The Importance of Gradual Retirement in America Today

Analysis of gradual retirement is not new. Using data from the 1960s and 1970s, researchers found that most older workers who left career jobs chose some version of gradual retirement rather than leaving the labor force (Quinn, Burkhauser, & Myers, 1990). Since then, many have explored how individuals transition from career employment later in life (Alcover, Topa, Parry, Fraccaroli, & Depolo, 2014; Cahill, Giandrea, & Quinn, 2006, 2015, 2018; Quinn, 1999, 2010; Wang, Penn, Bertone, & Stefanova, 2014). One approach is to focus on three distinct types of transitions besides labor force departure: phased retirement (a reduction in hours on the career job), bridge employment (a job with a new employer), and labor market reentry after a traditional retirement. Of these three types of gradual retirement, bridge employment is by far the most common: approximately one-half of older full-time career (FTC) men and women move to a bridge job before exiting the labor force, and this has been remarkably stable since the early 1990s (Cahill et al., 2018; Giandrea, Cahill, & Quinn, 2009). The next most common form of gradual retirement is reentry or “unretirement.” Using a minimum two-year threshold without paid work, we found that approximately 15% of retired career workers eventually return to the labor force (Cahill, Giandrea, & Quinn, 2011). Other researchers who have used a blend of work hours and individual self-assessments of retirement status have found unretirement rates of up to 25% (Maestas, 2010). The least prevalent form of gradual retirement is phased retirement: reduced hours with the career employer. We found that only about 10% of older workers with career jobs reduced their hours by 20% or more later in life (Cahill et al., 2015). The fact that gradual retirement has remained such a steady and important feature of the retirement landscape for so long is especially remarkable given the many permanent changes in the retirement environment since the mid-1980s. Social Security benefit calculation rules traditionally penalized continued work after age 65, because the adjustment for delayed receipt of Social Security benefits after age 65 was insufficient to compensate for the initial benefits forgone. But over 20 years, the delayed retirement credit gradually increased from 3% to 8% per year of delay, making it approximately actuarially fair from age 62 to age 70 (Pingle, 2006; U.S. Social Security Administration, 2020). The nature of private pensions has also changed considerably. Prior to the 1980s, defined-benefit (DB) pension plans dominated the landscape for the approximately one-half of private-sector employees with an employer pension. Starting in the early 1980s, however, defined-contribution (DC) plans began to dominate, in which individuals (and often employers) contribute to a personal account, manage these funds, and then own the balance of this account upon retirement (Butrica, Iams, Smith, & Toder, 2009). The incentives within the two types of plans differ significantly. With insufficient rewards for delayed pension receipt (usually after the earliest age of pension eligibility), DB employer plans typically penalized those who continued on the job, just as Social Security used to do. In both cases, the expected present discounted value of future pension benefits declined with continued employment, in essence creating a pay cut for those who remained on the job. The worker earned his or her salary, but lost future pension benefits with each additional year of work. Under DC plans no such penalty exists, increasing the attractiveness of continued employment. In addition, in DC plans individuals assume both investment and longevity risks (living longer than planned for), which are borne by employers under DB plans. The transition from DB to DC plans created an additional incentive to remain working as a way to insure against these new risks. Finally, the macroeconomic landscape has changed considerably over the past 30 years, including the dot-com bust in the early 2000s, the Great Recession of 2008–2009, and now the turmoil of the coronavirus epidemic. These macroeconomic disruptions have more impact today because older Americans are now more exposed to financial risk, in large part because of the dramatic switch to DC pension plans in the private sector. These changes in economic incentives, nearly all of which favor continued work over leisure, have influenced retirement decisions. A century-long trend toward earlier and earlier labor force exits came to an abrupt halt in the mid-1980s and has since reversed (Quinn, Cahill, & Giandrea, 2011). It is notable that, despite these dramatic changes in incentives and later labor force exits, older Americans continue to retire gradually. For most older Americans, retirement continues to be a gradual process, not a one-time, permanent event (Cahill & Quinn, 2019; Quinn & Cahill, 2016, 2018). For the first time, the prevalence of phased retirement, bridge jobs, and reentry can be calculated for a large cohort of older Americans who have nearly all completed their retirement transitions. The Health and Retirement Study (HRS) is a nationally representative, longitudinal data set of older Americans that began in 1992 with extensive interviews of 12,652 individuals aged 51 to 61 and their spouses, regardless of the spouse’s age (Survey Research Center, 2017). Interviews have been conducted biennially since then through 2018, with the primary sample now aged 77 to 87 and mostly long departed from their career jobs. This latest wave provides 26 years of follow-up and allows for a detailed construction of each individual’s work history through at least age 77, with all transitions from career employment completed for most of these respondents. As in our prior work, we examine transitions from career employment among HRS core respondents who were on a FTC job in 1992; that is, a job with 1,600 or more hours per year (“full-time”) and for 10 or more years (“career”). We have experimented with different cutoffs for both hours and tenure and find that the qualitative conclusions regarding the tremendous importance of gradual retirement remain the same (Cahill et al., 2006, 2015). A limitation of focusing on FTC employment is that individuals without a career job later in life are not included. We have explored retirement patterns among non-FTC workers and found that they have job transitions later in life that are very similar to those of career workers (Cahill, Giandrea, & Quinn, 2012). We stratify the analysis by gender, although we note that the retirement patterns of career men and women have many similarities. Where gender differences are most pronounced is with respect to the prevalence of FTC jobs, covering about one-half (52%) of the HRS core men compared to just 38% of the HRS core women (Table 1). A higher percentage of the men are also age eligible (i.e., age 51 to 61 at the time of the first survey), leaving us with a group of 2,649 men (45% of all respondents) and 1,791 women (26% of all respondents). Selection of Full-Time Career Health and Retirement Study Respondents for Analysis Note. FTC = full-time career. Source: Authors’ calculations based on the Health and Retirement Study. Selection of Full-Time Career Health and Retirement Study Respondents for Analysis Note. FTC = full-time career. Source: Authors’ calculations based on the Health and Retirement Study. We analyze retirement for wage-and-salary and self-employed workers separately, and compare the departure patterns of FTC public- and private-sector wage-and-salary workers. About 20% of the HRS core men and 10% of the HRS core women are self-employed in their FTC job. Among those who hold a FTC wage-and-salary job, about a quarter are working in the public sector. About 1 in 5 wage-and-salary workers are, because of sample attrition (nonresponses and deaths), last observed on a FTC job, so transitions from career employment are not observed for this group. Among the wage-and-salary workers for whom we do observe a transition, about half (48% of both the men and the women) transition to a bridge job (Table 2). The majority of these bridge jobs are part-time (52% among men and 64% among women) and a sizable minority involve self-employment (17% among men and 11% among women). Consistent with prior research, about 15% of wage-and-salary men and women reenter the labor force after an initial retirement (at least two HRS waves out of the labor force), and only about 10% of both men and women reduce their hours by 20% or more on their career job (“phased retirement”). Combinations of these exit types are also possible, further accenting the diverse nature of gradual retirement. Transitions from Full-Time Career Employment Through 2018 Note. Data are from those with FTC jobs at the time of the first interview, by gender and sector (horizontal percentage). FTC = full-time career; PT = part-time; SE = self-employed. aIncludes respondents on a wage-and-salary FTC job at the time of the first interview. Transitions were measured through 2018. bDoes not include respondents who were not working for two consecutive waves following FTC employment and who later reentered. cPercentage of respondents working part-time in bridge employment as a percentage of all individuals who transitioned to a bridge job; part-time employment is defined as working fewer than 1,600 hours per year. dPercentage of respondents who were self-employed in bridge employment as a percentage of all individuals who transitioned to a bridge job. ePercentage of respondents who returned to paid work after not having worked for at least two consecutive waves following career employment. Source: Authors’ calculations based on the Health and Retirement Study. Transitions from Full-Time Career Employment Through 2018 Note. Data are from those with FTC jobs at the time of the first interview, by gender and sector (horizontal percentage). FTC = full-time career; PT = part-time; SE = self-employed. aIncludes respondents on a wage-and-salary FTC job at the time of the first interview. Transitions were measured through 2018. bDoes not include respondents who were not working for two consecutive waves following FTC employment and who later reentered. cPercentage of respondents working part-time in bridge employment as a percentage of all individuals who transitioned to a bridge job; part-time employment is defined as working fewer than 1,600 hours per year. dPercentage of respondents who were self-employed in bridge employment as a percentage of all individuals who transitioned to a bridge job. ePercentage of respondents who returned to paid work after not having worked for at least two consecutive waves following career employment. Source: Authors’ calculations based on the Health and Retirement Study. The prevalence of bridge employment is substantially higher among those who are self-employed on their FTC job (about 70% of the men and the women) although, like wage-and-salary workers, the majority of these bridge jobs (about two-thirds) involve part-time employment. The definition of what constitutes a “new” employer among self-employed FTC individuals can be a challenge if the transitioning individual remains self-employed. We distinguish between a continuation of career self-employment and a new, self-employed bridge job, based on the respondent’s own assessment as to whether he or she is working at a new business (“According to our records, in [the previous survey] you were self-employed. Do you have the same business that you had in [the previous survey] or is it a different business?”). Regarding reentry, we find only slight differences between career self-employed workers (20% among men and 17% among women, compared with 17% and 15% among wage-and-salary men and women). Hours reductions are much more common among career self-employed than career wage-and-salary workers (roughly one-third to one-tenth, respectively), as might be expected given the long hours that many self-employed people work and the additional control that they are likely to have over their own hours worked. The comparison of public-sector and private-sector wage-and-salary workers reveals a particularly interesting nonfinding, in that the prevalence of bridge employment is almost identical among these two groups (47% and 49% among men and 46% and 49% among women, respectively). We anticipated that public-sector workers would have lower rates of bridge employment because of the stability provided by their largely DB public pension plans and their more stable salary histories (Quinn, Cahill, & Giandrea, 2019). One explanation for the surprising similarity is that more public-sector workers might opt for bridge employment out of choice rather than financial necessity, to supplement their retirement income and/or for the many nonpecuniary benefits that come with work, such as social connectedness and interactions. This explanation is consistent with what we find regarding hours worked. Public-sector workers are much more likely than private-sector ones to work part-time in bridge employment (68% vs. 48% among men and 73% vs. 61% among women, respectively). Public-sector workers are also somewhat less likely to reenter the labor force after an initial retirement. No clear public- and private-sector differences emerge with respect to phased retirement. The main conclusion regarding public- versus private-sector workers is that despite some important differences in their retirement environments (particularly the prevalence of DB pensions), gradual retirement plays a very important role in the retirement transitions of both groups. We believe that this extensive use of gradual retirement in the United States, primarily through bridge jobs, is a good thing. It is good for the workers who choose it, some out of financial necessity, those who need a paycheck and/or health insurance, especially in this era of increased financial vulnerability, and some for quality of life reasons, who choose a bridge job to make a difference or for the other nonpecuniary benefits that employment provides. It is good for the employers who can tap into a large cadre of experienced older Americans who would like to continue working. And it is good for the nation as a whole, because these workers produce the goods and services consumed by workers and retirees alike. We believe that this extensive use of gradual retirement in the United States, primarily through bridge jobs, is a good thing. Some policy changes could make gradual retirement more attractive. One reason why phased retirement is rare is that DB pension plans often base benefits on the last few years of actual earnings, so several last years of part-time earnings would reduce future pension benefits. Plans that base benefits on the highest rate rather than the last few years would not have this work disincentive, although if the highest years were many years back and were not indexed to the present, future benefits would be based on lower earnings than if the worker had continued full-time. Reducing disincentives to phased retirement might make both employees and employers better off, although employers sometimes complain about the planning issues involved in managing a large number of part-time workers. These advantages to employees and employers apply in both the private and public sectors. Governments could alter their pension rules for the benefit of older employees who would like to continue part-time. It is not clear whether governments should mandate this for private-sector employers. But since these are primarily DB pension plan issues and as these pensions are fading in importance over time, so too are the work disincentives they often include. Income inequality and elderly poverty rates in the United States, among the highest in the developed world, are reproduced in retirement, because those earning more over their lifetimes then enjoy higher Social Security benefits and are more likely to be covered by an employer pension plan. If low-earning employees who no longer want to continue full-time on their career jobs had the opportunity to continue part-time with their career employer, where the impact of their specific human capital is maximized, this would reduce income inequality among the elderly. Being able to combine part-time work on the career job with partial pension benefits from that same job would also make gradual retirement more attractive to interested workers. Social Security, Medicare, and Medicaid have played pivotal roles in improving the well-being of older Americans. In 1959, for example, more than one in three Americans aged 65 and older lived in poverty, which was 60% higher than the rate for all Americans. As Social Security coverage and real benefits grew, the poverty rate of older Americans declined rapidly, to near 15% in the mid-1970s and then below 10% since 2000, and is now below that of both children under 18 and adults aged 18 to 64 (Quinn & Cahill, 2016; Semega, Kollar, Creamer, & Mohanty, 2019). Further, while Social Security and earnings remain the most important sources of cash income for older Americans, Medicare and Medicaid are critical in-kind social safety nets that provide crucial medical insurance benefits to individuals aged 65 and over and those with low incomes. But more can be done. Older Americans are more likely than others to be near poor: below 1.25 times or 1.50 times their poverty line. Wide variation in elderly poverty continues to exist by gender, race, marital and household status, and age. These inequalities could be further exacerbated by welfare policies that require continued work later in life. Other program changes could reduce older workers’ income inequality, such as revisiting Social Security’s Primary Insurance Amount formula bend points, which determine the progressivity of the benefit structure, or means-testing benefits. Income inequality later in life might also be related to gradual retirement. To the extent that bridge employment is voluntary—for example, we find that bridge employment is more common among those with higher levels of educational attainment—those with advantages throughout their work histories appear to have those advantages extended to their labor market decisions later in life. Further, especially when bridge employment is involuntary, job transitions later in life could lead to persistently lower earnings because of lost firm-specific human capital. Policymakers could work with private-sector employers to facilitate phased retirement arrangements, perhaps by using technological advances, such as scheduling software, to assist employers and their managers in trying to coordinate work schedules. Policymakers could also work to alleviate employers’ concerns with phased retirement policies when it comes to following nondiscrimination rules within the tax code and age discrimination laws within the Age Discrimination and Employment Act (see Johnson, 2011; U.S. Government Accountability Office, 2017). Another potential inequality issue with respect to gradual retirement is the extent to which retirement from career employment permanently reduces an individual’s future earnings potential in a reentry job, due to the loss of firm-specific human capital, depreciation of skills, or stigma from having been out of the labor force. All three factors could exacerbate income inequality later in life. If so, policymakers could explore ways to promote continuous employment later in life and could educate older workers about the longer-term consequences of being out of the labor force for an extended period of time following career employment. Finally, policymakers should continue to address age discrimination, which can impact all forms of gradual retirement. Bridge job transitions and reentries require labor markets with both demand- and supply-side flexibility. Age discrimination, real and perceived, can constrain the choices older Americans make. Research has revealed wonderful creativity on the part of American workers leaving their career jobs late in life. For most, the stereotypical one-time transition from FTC work to complete and permanent labor force withdrawal does not apply. In contrast, for most, retirement is a process, with one or more stops along the way out, usually with another employer, sometimes in another part of the country, and often part-time. We think that policy changes that encourage these various forms of gradual retirement would make a good thing even better. For most, retirement is a process, with one or more stops along the way out, usually with another employer, sometimes in another part of the country, and often part-time. All views expressed in this paper are those of the authors and do not necessarily reflect the views or policies of the Center on Aging & Work at Boston College. None reported. None reported.