Issues for Implementing Phased Retirement in Defined Benefit Plans

Jonathan Barry Forman and Patricia Scahill

North American Actuarial Journal, 2003, vol. 7, issue 3, 75-84

Abstract: U.S. society is aging. The nature of work has changed from work that requires physical strength to work based on knowledge. As a result, workers are beginning to phase into retirement rather than going directly from full-time work to full retirement. From a retirement income perspective, many final-average-pay defined benefit plans have features that make phased retirement difficult at best and detrimental at worst. U.S. pension law and regulations present barriers to phased retirement if the phased retiree wants to receive a portion of available pension benefits during phased retirement.This paper examines private sector options to encourage phased retirement and to eliminate the disincentives that currently affect defined benefit plans. It offers alternative calculations of final average pay that do not penalize the part-time worker. It also demonstrates that the plan’s early retirement reduction and late retirement increase can be set to maintain actuarial equity throughout phased retirement. The paper presents benefit calculations with equal actuarial values for various payout patterns.The paper discusses the coordination between phased retirement and subsidized early retirement. Finally, the paper notes some of the changes in ERISA that will be needed to facilitate phased retirement in defined benefit plans, especially for participants who want to receive pension distributions while working part time.

Date: 2003
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DOI: 10.1080/10920277.2003.10596105

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