Having implemented such alternative work arrangements as job-sharing, work-at-home and flexible scheduling, employers are now considering alternative retirement arrangements. Watson Wyatt’s survey of phased retirement arrangements reveals that among a significant number of employers, flexibility is coming to retirement. Sixteen percent of the nearly 600 surveyed employers report that they allow phased retirement arrangements, defined in our survey as allowing employees approaching normal retirement age to reduce their work hours and/or job responsibilities to gradually ease into full retirement.

It’s the Demographics...

There are compelling reasons why a more flexible approach to retirement is likely to become more common. Simply put, the demographic reality now facing employers is that the significantly smaller baby bust generation will be hard pressed to fill all the positions vacated by the retiring baby boomers.

Far from being an esoteric subject better left to academics, demographics is a strategic issue that will confront every employer in one way or another given that — not to belabor the obvious — all workers are aging. Employers that confront the changing demographics as a strategic human resources issue will clearly have an advantage over those that ignore all the warning signals.

Much has been written about the aging of both the population and the workforce — the inevitable consequence of fewer births and longer life expectancies. Some employers are clearly aware of the implications of this aging process, but many more have yet to take appropriate steps to prepare for the new demographic order. This new order will feature a shrinking supply of workers and dramatic changes to the overall age composition of their particular workforces.

The U.S. labor supply grew at a healthy clip of more than 2 percent per year throughout the 1970s, peaking at more than 3 percent in 1978. In contrast, today’s labor force is expanding at an average rate of only 1 percent per year, and by 2004 the rate will fall below 1 percent. What this slow labor force growth means for employers is that from 1996 to 2006, the number of workers aged 25 to 34 will drop by nearly 9 percent, while the number of workers aged 55 to 64 will increase by more than 50 percent.

Given this undeniable demographic reality, phased retirement is not likely to be a fleeting phenomenon. Indeed, nearly half of Watson Wyatt’s survey respondents with phased retirement arrangements anticipate that such arrangements will become more common in their organizations over the next five years. Moreover, phased retirement appears to be more than a blip on the radar screen of many organizations that currently do not offer such arrangements. More than one-quarter of survey respondents indicate a moderate-to-high level of interest in implementing phased retirement arrangements over the next two to three years.

A (Gradual) Way Out: Phased Retirement

As the supply of new entrants to the workforce slows to a trickle, employers will need to focus on ways to retain qualified workers. Phased retirement could provide employers with a silver lining to the demographic cloud hanging over the future labor supply, while giving workers the flexible exit from the workforce many desire. Nearly three-quarters of surveyed employers reported that they considered phased retirement to be a viable strategy to address labor shortages.

Generally speaking, such phased retirement arrangements would work to the employer’s advantage, allowing them to retain valued workers longer than if the only option given the employee was full-stop retirement. Indeed, Watson Wyatt’s survey confirms that the main reason — by a wide margin — employers use phased retirement arrangements is to retain skilled workers (Figure 1). Phased retirement arrangements may also prevent an employer from losing valued employees to the competition — in cases, for instance, where a worker retires from a position with one company and goes to work for another employer. Research indicates that a significant number of older workers are making use of ""bridge jobs"" to span the period between the end of a career job and full-time retirement.

 Employers Primary Reason for Implementing Phased Retirement - Fig 1

A Closer Look at Phased Retirement

Watson Wyatt’s survey sheds light on many of the interesting facets of these still-evolving flexible retirement arrangements. Phased retirement arrangements are most prevalent in the educational services and professional/technical and scientific sectors. One might expect phased retirement to be relatively common in academic environments for instance, where it can be more easily arranged: A professor approaching retirement age, for example, may wind down her career by teaching one semester and then taking the next one off.

Phased retirement is also prevalent among employers in the public administration sector. Though considerably less prevalent, it is significant that more than 10 percent of employers in the manufacturing sector report that they allow phased retirement (Figure 2). Not surprisingly, organizations with older workforces had the highest proportion of phased retirees.

IRS regulations currently prohibit paying a pension to active employees before they reach the normal retirement age under the firm’s pension plan. A worker who wanted to retire gradually, for example, moving from a full-time schedule to say a 60 percent schedule (i.e., a three-day workweek), would probably want to supplement his reduced salary with pension payments. But under today’s IRS regulations, such pension distributions are not allowed, representing a significant deterrent to formal phased retirement arrangements.

Fig 2. Prevalence of Phased Retirement Arrangements by Industry

The regulatory hurdle notwithstanding, phased retirement arrangements of various stripes are available in many organizations, and often incorporate several different arrangements (Figure 3). Not surprisingly, the most prevalent arrangement is for the employer to hire retirees for part-time and temporary work. This arrangement enables employees to partially ""unretire"" in a sense — allowing them to supplement their pensions with work earnings. Such an arrangement is advantageous to the employer as well, representing a more cost-effective staffing approach than recruiting and training new workers — workers who, as noted above, will be in short supply in the near future.

Nearly one-third of responding employers with phased retirement arrangements allow employees to transfer to jobs with reduced pay and responsibilities. More than one-fifth of employers report offering extended leaves of absence to workers approaching retirement age.

Fig 3 Phased Retirement in its Many Forms

Perhaps most notably, a significant share of surveyed employers allow employees to gradually ease into retirement through flexible work schedules. Sixty percent of surveyed employers with phased retirement arrangements feature reduced workdays and/or workweeks. Indeed, phased retirees typically work less than 30 hours per week. More than 40 percent of all employers with phased retirement arrangements report that phased retirees work an average of 20 to 29 hours per week (Figure 4).

Fig 4 Slowing Down: Average Weekly Hours Worked by Phased Retirees

One approach to partial or phased retirement may be to combine it with an already established flexible work arrangement such as job sharing. Older workers could gradually move toward full retirement by sharing job responsibilities with another older worker, or even with a younger worker, with the older worker assuming a mentoring role. More than half of the surveyed employers reported having the largest number of phased retirees in the 60 to 64-year-old age group.

Not There Yet

The most common reason given by our surveyed employers for not implementing phased retirement arrangements was simply that their organization has not considered it yet, a likely reflection of the relatively cutting-edge nature of the flexible approach to retirement (Figure 5). Another large group of survey respondents indicate an incompatibility with corporate culture, while others point to the nature of their business and concerns over health and retirement benefit costs as the reasons for not implementing phased retirement arrangements.

Fig 5 Reasons for Not Implementing Phased Retirement Arrangements

In order to make flexible scheduling arrangements such as phased retirement work, employers need to consider modifications to their benefits programs — retirement as well as health. These include changes to the organization’s pension plan provisions such as lowering the plan’s normal retirement age, as well as providing benefits such as health care to phased retirees. Watson Wyatt’s survey indicates that having a retiree health benefit program in place, for instance, may enhance the success of a phased retirement program. Employers that offer phased retirement arrangements are more likely to offer retiree health programs (Figure 6).

Fig 6 Retiree Health Benefits

Reshaping the End of Work

Phased retirement arrangements have the potential to be a win-win situation for employers and employees. Older workers have shown a marked preference for a gradual, tapered departure from the full-time workforce, and such arrangements also allow employers to benefit from the expertise of skilled workers longer than full-stop retirement. Surveys indicate that employers have a positive view of older workers’ value to their organizations; the recent SHRM/AARP Older Workers survey revealed that employers find older workers to be more reliable, with a higher level of commitment and motivation than younger workers.

Clearly, successful implementation of programs to prolong the worklife hinge on measures such as career-long training to ensure the continued productivity of older workers. Devoting training resources to older workers, who tend to have lower rates of turnover than younger workers, would likely be a worthwhile investment.

Proposals have been put forth in Congress to eliminate Social Security’s earnings test, which penalizes older workers. Other changes that would make extending the worklife a more attractive option may be on the horizon. As the labor force shrinks and the workforce ages, employers and employees may call for broadening the definition of retirement. Expanded options for phased retirement, including allowing workers to receive a portion of their pension while continuing to work on a reduced schedule, could be part of that call. Two-thirds of our survey respondents indicate that they would support regulatory changes that would allow employees to receive pension payments before they reach the normal retirement age under their firm’s pension plan.

A powerful confluence of demographic and other factors — shrinking labor supply, aging workforce, increased life expectancy, better health at older ages, desire to remain active, and greater need for financial security, to name just a few — is at work, and will likely transform retirement from a one-shot, take-it-or-leave-it abrupt act into a much more flexible process in the years to come.

The era of slow labor force growth will heat up the competition for skilled workers, making it increasingly important for employers to retain their most qualified and experienced employees. Employers that offer phased retirement arrangements that enable them to ensure that the skills, institutional knowledge and expertise of valued retirement-eligible workers remain at work are likely to have a competitive edge over other employers.