One day you’re working. The next, you’re retired. That’s the way it goes for most Americans, whether they leave the time clock behind at age 62, 66 or 70.
The downshift from high gear to first is not only abrupt; it also has widespread ramifications for retirees’ savings and incomes, and for the Social Security system, which must provide benefits to a larger cohort that also happens to have longer life expectancies. By the year 2030, 20 percent of the U.S. population is projected to be 65 or older. The industries retirees leave behind similarly can face personnel shortages and training problems, and the economy could face a productivity decline, according to a 2016 study for the National Bureau of Economic Research.
But what to do about it?
The Government Accountability Office (GAO), a research and investigative arm of Congress, looked around the world to see how other countries with aging populations and national pension systems similar to Social Security deal with retirement. In a new report to leaders of the Senate Special Committee on Aging, the GAO focused on four nations in particular that help their citizens transition more gradually into retirement, by providing partial retirement benefits or supplemental income as workers put in fewer hours and therefore earn less from their jobs: Canada, the United Kingdom, Germany and Sweden.
“Even with unique considerations in the United States, other countries’ experiences with phased retirement could inform U.S. efforts,” the GAO said.
Canada introduced an income tax regulation in 2007 to allow flexible retirement arrangements under employers’ defined pension plans. This allows someone to collect a portion of his or her pension while still working — but with fewer work hours — and while still accruing future pension benefits in the same plan. The changes allowed employees to get up to 60 percent of their accrued benefits, subject to employer agreement, while in the phase-down stage of their careers.
Participating employees took home less in work wages, the GAO said, since they worked fewer hours. But to make up for the wage loss, they could withdraw funds from their employer-sponsored pension plans, take a lump sum funded by their employer, or simply dip into their savings.
And since they keep building benefits when working, albeit with fewer hours, they can retire with their full pensions when ready.
The United Kingdom implemented a policy in 2014 for anyone who worked continuously for at least 26 weeks, granting them the right to request flexible work. Flexible work can include job sharing, working from home or working a compressed week (such as putting in a full week’s work in four days), among other things. This policy covers workers who want to phase into retirement.
Employees participating in phased retirement programs are generally compensated for forgone wages by withdrawing funds from their workplace employer-sponsored pension plans. But as in Canada, they still accrue benefits for the hours they work, even if reduced. This can enable them to delay full retirement without harming their full-retirement benefits.