IRS plan would help older workers step slowly out of the work force

Older workers who want to step slowly out of the work force have a surprising ally in the IRS

Author: Bob Moos

Published: March 29, 2005

Social Security reform may be making headlines, but a less-noticed government proposal for changing retirement income could also end up affecting millions of older Americans.

The Internal Revenue Service proposes to ease the transition from work to retirement by allowing workers older than 591/2 to draw a partial pension and hold a part-time job with the same employer.

Tax and pension laws generally forbid early retirees from collecting both a traditional pension and a paycheck from the same company.

The proposed IRS regulation would recognize older Americans' budding desire - and employers' developing need - for what experts call "phased retirement."

"We need to rewrite our pension laws this year so that they say it's OK for an employer to put his retirees on the payroll," says Rep. Sam Johnson, R-Texas.

Advocates of phased retirement say it's a win for employers and employees.

After years of nudging older workers out of the work force to make room for younger ones, companies are about to have the opposite problem. As tens of millions of baby boomers leave the labor force, there won't be enough younger workers to replace them.

Labor analysts predict that many industries will face a severe shortage of skilled workers within a decade.

"Boomer retirements will mean a significant loss of intellectual capital for companies with older work forces, such as in telecommunications and utilities," said Pierce Noble, a partner in the Dallas office of Mercer Human Resource Consulting.

Said boomers aren't necessarily chafing to kick back and relax for the rest of their lives, either.

"Retirement used to be 'all or nothing' - you were either retired or employed," said Dallas human resources consultant Barbara O'Neal. Now, "more people are trying some combination of retirement and work."

Many older workers don't want to work as many hours, but they still enjoy the challenge or need the income. So they're retiring in steps, collecting their pensions from one company while getting a part-time or consulting job at another.

O'Neal calls it "retirement but with training wheels."

However, because of tax and pension laws, scaling back usually requires changing employers, even though many older workers would prefer to stay at the employer they know rather than re-enter the labor market.

"It's always easier to keep a job than to get a job," points out AARP senior policy adviser Sara Rix.

The idea of phased retirement is popular with employees, said Valerie Paganelli, a senior consultant with Watson Wyatt.

A survey by the human resources consulting company found that two-thirds of older workers wanted to scale back their hours before completely retiring. One-third also said they would postpone their full retirement if their employers offered a phased retirement option.

Human resources professionals call the phased retirement proposal by the Internal Revenue Service a good first step.

When the employees completely retired and began collecting their ultimate pension benefits, they wouldn't be penalized for the lower earnings of their last working years.

The programs would be voluntary for both employers and employees and cover traditional, defined-benefit pensions.

"Defined-contribution plans are more conducive to phased retirement, since employees can already withdraw funds at 591/2," said Paganelli of Watson Wyatt. Defined-contribution plans generally offer a lump sum at retirement, compared with defined-benefit plans' monthly checks for life.

Human resources specialists praised the intent of the IRS regulation.

"It provides some clarity and may prompt some employers to act," said Mary Huttlinger, manager of tax and benefits policy for the Society for Human Resource Management.

Procter & Gamble Co. and Eli Lilly & Co. have acted without the IRS. Their innovative approach highlights the need for retired employees' talents.

To get around the rules, the companies helped create an independently owned business that recruits and manages recently retired workers.

YourEncore matches its 500 retirees with short-term assignments at P&G, Eli Lilly and several other companies.

Most are engineers and scientists who retired in the last few years from long careers in research and development, said YourEncore Executive Vice President Mike Kostrzewa.

"They're a robust group," he said.

The retirees work for YourEncore and are paid based on their salary upon retirement.

Tom Jeffers, a biologist who retired from Eli Lilly at 60, recently returned as a YourEncore employee to work on a special project for about a month.

"It's a great way to keep your mind engaged and your skills up-to-date," he said. "And when it's over, I get to resume my retirement."

Critics of the current IRS rule argue that early retirees as young as 55 should be eligible for partial pension benefits, a move they say may require congressional action.

Eugene Steuerle, a senior fellow at the Urban Institute, expects employers to begin offering phased retirement once Congress acts.

The economy can't afford outdated tax and pension rules that were designed to get rid of older workers and replace them with younger ones, he said.

"Older adults represent our largest untapped pool of human talent," Steuerle said. "They can be a part of the solution."