Posted on 12 June 2008
By Mark Miller
So you’re getting ready to retire, but think you’ll want to keep working in some fashion after you leave. Maybe you’ll downshift to a part time position with your former employer, or do some consulting.
Congratulations on making such a smart move. Continuing to work means more income to supplement your retirement lifestyle, and it bolsters your overall retirement security. You can delay drawing Social Security benefits, since the system rewards you for waiting with higher monthly payments and cost-of-living increases. You’ll probably also find that working is good for your overall health and brain fitness.
But you do need to watch out for some pitfalls that could mean financial penalties for working past the traditional retirement age. Even though millions of 50-plus Americans are redefining their retirement years with a mix of work and leisure, our pension and Social Security laws haven’t kept pace with the changes. If you have a certain type of defined benefit pension, your payments could be reduced significantly if you keep working. Your Social Security benefits could be sliced, too.
Sen. Herb Kohl (D-Wis.), who chairs the Senate Special Committee on Aging, recently introduced legislation aimed at alleviating the problems, but odds of passage are poor in this election year. So, for the time being, here’s what you need to look out for:
Pensions: Some pension plans base their payouts on an employee’s salary during the last year of fulltime employment. Say you earn $80,000 a year, but then strike a deal to keep working part time at a pro-rated salary of $50,000. If you’re covered by a plan that calculates your pension payout based on your final year (or years) of fulltime employment, your ultimate payout would be based on the lower amount-and that could cost you thousands of dollars over the course of your retirement.
Social Security: Here, you need to look out for penalties that kick in if you retire before the official Social Security Normal Retirement Age (NRA), start drawing benefits and later decide to return to work. The official Social Security NRA ranges from 65 to 67, depending on your age; and you can start drawing Social Security benefits as early as age 62. If you do return to work, your Social Security is reduced $1 for every $2 that you earn over an annual limit-currently $13,560 per year.
Sen. Kohl’s bill-the Incentives for Older Workers Act-would address both the pension and Social Security issues. It would prohibit pension plans from penalizing individuals for continuing to work on a reduced schedule, and revises the Social Security benefit reduction to $1 for every $3 earned before the NRA.
The bill also would allow individuals to earn delayed retirement credits for Social Security purposes for an additional two years until age 72, instead of 70, which is the current limit.
That could be an important benefit for many; under current law, you earn additional Social Security payments for every year you delay filing for benefits past your NRA. For example, if you wait until age 70 to start drawing Social Security your annual benefit will be 32 percent higher than it would be if you started at age 66. Allowing people to delay two more years would sweeten the pot even further for people who live long past 72.
Bill Miner, a consulting actuary with Watson Wyatt, the international human resources consulting firm, argues that the bill could be stronger. “It nibbles around the edges,” he says, arguing, for example, that the $13,560 income threshold is unreasonably low.
“That is not a lot of income to earn. If you believe people are paid for productivity, that threshold is saying that the most productive members of society-who we want to keep in the economy-can’t do that and draw their Social Security benefit at the same time.”
Kohl’s changes would be welcome improvements, but what’s really needed is a more sweeping set of reforms that not only remove penalties but also create incentives for older workers to keep contributing to society.
Civic Ventures, the non-profit advocate for encore careers, advocates revising Medicare eligibility rules to let workers over age 55 buy coverage-a step that would help older workers choose more flexible or part-time work while still having access to health insurance at an affordable rate.
And a campaign called The Experience Wave, led by former Pennsylvania Sen. Harris Wofford, has offered up a number of good ideas to incent people to work longer, including changing the federal tax code to let older people treat as tax deductible the time they spend volunteering for non-profit groups.
In this interview, Stefanie Weiss of Civic Ventures talks about innovations at the state level that help older people stay in the workforce.