Retirement & Financial Planning Report

Defined benefit plans of governments in effect steer many employees to leave once they reach older ages by creating financial disincentives to staying on, according to a recent research paper.

The study by the Urban Institute notes that seven in eight full-time state and local employees are covered by traditional defined benefit type plans (as are all federal employees, under either CSRS or FERS). As with the federal government program, retirement in those typically is allowed on achieving some combination of age and years of service and benefits typically are based on a formula of years of service and a salary figure.


It found that in nearly two-thirds of state and local plans, employees hired at age 25 maximize their lifetime benefits by age 57, and among the remainder the maximum commonly is reached by age 61—in some other cases, by age 64. “Some plans cap retirement benefits, so some long-tenured employees can’t boost even their monthly benefits by working longer,” it says.

In contrast, federal government benefits continue to build as long as an individual is employed, with the caveat that there is a maximum CSRS benefit of 80 percent of salary that typically is not reached until nearly 42 years of service (earlier for some who worked in positions with special higher contribution and benefit accumulation rates). Those who hit that maximum can receive any excess contributions they made toward the system as a refund or can roll it over into an IRA.

Said the report: “Plans that pushed workers into early retirement might have made sense decades ago when employers were eager to hire young baby boomers surging into the labor force, but they are hard to justify today as the population ages. Health gains and declines in physical work also enable more older people to work now than before.”