 and 26% in 1990. Among women 62 to 64 years old, 41% were working in March 2008, compared with 32% in 1995 and 28% in 1990, whereas among women 65 to 69 years old, 27% were working in March 2008, compared with 17% in 1995 and 1990. There also has been a trend toward more full-time employment among older Americans who work. In March 2008, 82% of employed men aged 62 to 64 were working full-time, compared with 77% in 1995 and 1990. Seventy-two percent of men aged 65 to 69 who were working in March 2008 were employed full-time, compared with 57% in 1995 and 56% in 1990. Among working women aged 62 to 64, 65% worked full-time in March 2008, compared with 60% in both 1995 and 1990, whereas among working women aged 65 to 69, 55% were employed full-time in March 2008, compared with 43% in 1995 and 44% in 1990. As more workers reach retirement age, employers may try to induce some of them 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. The Pension Protection Act of 2006 (P.L. 109-280) allows pension plans to begin paying benefits to workers who have not yet separated from their employers at the earlier of age 62 or the pension plan’s normal retirement age, which in most plans is 65. Some employers would like to be able 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 Aged 55 and Older . . . . . . . . . . . . . . 5 Retirement Income Among Older Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Employment Among Recipients of Retirement Income . . . . . . . . . . . . . . . . 9 Social Security Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Age When Benefits Begin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Retired Worked Beneficiaries as a Percentage of Each Age Category . . . . 12 Older Workers and “Phased Retirement” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Current Approaches to Phased Retirement . . . . . . . . . . . . . . . . . . . . . . . . . 14 Phased Retirement and Pension Distributions . . . . . . . . . . . . . . . . . . . 14 Distributions from 401(k) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 List of Tables Table 1. U.S. Population Age 25 and Older, 2005 and 2025 . . . . . . . . . . . . . . . . 2 Table 2. Labor Force Participation Rates, 1950 to 2007 . . . . . . . . . . . . . . . . . . . . 4 Table 3. Employment of Men Aged 55 and Older, 1990 to 2008 . . . . . . . . . . . . . 6 Table 4. Employment of Women Aged 55 and Older, 1990 to 2008 . . . . . . . . . . 7 Table 5. Receipt of Income from Employer Pensions and Retirement Savings Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Table 6. Employment of Recipients of Employer Pensions and Retirement Savings Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 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 “retire.” 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 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, there are many people 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 by 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 (65 years and 10 months for CRS-2 people who turn 65 in 2008). The final section of the report discusses “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 Census Bureau, the proportion of the U.S. population aged 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 Census Bureau, there were 193 million Americans aged 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) Year 2005 Male Female Total 2025 Male Female Total Change % change Age Groups Total 25 to 34 35 to 44 45 to 54 55 to 64 65 and Up 20,081 19,608 39,689 21,773 21,878 43,651 20,852 21,589 42,441 14,618 15,758 30,376 15,299 21,398 36,697 92,623 100,231 192,854 22,529 21,906 44,435 4,746 12.0% 22,886 22,512 45,398 1,747 4.0% 20,241 20,485 40,726 -1,715 -4.0% 20,130 21,290 41,420 11,044 36.4% 27,801 35,724 63,525 26,828 73.1% 113,587 121,917 235,504 42,650 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 is the percentage of the population that is either employed or unemployed and looking for work; it 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 aged 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 1995, the labor force participation rate among men aged 55 to 64 has risen from 66% to 70%, while the labor force participation rate for men aged 65 and older has increased from 17% to 21%. From 1950 to the present, women’s labor force participation rates have steadily increased. Among women aged 55 to 64, the labor force participation rate rose from 27% in 1950 to 45% in 1990, and to 58% in 2007. Among women aged 65 and older, however, the labor force participation rate fell from 11% in 1955 to 7.3% in 1985. Since then, the labor force participation rate of women 65 and older has slowly but steadily risen, reaching 12.6% in 2007. 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 2007 Year Men 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 Women 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 25 to 54 Age Groups 55 to 64 65 and Up 96.5% 97.4 97.0 96.7 95.8 94.4 94.2 93.9 93.4 91.6 91.6 91.3 91.0 90.6 90.5 90.5 90.6 90.9 86.9% 87.9 86.8 84.6 83.0 75.6 72.1 67.9 67.8 66.0 67.3 68.1 69.2 68.7 68.7 69.3 69.6 69.6 45.8% 39.6 33.1 27.9 26.8 21.6 19.0 15.8 16.3 16.8 17.5 17.7 17.8 18.6 19.0 19.8 20.3 20.5 36.8% 39.8 42.9 45.2 50.1 55.1 64.0 69.6 74.0 75.6 76.8 76.4 76.0 75.6 75.3 75.3 75.5 75.4 27.0% 32.5 37.2 41.1 43.0 40.9 41.3 42.0 45.2 49.2 51.8 53.0 55.1 56.6 56.3 57.0 58.2 58.3 9.7% 10.6 10.8 10.0 9.7 8.2 8.1 7.3 8.6 8.8 9.4 9.7 9.9 10.6 11.1 11.5 11.7 12.6 Source: U.S. Department of Labor, Bureau of Labor Statistics. CRS-5 Recent Employment Trends Among People Aged 55 and Older Factors that influence the rate of employment among persons aged 55 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. Relatively few employers offer retiree health insurance, and so some workers may choose to remain employed until they become eligible for Medicare at age 65. Data collected by the Census Bureau indicate that between 1990 and 2008, employment remained generally steady among men 55 to 61 years old and rose among women in this age group.2 (See Table 3 and Table 4). Among men aged 55 to 61, 73% were employed in March 2008, compared with 72% in March 1990. Employment among women aged 55 to 61 rose to 63% in March 2008 from 50% in March 1990. Among both men and women aged 62 to 64, employment rose through this period. Fifty-two percent of 62- to 64-year-old men were employed in March 2008, compared with 42% in March 1990. The proportion who worked full-time rose from 77% to 82%. Among women aged 62 to 64, employment increased from 28% in March 1990 to 41% in March 2008. The percentage of 62- to 64-year-old working women who were employed full-time increased from 61% to 65%. Among men 65 to 69 years old, employment also has risen since 1990: 26% of men aged 65 to 69 were employed in March 1990, whereas 33% were employed in March 2008. The percentage of working 65- to 69-year-old men employed full-time rose from 56% in March 1990 to 72% in March 2008. Employment also increased among women aged 65 to 69 between 1990 and 2008. In March 2008, 27% of women aged 65 to 69 were working, compared with 17% in 1990. The percentage of 65- to 69-year-old working women who worked full time rose from 44% in 1990 to 55% in 2008. Among both men and women aged 70 and older, rates of employment rose slightly between 1990 and 2008. In March 2008, 14% of men aged 70 and older were employed, compared with 10% in 1990. Among women aged 70 and older, 8% were employed in March 2008, compared with 5% in March 1990. 2 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 Aged 55 and Older, 1990 to 2008 Age in March 55 to 61 1990 1995 2000 2005 2006 2007 2008 62 to 64 1990 1995 2000 2005 2006 2007 2008 65 to 69 1990 1995 2000 2005 2006 2007 2008 70 and Older 1990 1995 2000 2005 2006 2007 2008 Population (thousands) Employed Workers (thousands) Percent Employment Full-Time Part-Time 7,248 7,409 8,204 10,554 11,221 11,774 12,270 5,219 5,349 5,849 7,666 8,149 8,625 8,954 72.0 72.2 71.3 72.6 72.6 73.3 73.0 91.2 89.5 92.3 92.1 91.9 91.7 92.8 8.8 10.5 7.7 7.9 8.1 8.3 7.2 2,903 2,681 2,927 3,481 3,644 3,696 3,800 1,228 1,159 1,380 1,77 1,883 1,822 1,968 42.3 43.2 47.2 51.1 51.7 49.3 51.8 76.6 76.6 77.9 79.5 80.6 81.3 82.0 23.4 23.4 22.1 20.6 19.4 18.7 18.0 4,586 4,522 4,376 4,814 4,782 5,013 5,238 1,189 1,237 1,330 1,428 1,497 1,655 1,721 25.9 27.4 30.4 29.7 31.3 33.0 32.9 55.6 57.3 60.5 67.5 69.0 70.7 72.2 44.4 42.7 39.5 32.5 31.0 29.3 27.8 7,961 8,738 9,510 10,337 10,402 10,430 10,524 772 989 1,169 1,379 1,441 1,508 1,500 9.7 11.3 12.3 13.3 13.9 14.5 14.3 47.2 46.5 48.5 50.8 50.4 53.1 55.5 52.8 53.5 51.5 49.2 49.6 46.9 44.5 Source: Congressional Research Service analysis of the Current Population Survey. CRS-7 Table 4. Employment of Women Aged 55 and Older, 1990 to 2008 Age in March 55 to 61 1990 1995 2000 2005 2006 2007 2008 62 to 64 1990 1995 2000 2005 2006 2007 2008 65 to 69 1990 1995 2000 2005 2006 2007 2008 70 and Older 1990 1995 2000 2005 2006 2007 2008 Population (thousands) Employed Workers (thousands) Percent Employment Full-Time Part-Time 7,830 7,947 9,041 11,650 12,066 12,533 13,032 3,916 4,314 5,250 7,086 7,466 7,817 8,262 50.0 54.3 58.1 60.8 61.9 62.4 63.4 70.8 74.8 77.2 78.9 78.8 79.2 79.5 29.2 25.2 22.8 21.1 21.2 20.8 20.5 3,351 3,044 3,209 3,834 4,038 4,179 4,189 941 968 1,109 1,401 1,661 1,746 1,736 28.1 31.8 34.6 36.5 41.1 41.8 41.4 60.5 59.5 61.4 67.2 68.7 68.5 65.3 39.5 40.5 38.6 32.8 32.3 31.5 34.7 5,537 5,224 4,976 5,311 5,449 5,616 5,927 920 865 983 1,193 1,247 1,438 1,570 16.6 16.6 19.7 22.5 22.9 25.6 26.5 43.6 42.7 44.2 51.4 52.7 54.0 55.3 56.4 57.3 55.8 48.6 47.3 46.0 44.7 12,000 13,174 13,759 14,752 14,872 14,977 15,100 600 681 816 1,041 993 1,160 1,135 5.0 5.2 5.9 7.1 6.7 7.8 7.5 32.8 29.8 36.3 37.1 38.8 40.0 40.9 67.2 70.2 63.7 62.9 61.2 60.0 59.1 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 income sources will be adequate to maintain his or her desired standard of living. Table 5 shows the proportion of men and women aged 55 and older who reported on the 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.3 Not surprisingly, the proportion of men and women who receive income from a pension or other retirement plan increases with age. In 2007, only 17% of men aged 55 to 64 received income from a pension or other retirement plan. Among those aged 65 or older, 42% had income from pensions or retirement savings plans. The patterns among women were similar: only 11% of 55- to 64-year-old women received income from pensions or retirement savings plans in 2007, whereas 28% of those aged 65 or older received such income. The 17% of men aged 55 to 64 who were receiving pension income in 2007 represents a decline from 23% who received such income in 1990 and 1995. Over the same period, the proportion of men aged 65 or older receiving pension income also fell, declining from 49% in 1990 to 42% in 2007. The proportion of women aged 55 to 64 with pension income fell slightly from 13% in 1990 to 11% in 2006. Among women 65 or older, 28% received income from pensions and retirement savings plans in 2007, little changed from 28% in 1990 and 27% in 1995. To study the relationship between employment rates and receipt of pension distributions, we grouped the men and women into two age categories, 55 to 64 and 65 and older, and calculated the correlation coefficient between the percentage who were employed and the percentage who received pension income. Among men, there is a negative correlation between receipt of pension income and employment. Over the period from 1994 to 2007, the correlation between current employment and receipt of pension income was -0.87 for men 55 to 64 years old and -0.84 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 past investment losses. Among women, the percentage who were employed and the percentage who received pension income were not strongly correlated over the period from 1994 to 2007 (0.14 for women aged 55-64 and 0.16 for women 65 and older). This is partly 3 Lump-sum distributions from employer-sponsored retirement plans are not counted as income on the CPS. To the extent that individuals take lump-sum distributions from these plans and deposit the funds into non-retirement account from which they make withdrawals to supplement their income, the CPS underestimates retirement income. CRS-9 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. Table 5. Receipt of Income from Employer Pensions and Retirement Savings Plans (in thousands) Individuals 55 to 64 Years Old Individuals Aged 65 and Older Number of Number of Number of Number of People Recipients Percentage People Recipients Percentage Men 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 Women 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 10,152 10,090 11,249 12,366 13,149 13,531 14,034 14,865 15,469 16,069 2,368 2,279 2,124 2,371 2,372 2,450 2,578 2,709 2,692 2,677 23.3 22.6 18.9 19.2 18.0 18.1 18.4 18.2 17.4 16.7 12,547 13,260 14,179 14,235 14,527 14,797 15,151 15,185 15,443 15,762 6,178 6,206 6,099 6,276 6,414 6,656 6,778 6,539 6,739 6,552 49.2 46.8 43.0 44.1 44.2 45.0 44.7 43.1 43.6 41.6 11,182 10,991 12,532 13,501 14,229 14,824 15,484 16,104 16,712 17,220 1,479 1,164 1,475 1,525 1,572 1,705 1,776 1,959 1,940 1,883 13.2 10.6 11.8 11.3 11.0 11.5 11.5 12.2 11.6 10.9 17,538 18,398 18,799 19,535 19,706 19,862 20,063 20,320 20,593 21,027 4,962 5,025 5,426 5,412 5,379 5,610 5,603 5,901 5,786 5,840 28.3 27.3 28.9 27.7 27.3 28.2 27.9 29.0 28.1 27.8 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 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 aged 55 to 64 who received income from a pension or retirement savings plan during 2007, 37.4% were employed either full or part time in March 2008. Relatively few men aged 65 or older who received income from pensions or retirement savings plans also engaged in paid employment: only 10% CRS-10 to 13% were employed, on average, at any point during the 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 2007, 35.1% were employed in March 2008. Among women aged 65 or older who received income from a pension or retirement savings plan, only 6% to 9%, on average, were employed at any time during the period from 1990 to 2007. Table 6. Employment of Recipients of Employer Pensions and Retirement Savings Plans (in thousands) Recipients, Aged 55 to 64 Recipients, Aged 65 and Older Number of Number Number of Number Recipients Employed Percentage Recipients Employed Percentage Men 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 Women 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2,368 2,279 2,124 2,371 2,372 2,450 2,578 2,709 2,692 2,677 879 831 797 907 827 959 982 1,081 1,102 1,000 37.1 36.5 37.5 38.3 34.9 39.1 38.1 39.9 40.9 37.4 6,178 6,206 6,099 6,276 6,414 6,656 6,778 6,539 6,739 6,552 643 726 721 739 745 839 836 771 846 799 10.4 11.7 11.8 11.8 11.6 12.6 12.3 11.8 12.6 12.2 1,479 1,164 1,475 1,525 1,572 1,705 1,776 1,959 1,940 1,883 392 324 488 439 530 560 553 675 682 662 26.5 27.9 33.1 28.8 33.7 32.9 31.1 34.5 35.2 35.1 4,962 5,025 5,426 5,412 5,379 5,610 5,603 5,901 5,786 5,840 345 281 436 393 425 454 416 457 504 528 7.0 5.6 8.0 7.3 8.0 8.1 7.4 7.7 8.7 9.0 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. CRS-11 Social Security Retirement Benefits Age When Benefits Begin In 2008, full retirement benefits under Social Security are available at age 65 and 10 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 2008, 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. Most people choose to begin receiving Social Security retirement benefits before age 65. The data presented in Table 7 show that 71% of men and 75% of women who began receiving Social Security retired-worker benefits in 2006 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 full retirement age. With the repeal of the earnings test for people aged 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. 4 In 2008, a Social Security recipient under the full retirement age can earn up to $13,560 without a benefit reduction. Benefits are cut by $1 for each $2 earned over that amount. CRS-12 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 of Percentage of Percentage of Awards All Awards Awards All Awards Awards All Awards Men 1990 1995 2000a 2001 2002 2003 2004 2005 2006 Women 1990 1995 2000a 2001 2002 2003 2004 2005 2006 637,100 614,700 637,000 650,000 673,000 653,300 671,700 693,000 659,300 74.4 76.1 64.5 75.1 76.9 76.4 75.1 73.3 71.0 158,300 144,400 226,000 179,000 171,600 173,300 188,600 210,800 236,700 18.5 17.9 22.9 20.7 19.6 20.2 21.1 22.3 25.5 60,800 48,700 124,800 36,700 30,300 28,900 34,500 41,700 32,600 7.1 6.0 12.6 4.2 3.5 3.4 3.8 4.4 3.5 494,800 492,900 574,700 556,200 581,700 582,400 615,100 649,800 631,900 80.0 79.9 74.5 78.5 80.7 78.9 80.3 76.6 74.9 85,900 87,800 118,700 102,000 103,500 111,000 124,400 143,400 158,900 13.9 14.2 15.4 14.4 14.4 15.1 16.2 16.9 18.8 37,700 36,300 77,700 50,100 35,400 44,300 26,700 55,000 52,400 6.1 5.9 10.1 7.1 4.9 6.0 3.5 6.5 6.2 Source: Annual Statistical Supplement to the Social Security Bulletin, various years. Note: Initial awards exclude conversions from disabled worker to retired worker benefits. a. The earnings test was repealed in 2000 for workers above the Social Security full retirement age. Retired Worked Beneficiaries as a Percentage of Each Age Category The data presented in Table 8 show that in 2006, 38.1% of men aged 62 to 64 were receiving Social Security retired worker benefits. This was 8.7 percentage points lower than in 1995, a decline that coincided with the rising employment rates among men in this age group. (See Table 4.) The decline in the percentage of 62to 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%, but by 2006, the percentage had fallen to 34.3%. Among men aged 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. Since then, this percentage has been fairly stable. Among women aged 65 to 69, the CRS-13 proportion who were receiving Social Security retired worker benefits increased from 55.6% in 1990 to 67.6% in 2006. 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 62 to 64 65 to 69 70 and Over Percentage Percentage Percentage Number Of Age Number Of Age Number Of Age (thousands) (thousands) (thousands) Group Group Group Men 1990 1995 2000 2001 2002 2003 2004 2005 2006 Women 1990 1995 2000 2001 2002 2003 2004 2005 2006 1,336 1,320 1,330 1,333 1,333 1,331 1,373 1,430 1,424 45.3 46.8 43.2 41.8 40.4 39.9 38.4 38.4 38.1 3,898 3,900 4,076 4,125 4,198 4,255 4,270 4,289 4,357 83.8 83.4 90.8 91.4 91.0 91.8 90.4 91.0 90.1 7,751 8,694 9,366 9,473 9,578 9,667 9,796 9,935 10,087 91.7 91.2 90.3 90.3 91.1 91.9 91.6 93.8 93.3 1,167 1,128 1,223 1,237 1,246 1,256 1,313 1,394 1,416 35.9 36.8 36.0 35.3 34.4 34.0 33.2 34.1 34.3 3,067 3,058 3,209 3,284 3,369 3,475 3,544 3,621 3,742 55.6 56.7 63.1 64.5 63.2 65.3 65.5 66.9 67.6 7,607 8,570 9,302 9,390 9,480 9,563 9,677 9,806 9,949 55.9 57.7 59.7 60.0 59.6 60.5 60.6 61.3 61.9 Source: Annual Statistical Supplement to the Social Security Bulletin, various years. 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, many workers choose to continue working after they have retired from their “career” jobs. The process of retiring often occurs gradually over several years, with some workers retiring from year-round, full-time employment and moving to parttime or part-year work at another firm, often in a different occupation. The data in Table 6, for example, show that 37% of men and 35% of women aged 55 to 64 who received income from a pension in 2007 were employed in March 2008. 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 partyear schedule. This process is sometimes referred to as phased retirement. No statutory definition of phased retirement exists, but one analyst has described it as CRS-14 “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 Prior to enactment of the Pension Protection Act of 2006 (PPA, P.L. 109-280), an employee could take distributions from an employer’s defined benefit pension only after having separated from the employer or after having reached the pension plan’s normal retirement age, which by law cannot be greater than 65. Section 905 of the PPA amended the Employee Retirement Income Security Act of 1974 (ERISA) such that distributions from a qualified retirement plan to an employee who has not separated from the employer can begin at age 62, even if this is younger than the plan’s normal retirement age. Some employers have suggested phased retirement would be embraced by more firms if pension distributions could be paid to employees at the plan’s early retirement age. Employers could offer in-service distributions to employees who have reached the plan’s early retirement age but who have not separated from the employer only if the Internal Revenue Code and 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 to retire and who might be lost to the firm if the only options available to them are 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 jobsharing. Firms sometimes rehire retired employees on a part-time or temporary basis, or bring them back as contractors or consultants 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 the earlier of age 62 or the pension plan’s normal retirement age, the plan cannot pay retirement benefits to the individual while he or she remains employed by the firm, even if only on a part-time basis. 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 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. 6 26 C.F.R. § 1.401-1(b)(1)(i). CRS-15 reached the plan’s normal retirement age could lose its tax-qualified status.7 An employee who has reached age 62 or 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 for it 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 inservice pension distributions to employees who have reached the plan’s early retirement age (or some age between the early retirement age and 62).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 age 62 or 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 to the pension fund that would otherwise be paid as wages. 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. 10 Requirements for qualification of pension plans are defined at 26 U.S.C. § 401(a). CRS-16 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 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. 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.