By now we all know that we will be working longer. I don't know anyone who is planning to retire at 50 any more. And as those 401-k statements roll in, reality is sinking in. Retirement is going to come later.
The real question is whether employers and society as a whole are ready for people who don't just want to work, but have to work until they are 70 or older.
Many of our current retirement policies were designed to convince people to leave the workforce early. More retirees equaled more jobs for everyone else. Social Security offers early retirement. Pensions often carry penalties for employees who keep working. Many companies still have mandatory retirement ages for their CEOs.
Even though it's clear most workers now need to work longer, public policy hasn't caught up to this new reality.
The Washington Post today argues President Obama should consider raising the retirement age for Social Security to 68 and reducing benefits for the "well-off."
Some reform of Social Security will be needed, no doubt about it. But it's not enough to say mandate people work longer. We have to implement policies that allow that to happen.
When the retirement age was roughly 62, workers spent roughly 40 years in the labor force. Raising the retirement age to 70 extends a career by 20%. A longer career means it might be possible to recoup investments made in retraining older workers.
New, more flexible work arrangements will be needed. Age discrimination will have to be tackled in a way that allows employers to carve out jobs that help ease people into retirement.
At every stage of their lives, the baby boomers have reshaped the institutions they've inherited. Now that the boomers are facing a delayed retirement, I am sure they'll be making their voices heard on this.
Comments
Plan Admin - thank you for the interesting info. In my (limited) experience, I see older workers leave a full time position for part time work or consulting situations with their former employers, without benefits. So I would suppose only the RMD would apply to them, unless their particular plan permits delayed withdrawals.
Darren,
The IRS allows plans to select one of two options for its employees who continue to work beyond normal retirement.
Option 1 allows age 70 1/2 employees to draw their retirement benefit while still employed, meaning they draw pay and pension benefit. This creates somewhat of an administrative monster because the individual continues to participate in the plan earning pay and service. So each year their benefit needs to be recalculated, with offsets for amounts paid. They continue this process until they retire from service at which time their benefit is recalculated one last time.
Option 2 does not allow age 70 1/2 employees to draw their retirement benefit while still employed. The individual continues to participate in the plan as do all other employees. When they retire their benefit is calculated just as it is for every other retiring employee. Probably 90% of people who retire prior to reaching age 75 have their benefit computed this traditional way.
But this is where Option 2 gets tricky. The IRS says that if you continue to work beyond normal retirement (usually age 65) an actuarial factor is applied to your age 65 benefit to make up for the delay in payment. If the plan is non-contributory no one would voluntarily quit the plan; the benefit accrual in the early stages will exceed the actuarial increase. Assume for the sake of example that the plan allows the employer to stop making contributions on behalf of a > age 65 employee, and that employee continues to work. When that employee finally retires their benefit has the actuarial factor applied to their age 65 benefit and they receive a higher annuity. The longer they work, the greater the amount. Depending on the age of the employees, maybe employers stop making contributions because those contributions do not provide as great a benefit as the actuarial increase.
In a contributory plan it could get even crazier. Depending upon the years of service and age (usually around age 75 if there's a large service credit) the benefit received through the actuarial increase could be greater than the benefit earned through plan accruals. Under that scenerio, the individual would be wise to quit the plan and stop making contributions. The law says they have to be paid the higher of the plan benefit and the actuarial benefit. Because the actuarial benefit is greater the contributions were a waste of money.
Here's another thing that 70 1/2's who continue to work should keep in mind. It deals with Required Minimum Distributions. I know RMDs are waived for 2009 but this is for the future. If the 70 1/2 continues to work, has a pre-tax 401(k) Plan at work that accepts rollovers and has an IRA subject to an RMD, they should roll that IRA into the 401(k). RMDs are not required from a 401(k) plan while still employed.
Aren't you glad you asked?
Plan Administrator,
This is why I have so much respect for NBR viewers. It was my impression/understanding that many pensions did not choose to increase benefits after a certain age, even if they could.
Am I wrong on that?
It sounds like your point is that the policy option is available, even if employers don't do it.
Darren
Darren,
Regarding your comment that some pensions carry penalties for employees who keep working--- I believe the IRS has tables for those who continue to work past age 70 1/2 that provide for actuarial increases to an accrued benefit that, depending upon age and years of service, could provide a benefit greater than a participation accrual.