Working after Retiring from Career Jobs:
Worklife Transitions of Public Employees in North Carolina
Robert L Clark
Robert G Hammond
Melinda Sandler Morrill
Aditi Pathak
Prepared for the 2015 SIEPR Conference on Working Longer and Retirement
Stanford University
Draft
October 2015
Robert L. Clark is Stephen Zelnak Professor of Economics and Management, Innovation, and Entrepreneurship, North Carolina State University and Research Associate, National Bureau of Economic Research, . Robert G. Hammond is Associate Professor of Economics at North Carolina State University, . Melinda Sandler Morrill, Associate Professor, Department of Economics, North Carolina State University, . Aditi Pathak is a doctoral student of Economics at North Carolina State University, .
The authors gratefully acknowledge funding from the Sloan Foundation, Grant Number 2013-10-20. The research reported here is part of an on-going project that is being conducted in partnership with the North Carolina Retirement Systems Division. The authors gratefully acknowledge the help and support of Janet Cowell, North Carolina State Treasurer, Steven C. Toole, Director of the Retirement Systems Division, Mary Buonfiglio, Deputy Director of Supplemental Retirement Plans, and Sam Watts, Policy Director of the Retirement Systems Division. The authors would like to thank Bryan Allard, Emma Hanson,and Christelle Khalaf for research assistance. The opinions and conclusions expressed herein are solely those of the authors and do not represent the opinions or policy of the North Carolina Retirement System or any other institution with which the authors are affiliated.
For the past three decades, labor force participation rates among older persons have been rising.[1] A longer worklife is consistent with increasing life expectancy and improving health status. However, working longer does not necessarily imply delaying retirement from career jobs. Increasingly, retirement is becoming a transitional process instead of a one-time event. Individuals leave their career jobs and move on to new employment situations before permanently leaving the labor force. This is especially true in the public sector where long-career employees covered by defined benefit pension plans without a minimum age requirement could potentially retire in their 50s with unreduced benefits after some minimum years of service (e.g., 30 years of service). In addition, many of these relatively young retirees are eligible to remain in their employer’s health plan, which is a valuable benefit for those not yet eligible for Medicare.[2] Together,defined benefit pension and retiree health insurance plans provide strong incentives for employees to leave their state or local government job as soon as they qualify for retirement benefits. Using these benefits as a base for annual income and health insurance coverage, public sector retirees can consider a wide range of employment and leisure opportunities including part-time jobs, employment in less stressful environments, volunteer work, and other types of employment that they may find more appealing.
Economists have been studying and documenting the various types of worklife transition from full-time career employment into a final period of zero hours of paid work. Potential steps in this process include accepting phased retirement with one’s career employer, gaining new employment at either full or part-time, or moving into self-employment. The transition may include periods of no work followed by months of full- or part-time employment. Virtually all of the economic studies of the final worklife transition examine data from either the Retirement History Study (RHS) or the Health and Retirement Survey (HRS). In general, these studies do not consider important differences between public and private sector workers.
Using individual-level survey data merged with administrative records, this study examines the worklife transitions of public sector workers and recent retirees in North Carolina. We observe and analyze the plans of older workers concerning when they expect to retire and whether they anticipate working after retirement from their government job. Then, we examine the labor force choices by recent retirees as they re-enter the labor force (or not). In particular, many public retirees have the opportunity to return to work for the state or local government. In some cases, retirees are able to return to the same job, raising concerns over potential ‘double dipping’. The terms of re-employment by the same or different government agencies are typically prescribed by law and these regulations describe how the return to work may impact current and future pension benefits. Understanding what retirement pathsindividuals follow and why can help inform government and employer policies regarding benefit design and return to work provisions. Further, this study contributes to the small and growing literature aimed at understanding contemporary worklife transitions, described further below.
- What Do We Know About the Retirement Transition?
Most workers will retire from their career employer in their 50’s or 60’s and can expect to live for an additional 30 or more years. Younger retirees might be looking for changes in hours of work, less stressful working conditions, and new employment challenges. As such, they may not wish to completely and permanently leave the labor force. ‘Retirement’ has many potential meanings including leaving a career job, claiming retirement benefits, or completely leaving the labor force. In this paper, we use the term “retirement” and “retiree” to indicate that an individual has left their full-time state or local government job and begun to receive a benefit from a North Carolina public pension plan. Thus, an individual may be retired from a North Carolina public employer but still working full-time.
After retiring from a career employer, there are several possible worklife transitions that individuals might experience. These transition types include phased retirement with the same employer, return to work with the same employer (either full or part-time), or a shift to bridge jobs (including self-employment). A further complication is that individuals may leave the labor force entirely for a period of time and then return to the same or a different employer. Returning to the labor force after a period of no employment may be planned in advance or could be due to a health or financial shock (Maestas, 2010). Figure 1 provides a visual flow chart of possible retirement transitions.This section describes these transitions in detail and reviews the relevant literature.
[Figure 1]
I.A. Post-Career Employment with Same Employer
Individuals who retire from their career jobs may find that their best employment opportunities are to continue their relationship with the career employer but in different employment conditions. We divide post-career employment into two types: phased retirement and returning to work after retirement. Phased retirement is when an older worker shifts from full-time to part-time employment with the same employer.[3] When returning to work, the individual generally retires, has a period of separation, and then returns to work, perhaps as some type of contract worker. In our discussion, returning to work includes both the movement to bridge jobs and returning to the same employer. IRS and employer-specific rules will govern the requirements for a period of separation and the ability to renegotiate salary and benefits.
Phased Retirement. Older workers may wish to remain with their career employer, but with reduced hours and/or responsibilities. Phased retirement can be defined as a change in working conditions while remaining with the same employer, such as when an older worker continues to work with a career employer but shifts from full-time to part-time. One might also include situations where the employee still works full-time, but accepts lower compensation and/or reduced responsibilities. Clark and Morrill (2015) find that the first retirement transition of 8 percent of employees in the 1992 HRS cohort was to reduce hours while remaining with their career employers.[4] This transition could entail a shift in job assignments, or the employee in phased retirement could continue doing the same tasks but only work a part of the day, fewer days per week, or full-time for part of the year.
In general, it appears that many older workers would like the option of phased retirement with their current employer. However, relatively few firms have adopted formal phased retirement policies and many seem uninterested in including phased retirement as part of their formal human resource policies.[5] McGill, et al. (2010) found that despite potential advantages of phased retirement, there are few broad-based phased retirement programs in the private sector. The lack of interest by employers in establishing phased retirement programs may be due to legal and regulatory policies associated with retirement plans, tax policies, and age discrimination laws.[6] Changes in federal legislation to allow in-service distributions of pension benefits after employees have attained the normal retirement age has moderated a significant impediment to phased retirement (Hill, 2010).[7]
Returning to Work. Another method of extending worklife with employers occurs when a worker leaves a career job, startsher pension benefit, and returns to work after a period of being out of the labor force. The feasibility of returning to work with a career employer depends, in part, on the retirement benefits offered by the firm and federal tax policy and regulations concerning pension benefits. Furthermore, the labor supply needs of the employer will dictate whether an individual has the opportunity to return to work after a period of separation. In the public sector, the length of time between retirement and re-employment is clearly stated along with how returning to work impacts the annual pension amount.[8]
Most public sector employees are covered by defined benefit pension plans (Clark, Craig, and Sabelhaus, 2011). The benefit formulas and eligibility conditions of these plans are an important determinant of the worklife transition of public employees. The retirement benefit in defined benefit plans is typically a function of the final average salary using the last 3 to 5 years of annual earnings. Basing benefits on final salary makes reduced hours, without retiring and determining annual pension benefits, unfeasible for most public employees. Thus, retirement followed by a break in service is the norm for public employees returning to work
I.B. Bridge Jobs.
Over the past three decades, economists have been documenting the change in the worklife transition and the importance of individuals moving to bridge jobs (e.g., Quinn 1999, Ruhm 1990). Bridge jobs are typically defined as a job not with one’s former employer. Bridge jobs include self-employment and can be either full-time or part-time. These jobs can be short-term or become essentially a second career lasting for a number of years. The transition to a bridgejob can be immediately after retirement or after a planned period of being out of the labor force, hence ‘bridging’ the gap between retirement from a career employer and a full exit from the labor force.
Clark and Morrill (2015) find that the first transition of 20 percent of career employees in the 1992 HRS cohort was to a bridge job with an additional 5 percent moving into self-employment.[9] Individuals who leave career employers but choose not to move directly into complete retirement may be seeking new challenges in different types of jobs or they may be looking for jobs with less physical or mental stress. Two interesting points related to employment transitions are whether these job shifters planned for a period of work after retirement while still at their career job and whether, in the years prior to retirement from career jobs, they engage in training toacquire new skills needed to be competitive for these bridge jobs.
A series of studies indicate that the new norm of retirement is to gradually transition from full-time work with a career employer to an additional period of employment prior to leaving the labor force permanently.[10] Giandrea, Cahill, and Quinn (2009) find that 60 percent of individuals leaving full-time career jobs ultimately moved to bridge jobs instead of permanently retiring. The transition often includes changes in occupations, industries, and hours of work. For example, Cahill, Giandrea, and Quinn (2006) show that 55 percent of men and 59 percent of women transiting to bridge jobs were working part-time. Johnson, Kawachi, and Lewis (2009) find that two thirds of older job changers switched occupations and that hourly wages were substantially lower in their bridge jobs. They note that bridge jobs tend to be less stressful, have more flexible work schedules, and are less likely to have health insurance. Cahill, Giandrea, and Quinn (2006) also find that the tendency to move to a post-career job declines with age.
The probability of a gradual transition into retirement is found to be affected by the age of termination of career job, health status at retirement, and type of pension in which the individual was enrolled. Cahill, Giandrea, and Quinn (2006) examined ten years of data from the HRS and found an increase in the tendency to move from career jobs to bridge jobs before leaving the labor force. They find that approximately 60 percent of both men and women leaving career jobs after age 50 moved first to bridge jobs instead of totally leaving the labor force.
I.C. Returning to the Labor Force.
In addition to a phased retirement or bridge job, the worklife transition may include a period of non-employment followed by the return to the labor force. An individual who is reentering the labor force could choose to return to the previous employer or a different employer (i.e., bridge job). The decision to re-enter the labor force after a period of nonparticipation may be part of an ex ante retirement plan. As part of their worklife transitions, individuals may have planned to retire from their career job, have a few years away from work, and then re-enter the labor force in a different job, perhaps at reduced hours. The retirement plan may include learning new skills in order to be prepared for a different job or simply reflect a preference for time away from work before moving on to a second career. Alternatively, re-entry may not be planned at the time of retirement. Instead, unexpected economic events, such as a shock to retirement wealth due to market fluctuations or changes in family circumstances, can create a renewed need for earned income.
Maestas (2010) uses the HRS to examine the tendency of individuals to return to work after retiring and completely leaving the labor force. She finds that between 27 and 37 percent of individuals who moved from work to full retirement reversed their retirement decisions and re-entered the labor market. Some of these re-entries were planned while individuals were still on their career jobs and some were the result of unanticipated events in the post-retirement period. She finds that the jobs obtained by these individuals are similar to the bridge jobs of those that move from career jobs to new employment.
Zissimopoulos and Karoly (2009) examine data from the HRS from 1992 to 2002. They pool individuals across all waves and find that 5 percent of retirees find new employees between waves of the survey and that about one third of those who had left the labor force moved into self-employment. Cahill, Giandrea, and Quinn (2011) estimate that about 15 percent of career employees who exited the labor force returned to work. As might be expected, younger and healthier individuals are more likely to return to the labor force. Taken together, this limited research on labor force re-entry by retirees indicates that complete withdrawal from the labor force is not a permanent state for many individuals and that re-entering the labor force after a period of zero hours of work can be part of a lifetime plan or driven by unexpected events that occur after retirement.
I.D. Implications for Retirement by Public Employees.
None of the studies discussed above focused on the worklife transitions of public employees. As a result, little is known about the transition from career employment to complete withdrawal from the labor force by workers who spent their career working for state and local government agencies. There are some clear differences in the situations confronting older public employees that may influence the retirement transition. Individuals employed in the public sector are much more likely to be covered defined benefit pension plans that have strong early retirement incentives compared to workers in the private sector and they are more likely to be included in employer-provided health insurance in retirement. These plans provide a base level of annual income in retirement, and, thus, one might expect public retirees to be less likely to work in retirement. However, public workers retire from their career jobs at considerably younger ages than their private sector counterparts in large measure because of the incentives associated with retirement plans. Thus, these relatively young retirees might be more likely to desire some form of post-retirement work as they can expect 30 or more years of life after retirement and on average, will be in better health than persons who retire at older ages. Of course, some public employees, like private sector workers, retire at young ages due to health problems.