States may need to restructure retirement incentivesNews added by Benefits Pro on April 10, 2014

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By Paula Aven Gladych

Government agencies need to find new ways to encourage workers to remain in their jobs longer so that the massive wave of baby boomer retirements doesn’t overwhelm the system, according to Angela Curl, assistant professor in the University of Missouri School of Social Work.

In a case study of the state of Missouri’s Deferred Retirement Option Provision, or BackDROP, Curl found that states may need to restructure deferred retirement incentives to encourage more employees to stay on the job longer and minimize the disruption to government operations.

She estimated that a full quarter of Missouri state employees will be eligible for retirement by 2016. Such a mass exodus threatens the continuity of the state government workforce.

BackDROP is Missouri’s strategy to retain employees past their initial eligibility for a state pension by allowing them to continue working while also receiving (at the time of retirement) most of the pension benefits they would have received if they had retired instead of enrolling in the program, Curl said in her study.

A number of states have adopted delayed retirement policies that allow employees to continue working past their age of eligibility for retirement benefits while collecting pension benefits in the form of a lump sum payment upon retirement, including Alabama, Arizona, Arkansas, Florida, Louisiana and Missouri.

Most Deferred Retirement Option Plans require participants to enroll in the program ahead of time and commit to a specific retirement date.

Curl found that states that implemented traditional DROPs experienced a great deal of problems with people wanting to opt in or opt out for different reasons. Allowing employees to formally select BackDROP participation at the time of retirement is an advantage to employers because it offers greater flexibility, easier administration and lack of adverse selection by employees, the report found.

Of the 462 Missouri state employees who retired between February and April 2008, 180 or 39 percent delayed retirement for at least two years past eligibility. Of these 180 who were eligible, 156 participated in Missouri’s BackDROP delayed retirement option. About half retired from the three state agencies in which retirees represented the largest percentage of its employees in 2008, with 37.4 percent delaying their retirement at least two years and nearly 88 percent selecting BackDROP if eligible.

States like Missouri, with high populations of older workers, benefit from delayed retirement incentives. Curl found that as of 2012, 22.3 percent of Missouri’s state employees were age 55 or older. She found 13,161 state employees who will be eligible to retire by 2016, which would have disproportionate effects as more than 30 percent of employees in seven state agencies will be eligible to retire by 2016.

Length of service for the state and having a higher age of eligibility for full retirement benefits both increased likelihood of people delaying their retirement, Curl found. Delaying retirement also reduces the gap between leaving state employment and age eligibility for Social Security, Medicare and Medicaid.

Although the state contributes to retiree health care, cost is considerably higher until age 65, when Medicare takes over. Also, since the state subsidizes retiree health care based on years of service, working longer means lower premiums, she found.

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