Retirement & Financial Planning Report

A report from the Urban Institute says that those thinking of extending their working careers may face financial disincentives as they reach older ages that could sway them to cut those plans short.

Working to a later age has been an ongoing trend for years and is expected to continue for a combination of financial and personal reasons. In the federal government, continued work has the advantage of building up FERS or CSRS defined benefits, the type of benefit that has eroded in the private sector—about 15 percent of federal employees already are eligible to retire.

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However, the report notes that “because workers can only collect these earnings after they separate from their employer, a DB pension’s lifetime value often declines if employees remain at work after they qualify for full benefits and thus receive fewer lifetime monthly payments, penalizing work at older ages.”

Similarly, under the Social Security program “only the 35 highest-earnings years are considered in the Social Security benefit formula, so once workers have 35 years of covered employment, additional work raises future Social Security benefits only if these additional earnings exceed what was earned in previous years.

“Moreover, Social Security’s progressive benefit formula often penalizes older workers. Social Security benefits replace 90 percent of earnings for beneficiaries with very limited lifetime earnings, but an additional dollar in monthly earnings averaged over a career increases monthly Social Security benefits only 15 cents for workers with high lifetime earnings. Because older workers with long employment histories tend to have relatively high lifetime earnings, additional employment does not raise future Social Security benefits much for many older workers,” it says.

Further, those who continue working past the Medicare eligibility age of 65 (and continue to receive health benefits from their employer) “forfeit much of their Medicare benefits because Medicare covers only health care expenses not covered by their employer-sponsored health insurance.”

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And continued work beyond when taxable distributions from “traditional” IRAs are required—recently raised from 70 ½ to 72–could push those individuals into higher tax brackets, effectively reducing their earnings, it said. (There are no required distributions from “Roth” IRAs and distributions from employer-sponsored plans such as the TSP are not required so long as the account owner is still working).

“Together, these features of the tax code, employee benefits, and the retirement system can create strong financial penalties for working at older ages. Although many older adults choose to work despite these penalties, these financial disincentives may encourage many other older adults to leave the labor force,” it said.

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