Phased Retirement: Who Opts for It and Toward What End?

3.3 Research on Phased Retirement

For this report, phased retirement means the gradual reduction of work with a long-term employer as an older employee approaches full retirement. To date, there has been relatively little research on the number of people taking part in phased retirement in the United States. Gustman and Steinmeier (1984) made one of the first distinctions between phased and partial retirement by finding that 3% of their sample were phased retirees. Subsequently, Ruhm noted that 6.2% of his sample of workers ‘were partially retired and working for their career employer’ (Ruhm, 1990: 492). More recently, Even and Macpherson (2004) found that phased retirement varies from 2.7% to 14.3% depending on the age group6.
According to the ERISA Advisory Council (2000), employees who are contemplating retirement generally respond favorably to the option of phased retirement. An AARP study (2005) found that, although only 19% of surveyed older workers had heard of the term ‘phased retirement’, nearly 40% expressed interest after reading a description of it.
Similarly, Abraham and Houseman (2004) analyzed workers’ plans for the future and found significant interest by employees in reducing their hours of work. Analyzing the HRS over the first five waves, they found that 18% of respondents desired a reduction in work hours while another 5% wanted to change the kind of work they did, 25% wanted to stop work altogether, nearly 8% never wanted to stop, and more than 45% did not know or gave a different response. Of those planning to stop work, almost two-thirds did so, and 86% of those who planned to keep working continued working. However, only one-third of those desiring to reduce hours were able to do so, and only 22% of respondents who wanted to change the kind of work actually did so.
Employee responses to phased retirement can vary depending on how the program operates (see, e.g., Bertelsen, 1983; Berry, 1998)7. The same AARP study in which 40% of workers expressed an interest in phased retirement showed that 48% of workers said that, if being a phased retiree meant that they would have to hold a different job with the same employer, this would make phased retirement less attractive to them. In the same study, 63% of all workers indicated that phased retirement would be less attractive to them if it reduced the amount of pension benefits. Likewise, Even and Macpherson (2004) reported that workers covered by pension plans are less likely to transition to part-time work than those not covered by pension programs, and of those that do make the switch to part-time work, those with pension coverage are more likely to make a switch of employers in the process. For those workers who desire a reduction in hours or a different kind of job, some job duties may not be amenable to division or other changes (Abraham and Houseman, 2004).
On attitudes of phased retirees, Watson Wyatt Worldwide (2004) found that 57% of those workers currently in phased retirement entered into an arrangement voluntarily to have more leisure time. Of these voluntary phased retirees, 42% indicated that they chose phased retirement because they enjoyed their work while 28% stated that they needed the income from continued work. However, 32% of the phased retirees retired completely from their jobs but then returned to work part-time, and of this group 40% indicated that they entered into phased retirement for financial reasons. Almost 10% of phased retirees surveyed were forced into phased retirement through job restructuring. Almost 60% of these phased retirees said they continued to work because they needed the income.
The Watson Wyatt Worldwide survey also indicated that phased retirement might influence the timing of retirement: nearly 25% of phased retirees expected to work past age 65 and another 20% did not plan to retire at all. This comports with surveys of older workers not in phased retirement programs who answered that they would continue working longer than otherwise planned if their employer offered a phased retirement program (Watson Wyatt Worldwide, 2004; AARP, 2005). In the AARP survey (2005), 78% of older workers who expressed an interest in phased retirement anticipated that the availability of phased retirement would encourage them to work past their expected retirement age. In a different survey of employees in a state public school system, 44% of respondents indicated that they would consider delaying full retirement if a phased retirement option were made available (Bartle, 1989).
Employers also view phased retirement programs positively, but most phased retirement programs are neither broad based nor part of a formal written policy (Watson Wyatt Worldwide, 1999; Hutchens, 2003). One survey of 600 large private firms found that 16% of employers provide a formal phased retirement program, with an additional 40% interested in initiating a program (Watson Wyatt, 1999). In a study of 950 public and private organizations that employ 20 or more workers, Hutchens (2003) found that although 73% of surveyed employers permitted an employee to reduce hours before official retirement, only 14% of those employers had a formal, written phased retirement policy that applied broadly to employees. Phased retirement programs appear to be more prevalent among organizations that are smaller in size, non-unionized, and in the service sector — although larger organizations were more likely than smaller organizations to have formal programs. Colleges and universities, with their unique tenure rules, seem to be leaders in providing phased retirement programs for faculty. A survey of universities found that 27% have formal programs through which tenured faculty may make a gradual transition to retirement by working part time for a number of years before complete retirement (Ehrenberg, 2001).
Phased retirement was also likely to be offered with other types of human resource policies such as job sharing, flexible starting times, and health insurance for part-time workers (Hutchens, 2003). Nearly three-quarters of employers would alter health insurance benefits for workers who entered into phased retirement, and 34% of employers would drop health insurance coverage for phased retirees.
Significant legal, cultural, and institutional barriers stand in the way of the implementation of broad-based phased retirement programs. Complicated tax rules on distributions from, and benefit accruals under, pension plans may be preventing employers from coordinating pension benefits with a phased retirement program, although recently proposed rules from the Internal Revenue Service may alleviate some of these complexities8. Moreover, it is unclear how the age discrimination laws would apply to phased retirement programs, if at all. Employers may also be concerned about employees drawing down benefits, particularly in defined contribution plans. Employers are unlikely to institute phased retirement programs, particularly broad-based programs, without greater clarity in the law and without the flexibility to adapt such programs to their own needs (Chen and Scott, 2003).

6 Even and Macpherson (2004) found phased retirement at 3.9% for those aged 50-54; 2.7% for those aged 55-59; 3.5% for those aged 60-61; 8.3% for those aged 62-64; and 14.3% for those aged 65 and older.
7 In a study of university faculties, the overall rate of workers leaving full-time employment increased significantly, but the increase in full retirement was small. Based on observable characteristics such as age, salary, years of service, and job characteristics, employees entering a formal phased retirement program offered by an employer more closely resembled those remaining in full-time jobs than those entering full retirement. The probability of entering into phased retirement was also related to job performance, workload, and maximization of personal income (Allen, Clark, and Ghent, 2001). One study of a large state university system found that a phased retirement program raised the odds that low-performing faculty would start the retirement process earlier (Allen, 2004).
8 U.S. Treasury Department Proposed Regulation 114726-04, Federal Register, vol. 69, no. 217, Nov. 10, 2004. The proposed Internal Revenue Service regulations generally provide for defined benefit plan distributions that are made as part of a ‘bona fide’ phased retirement program. A phased retiree would be able to receive a pro rata share of his or her accrued benefits based on the reduction in hours worked in phased retirement. The employee would be able to continue accruing benefits under the pension plan. The proposed regulations focus only on defined benefit pension distributions and not on other issues such as age discrimination or health insurance coverage.

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