Work and Retirement

An important issue pertaining to aging and work is retirement. But what is retirement?

Retirement is often defined using 2 characteristics: 1. Non-participation in the paid labor force Receipt of income from pensions, Social Security, and other retirement plans Source: P.J. Purcell. Other workers: Employment and retirement trends. Monthly Labor Review, October 2000, pp. 19-30.

An individual who does not work for compensation and who receives income only from pensions, Social Security, and retirement savings plans would be defined as retired. An individual who works for compensation and who receives no income from pensions, Social Security, or retirement savings plans would not be defined as retired.

Some people satisfy one characteristic, however, but not the other. For example, there are individuals who have retired from careers in law enforcement or the military, receiving pensions after 20 years of service, but who go on to work for many years at other jobs. These individuals have retired from one job, but have not retired from the workforce.

Some people retire from full-time employment, but 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, they are often considered to be retired.

Thus, retirement classification is not always simple. Not everyone who receives pension income is retired, and some who work for pay are actually retired.

Over the last couple of decades, data from the Current Population Survey (CPS) have found that the labor force participation rate has increased among both men and women aged 55 to 64. ( http://www.bls.gov/opub/mlr/2013/article/pdf/labor-force-projections-to-2022-the-labor-force-participation-rate-continues-to-fall.pdf )

One of the reasons given for this change is a long-term trend away from defined-benefit pension plans toward defined-contribution plans. What is the difference between a defined-benefit plan and a defined-contribution plan?

Defined-Benefit Plan The employer provides a set amount of benefits to the individual. It is the employer's responsibility to come up with the cash for the retiree.

Defined-Contribution Plan The employer places a certain amount of money in the employee's name into the pension fund and makes no promises concerning the level of pension benefits that the employee will receive upon retirement. The employee assumes the risk of investment failure.

Social Security

The amount of Social Security taxes paid depends on an individual’s employment history. Social Security benefits received are based on the family.

In 2004, individuals in jobs covered by Social Security faced a 15 In 2004, individuals in jobs covered by Social Security faced a 15.3% tax rate up to a maximum level, half paid by the worker & half by the employer. To receive benefits an individual must obtain a threshold level of pay from jobs covered by Social Security for 40 calendar quarters. Spouses of covered workers are entitled to receive social security benefits equal to 50% of the amount entitled by the covered worker, or survivor benefits of 100% if the covered worker dies, but not both. A spouse may receive benefits based on his/her own earnings record or 50% of the spouse’s benefit, whichever is greater. An individual cannot receive both their own benefit and a survivor’s benefit.

Case 1: Wife is full-time homemaker. The couple gets 150% of the husband’s benefit, even though the wife has not paid taxes in the S.S. system. The benefit is greater than the couple would have received if they were not married.

Suppose the husband is eligible for $1000 in monthly S.S. benefits. Example Suppose the husband is eligible for $1000 in monthly S.S. benefits. The the wife would receive $500 in S.S. benefits, & the couple’s total benefit would be $1500.

Case 2: Wife earned less than half of husband’s earnings. A wife who has had much lower wages & a much shorter worklife than her husband would have lower S.S. benefits based on her own earnings than based on 50% of her husband’s benefit. So she receives 50% of her husband’s benefit, which is the same amount that she would have received if she had not worked at all & had not paid into the S.S. system. The benefit is greater than the couple would have received if they were not married.

Example Suppose the husband is eligible for $1000 in monthly S.S. benefits. Suppose also that based on her own earnings, the wife would receive $400 in benefits. Since 50% of her husband’s benefit is greater, she receives that ($500) and the couple’s total S.S. benefit is $1500, no more than if the wife had not worked at all.

Case 3: Wife earned more than half of husband’s earnings. Suppose a wife has earned enough to be eligible for a greater benefit based on her own earnings than based on 50% of her husband’s benefit. So they each receive the same benefit as if they were single; neither benefits from being a spouse.

Example Suppose the husband is eligible for $1000 in monthly S.S. benefits. Suppose the wife is eligible for $800 in monthly S.S. benefits based on her own earnings. Since her own earnings benefit is greater than 50% of her husband’s benefit ($500), she gets the $800, which is only $300 more than she would get if she had not worked at all.

The S.S. system provides disincentives for secondary earners to work for pay. If they work, they pay taxes into the S.S. system, but they don’t gain as much in S.S. benefits as the primary earner, and they may gain no additional S.S. benefits at all.

An important concept in Social Security full retirement age

Upon reaching the age of “full retirement,” individuals become eligible to receive their full social security benefit. For individuals born in 1960 or after, the age of full retirement is 67. For those born in 1937 or earlier, it is 65. For those born between 1938 and 1959, it was gradually increased from 65 to 67.

Source: http://agebb.missouri.edu/agtax/issues/ssandse/socsecret.pdf

Retired-worker benefits are first available at age 62. However, benefits that begin before the full retirement age are reduced for each month below the full retirement age.

An individual, whose full retirement age is 65 but who retires at 62, receives benefits equal to 80% of what would have been received if he/she retired at age 65. An individual, whose full retirement age is 67 but who retires at 62, receives benefits equal to 70% of what would have been received if he/she retired at age 67. The reduction in benefit for retiring prior to full-retirement age serves as a disincentive to retire early.

The Social Security system also influences the retirement decision in two other ways. the delayed retirement credit the earnings test

Delayed Retirement Credit This credit is a permanent increase in benefits for workers who delay receipt of Social Security benefits until after full retirement age. For each year after full retirement age, that an individual delays retirement, his/her Social Security benefits increase, up to age 70. This credit encourages individuals to stay in the labor force.

The annual delayed retirement credit percentage depends on year of birth & varies from 3% to 8%. Credit per year 1917-24 3.0% 1925-26 3.5% 1927-28 4.0% 1929-30 4.5% 1931-32 5.0% 1933-34 5.5% 1935-36 6.0% 1937-38 6.5% 1939-40 7.0% 1941-42 7.5% 1943 and later 8.0% Source: http://www.ssa.gov/OACT/quickcalc/early_late.html

Delayed Retirement Credit Example: Suppose your full retirement age is 67. If you wait until you are 68 to retire, you will get 108% of the benefits that you would have received if you had retired at age 67. If you wait until you are 69 to retire, you will get 116% of the benefits that you would have received if you had retired at age 67. If you wait until you are 70 to retire, you will get 124% of the benefits that you would have received if you had retired at age 67. If you wait until you are 71 or later to retire, you will get still 124% of the benefits that you would have received if you had retired at age 67.

Earnings Test This test reduces the Social Security benefits of recipients under the full retirement age whose earnings exceed specific levels. For example, a Social Security recipient under full retirement age in 2015 can earn up to $15,720/yr. without having his/her benefit reduced. However, for each dollar earned above that amount, benefits are cut by fifty cents. Thus, individuals are encouraged to keep their earnings below the earnings test level. The earnings test does not apply to those at full retirement age or older.

Phased Retirement

What is phased retirement? It is a situation in which an individual works for an employer part-time or on a reduced schedule as a transition into full retirement.

Two Popular Phased Retirement Arrangements An employer hires former employees on a part-time or temporary basis. An employer hires former employees as contractors. In both of these situations, the individual first separates from the firm before returning to work under the new arrangement.

Another approach to phased retirement Employees reduce the number of days per week or hours per day that they work, for a period of time prior to ceasing employment entirely. Unless the employee has reached the pension plan’s normal retirement age, however, the firm can not pay retirement benefits to the individual. In order to qualify for favorable tax status, the plan must pay benefits only on condition of death, disability, termination of employment, plan termination, or at the normal retirement age.

Employees who become part-timers frequently change employers. While many employees express an interest in taking a phased retirement, few actually do. Employees who become part-timers frequently change employers. Source: R. Hutchens, Phased Retirement: Problems and Prospects, Center for Retirement Research at Boston College, February 2007. http://www.bc.edu/centers/crr/issues/wob_8.pdf

Who does phased retirement? Compared to other respondents, phased retirees have greater household income and wealth, are better educated, are more likely to be in white-collar, highly skilled occupations, are less likely to be black, are about equally likely to be male or female. Source: Y.-P. Chen and J.C. Scott (2006) “Phased Retirement: Who Opts for it and Toward What End?” Washington, DC: AARP Public Policy Institute. http://assets.aarp.org/rgcenter/econ/2006_01_retire.pdf

Conclusion Retirement can be quite a complicated issue. It is not just a question of when to stop working entirely. It is influenced by a number of factors including access to social security and pension funds.