Tax, benefit hurdles discourage later retirement

WASHINGTON, Dec. 5 (UPI) -- To work, or not to work, that is the question facing many older workers in the United States. A study by the Boston College Center for Retirement Research says that for most, the answer is often not to work, due to tax and employee benefit barriers.

The study, released last week, documents what Social Security, federal income tax, and employee benefit hurdles older workers face.

"The implicit tax rate on work increases rapidly at older ages, and by age 65 people can typically receive nearly as much in retirement as they can by working," according to the study, "Does Work Pay at Older Ages," by Barbara Butrica, Richard Johnson, Karen Smith, and Eugene Steuerle.

"If older Americans could overcome these barriers and delay retirement, they could substantially improve their economic well-being at older ages. For example, many people could increase their annual consumption at older ages by more than 25 percent by simply retiring at age 67 instead of age 62."

Encouraging workers to delay retirement would relieve impending economic pressures created by an aging population. Over the next 50 years, if current employment patterns persist, there will be 50 Social Security beneficiaries for every 100 workers, up from 30 beneficiaries today.

Workers who work longer could add to their own retirement resources and help produce goods and services to support their own current consumption as well as help cover the costs of both retirement programs and other government efforts, while also reducing tax pressures on younger workers to support them in retirement.

Other reasons to work past 65 are the decline of the traditional employee pension plan and the rise of the 401(k), and the fact that married women collect lower Social Security benefits than men as they are expected to live longer.

To encourage older workers to stay in the work force, the study's authors advocate a payroll tax credit, an increase in the benefit entitlement ages for Social Security and Medicare, lower benefits at younger ages to allow for better benefits at older ages, and reductions in regulatory barriers to older workers, such as the rule that forces workers to retire altogether or not be able to collect their pensions.

Right now, Medicare becomes a secondary health insurance for those over age 65 that continue to work if they receive employer health insurance. Also, with some pension plans, workers over age 65 lose a year of benefits for every year they work, and cap the amount of pre-retirement earnings or number of years workers can credit toward their pensions.

In summary, the study suggests these specific changes:

•The creation of a payroll tax credit for older workers, which would encourage work by lowering both tax rates and replacement rates. This credit would not necessarily reduce total tax revenue, because it could draw substantial number of older workers into the labor market and lead to higher income tax revenue.

•Increases in the benefit entitlement age for both Social Security and Medicare. Indexing the NRA to changes in life expectancy is one reasonable approach, combined with protections for those with health problems. It would encourage work by lowering the replacement rate at relatively young ages.

•Reductions in benefits at younger ages in exchange for increases in benefits at older ages. This change would lower the replacement rate at initial benefit entitlement while preserving total Social Security wealth. It would encourage work while improving the economic status of the oldest Americans.

•Reductions in regulatory barriers to work at older ages. There are many regulatory barriers that employers face that discourage phased retirement (e.g. the tax code, the Employee Retirement Income Security Act of 1974 (ERISA), and the Age Discrimination in Employment Act (ADEA)). These regulations prevent workers from collecting their defined pensions while continuing to work for the plan sponsor, forcing workers to either retire or lose substantial pension wealth. Addressing these regulations may encourage more flexible work arrangements and continued work for older workers. Employers should also be given greater flexibility in limiting any rise in health costs simply because they hire older workers.

•The elimination of the requirement that Medicare serve as the secondary payer for workers with employer-sponsored coverage. The high cost of medical insurance for older workers discourages employers from retaining or hiring workers over age 65. Allowing Medicare to be the primary payer would lower employment costs and reduce the implicit tax rate faced by older workers, increasing work incentives at older ages.