Please don't go! why phased retirement may make sense for your government.

• Author: Flahaven, Brian

Two-fifths of state and local government employees will be eligible to retire between 2000 and 2015. Phased retirement is one strategy governments are using to retain skilled older workers and minimize training costs.

Encouraging governments to consider employee retention programs may seem a bit odd, especially when many are currently dealing with revenue shortfalls and tight budgets. When times are tough, governments often look for ways to remove highly paid older workers from the payroll using a variety of early retirement incentives. For the past 20 years, early retirement programs have been popular public sector money saving strategies. This year alone, a number of state and local governments enacted early retirement programs in an attempt to reduce budget deficits and avoid layoffs.

But while early retirement programs can help governments avert short-term budget problems, these programs may damage a government's ability to function in the long term. Over the next two decades, 76 million baby boomers are going to reach retirement age; many of these baby boomers currently work in the public sector as managers, finance officers, teachers, and technicians. Governments already are struggling to find well-trained and experienced finance officers, even in the current economic environment. With a decreasing number of graduates projected to enter the workforce each year, public sector managers need to ask themselves if it is truly in their governments' best interest to encourage early retirement among older employees.

Many governments are trying to retain skilled older workers through phased retirement programs. Phased retirement is very popular among older employees, many of whom want or need to keep earning income after retirement age. Though the type of program can vary from government to government, all phased retirement plans offer incentives to keep older employees on the payroll. Although the benefits of phased retirement for employers and employees are numerous, there remain a number of administrative and legal barriers that threaten to halt its progress as a widespread strategy for blunting the effects of future labor shortages. Governments will need to consider the long-term implications of the baby boomer retirement wave, and examine whether phased retirement is the right strategy for them.

What Is Phased Retirement?

Perhaps because it varies from jurisdiction to jurisdiction, phased retirement lacks a formal definition. The U.S. Department of Labor's Working Group on Phased Retirement defines it as "a gradual change in a person's work arrangements as a transition toward full retirement."' Under this broad definition, work completed for the same employer or a different employer before full retirement, whether it is part time or full time, is considered phased retirement.

Most scholars and practitioners, however, limit the concept to continued work past normal retirement for the same employer or employers within the same system. Phased retirement programs are usually "sold" as a way for employers to keep valued employees past their pension plan's early or normal retirement age. Programs like retiree pools, job sharing arrangements, part-time work, part-year work, and telecommuting are all attempts to retain older employees by reducing job responsibilities and/or hours worked.

The deferred retirement option plan, or DROP, is the most common public sector phased retirement plan. Interestingly, some early DROPs were designed to enhance the retirement benefits of police and fire personnel whose careers tend to be relatively short; they were not explicitly conceived as phased retirement programs. (2) Now, governments are using DROPs as a way to retain experienced staff for additional years. Instead of retiring and receiving benefits from their defined benefit pension plans, DROP participants continue to work full time for a period of usually three to five years. Since DROP participants are considered retired employees, their monthly pension benefits (frozen at the time of program entry) are deposited in a separate account. Depending on the DROP plan, either the program participants or the employer determines how the deposited pension benefits will earn a return. When the DROP period ends, the accumulated pension benefits are paid to the participant. The decision to enter a DROP plan is usually irrevocable, and employees that exit the plan early can be subject to large penalties. (3)

Another type of phased retirement program involves rehiring employees after they formally retire. Unlike DROPs, these "retire-rehire" plans allow employees to continue working for the same employer on a reduced schedule for an unlimited amount of time. Most plans require employees to separate from service for a specified amount of time. In July 2001, the State of Washington enacted a retire-rehire plan in response to a critical teacher shortage. Washington requires retired employees to separate from service for at least 30 days. If...