Applied Research Bulletin - Volume 2, Number 2 (Summer-Fall 1996) - January 1996

Changing Notions of Retirement: A Phased-In Approach

Previous

Contents

Next

Our notion of retirement may be poised to change. Most of us still view retirement as a singular and abrupt lifetime event. And for many Canadians it's just that. In 1994, for example, 86 percent of those leaving the labour force did so without any adjustment in their work schedules prior to their retirement. Current trends and circumstances, however, suggest that a phased-in approach to retirement may deserve more consideration. A recent report commissioned by Human Resources Development Canada and prepared by human resources specialists William M. Mercer Limited examines issues surrounding phased-in retirement.

Flexible Pension Design

Phased-in retirement starts with a joint decision by employer and employee to reduce the employee's total hours of work over a period of time as the worker moves toward a full and complete retirement. That decision could accommodate the choice to retire before the normal date of retirement as established in the pension plan (e.g. before age 65) or it could accommodate an individual's choice to continue working beyond the normal date of retirement. Either way, flexible pension design could take one of three forms:

• receipt of final pension is delayed completely, enabling the employee to earn new pension credits based on a reduced work schedule;
• receipt of all or part of the final pension, but the employee earns no new pension credits while continuing to work on a reduced schedule; or
• receipt of the final pension and the employee continues to earn partial pension credits, necessitating the recalculation of the value of the pension when full retirement occurs.

Today's pension plan environment already provides limited opportunities for certain workers to phase-in their retirement. Lengthy service with a single employer, above-average earnings, access to relatively generous employer-sponsored benefits and some investment income are the common features that appear to support existing phased-in approaches to retirement.

Benefits of Phased-In Retirement

Many trends point to the benefits of phased-in retirement. A recent report by the Organization for Economic Co-operation and Development underscores the future fiscal unsustainability of rising social security costs. A crucial means of keeping these costs down could be to counteract the effects of the rate of increase in the total dependency ratio (defined as a comparison of the number of persons in the population who are both older and younger than those of working age, to the number of persons who are between the ages of 15 and 65). This could be done by encouraging workers to stay in the work force longer via phased-in retirement.

From a practical perspective, individuals who begin paid employment later in life, or who interrupt employment due to education or family care needs, for example, may either want or need to remain working longer. This growing legion of workers probably requires a set of more flexible pension plan rules that will not unduly penalize them for having followed non-traditional career paths.

Employers can reduce payroll costs by implementing phased-in retirement. In addition, this approach may create additional employment opportunities within their organization, ensuring higher morale by satisfying the individual needs and aspirations of workers. At the same time, employers can continue to draw on the energies and knowledge of experienced workers, albeit for reduced periods of time.

Employees who can afford to do so may want to broaden their horizons outside of the confines of working life. The continued regular earnings that a phased-in retirement provides may help them to realize some of these other goals while adjusting to the reduced income that usually accompanies full retirement.

Key Findings of Mercer Report

The Mercer report concludes that the current set of supervisory rules and regulations surrounding existing occupational pension plans, in both the private and public sectors, would need to be modified in a number of ways to facilitate a broader adoption of a phased-in approach to retirement. For example, for defined contribution plans, the regulatory requirement that pension plans provide pensions in "equal periodic amounts" represents a barrier to the possibility of earning partial pension credits while receiving part of the accrued pension. If the pension starts in two stages, then the pension will not have been paid in equal payments throughout the employee's retirement.

This regulatory barrier also exists for defined benefit plans. In addition, regulations do not allow employees receiving defined benefit pension payments to earn further pension credits. The report recommends that these regulatory features be examined with a view to supporting increased choice by both employers and employees.

The regulatory requirement that pension plans provide pensions in "equal periodic amounts" represents a barrier.

The Mercer report notes two other major drawbacks to phased-in retirement. The current structure of most pension plans would mean that a more "gentle" or phased-in move to retirement would severely reduce the final value of one's pension at the time of full and final withdrawal from paid work. Another drawback — current attitudes toward retirement. The general expectation of full retirement at an increasingly early age may work against the likelihood that phased-in retirement will gain greater acceptance.

Here are some of the other key findings of the Mercer report:

• A phased-in approach to retirement is more likely to be successful in a situation where an employer has already made generous provision for early retirement, for example, with an early departure incentive.
• Phased-in retirement will be attractive only to the extent that employees can afford to go into semiretirement rather than remain working full time. Affordability is the ultimate barrier. Data on pensions and RRSP savings suggest that the proportion of the Canadian population who could afford to retire early, without financial incentives, is small.
• Of the two types of pension plan systems, defined contribution plans rather than defined benefit plans are most amenable to a phasing-in of retirement benefits. The sponsors of defined contribution plans, however, tend to be small business owners and operators who may lack the capacity to provide flexible working time arrangements — a critical ingredient in the phase-in process.
• Current Canada Pension Plan retirement provisions are not particularly conducive to a phased-in approach to retirement.

Does phased-in retirement lie ahead for Canadians? Assuming that pension systems become more flexible and that corporate cultures and individual attitudes change, phased-in retirement may be an appealing alternative for employers and employees alike.

Previous

Contents

Next