Early Retirement Incentives Involve Risks.

• Author: Belarmino, Michael

One constant for state and local governments is the never-ending search for ways to cut costs. In areas like service provision, that search sometimes leads to innovative solutions (e.g., technology).

Areas such as payroll and benefits, however, are trickier, and solutions are even harder to find. Governments sometimes use early retirement incentives, but they are not without problems. In 2004, GFOA first issued an advisory urging governments that were considering early retirement incentives to exercise extreme caution.

Historically, early retirement incentives have had a low success rate, with governments underestimating the full costs of offering the incentive. GFOA's Executive Board therefore felt that the early retirement incentive advisory warranted review and a stronger stance, so over the past two years, GFOA's Committee on Retirement and Benefits Administration (CORBA) engaged in an extensive review. The updated advisory was recently approved by the Executive Board and now recommends that state and local governments not offer early retirement incentives. The lengthy review process did, however, produce a fortunate byproduct: a supplemental resource intended to help governments think about early retirement incentives from a risk perspective.

What are Early Retirement Incentives? Early retirement incentives are a strategy that governments employ to reduce payroll costs or stimulate short-term turnover among staff. Early retirement incentives are intended to be temporary and are generally offered over a specified time period. They may be offered in different forms, such as a one-time payment (that doesn't affect an ongoing defined benefit or defined contribution retirement benefit) or as some other financial incentive to encourage employees to retire before they had planned to do so.

Approaching Early Retirement Incentives from a Risk Analysis Perspective. In developing the supplemental resource, "Common Risks Associated with Early Retirement Incentives," GFOA did not intend to create any sort of checklist for offering early retirement incentives. Rather, the intent was to highlight a cross-section of the risks that are commonly associated with early retirement incentives, yet often overlooked. The resource sets out some of the common risks across the four key areas of goal setting, cost-benefit analysis, budget, and implementation.

The risks listed are not exhaustive, but they are fairly demonstrative of where challenges can arise in...