Early Retirement Incentives.

• Author: Purcell, Melanie
• Position: Point/Counterpoint

Governments occasionally offer early retirement incentives to employees as a strategy to reduce payroll costs or stimulate short-term turnover among staff. These incentives are temporary, usually offered during a window that covers a specific period of time. They might increase the economic value of the standard retirement benefit or be a one-time payment that doesn't affect an ongoing defined benefit or defined contribution retirement benefit, or they can provide other financial incentives to facilitate retirement before an employee's otherwise planned retirement.

POINT

It's Too Risky

By Melanie Purcell

Early retirement incentives are too problematic to be a useful tool for most state and local governments. The full costs are easily underestimated, and the projected savings can be lower than projected and below what is necessary to make the program work to the organization's advantage. There are many issues that can keep an early retirement incentive strategy from accomplishing what the government intends.

A cost-benefits analysis can easily miss some of the direct and indirect impacts of the strategy--for example, the cost of hiring and training new workers, or of accrued leave cash-outs. Governments may also experience increased long-term costs to the retirement system because employees who accept the early retirement incentive begin drawing their retirement benefits earlier than funding strategies identified. These additional costs can make an early retirement incentive strategy much more expensive overall than expected.

Early retirement incentives often assume savings based on replacing long-term, highly compensated staff with new, lower-paid staff or contracted services. This can be a positive development in the short term, but newly hired staff tend to get raises more often than longer-term employees, so the cost savings do not last. New staff often require better pay and/or benefits than expected because of unanticipated market factors.

There's also the issue of complexity. Early retirement incentives require careful cost-benefits analysis, budgetary analysis, legal analysis, and actuarial analysis to determine their impacts. The effort of implementing them is extensive and must be strictly consistent, despite political pressures. Analysis of early retirement incentives often focuses on the short-term savings and not the long-term impact to the organization, such as changes in service delivery after employees retire and the...