Employment
Retirement plans
Reforms have included a phased increase in the normal retirement age beginning in 2003, adjustments to the annual growth in delayed benefits, and elimination of the annual earnings test for persons at full retirement age (currently 65 and older). Nevertheless, the rules still encourage most people to start receiving benefits as soon as they are eligible.
The annual growth rate in delayed retirement credits - currently 6.0% per year - provides an incentive to start receiving benefits at age 65.
Defined-benefit retirement plans encourage workers to retire at or before the specified normal retirement age. Defined-benefit plans provide the maximum benefits when taken at the earliest possible age of eligibility. Although benefits are reduced for retiring early, they often have a greater actuarial value than if the individual had retired at the normal retirement age.
In contrast to defined-contribution plans where an individual receives the amount invested at retirement, defined-benefit plans calculate retirement benefits in advance using a formula that includes the number of working years, earnings history, and age at retirement. Actuaries determine the percentage of employee earnings that must be set aside to meet the future payment obligations of a defined-benefit plan. This percentage rapidly increases with the age of the employee. Thus, employers often structure their defined-benefit plans to encourage older workers to retire early. Today, about half of all workers with pension coverage have defined-benefit plans.
Employers' payroll and health insurance costs may also affect the timing of retirement. The higher payroll and health insurance costs associated with hiring and retaining older workers encourage employers to scale back their older workforce. Often employers incur greater payroll expenses when they hire older workers because earnings rise steadily with age. In general, health insurance costs are also higher for older than younger workers.
Updated: November 2, 2007
