Case Study: Early Retirement Incentives

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[. . .] It will provide the basis for their decision making and provide the theoretical background for their analysis of their own firm's situation. The research is also designed for professionals of management field who are interested in studying the viability of adopting various methods of downsizing and organization restructuring. Students of management will also find this research useful to further their own research in areas like retirement planning, human resources legislation or employee motivation factors.

The scope of the study however is limited to the faculty of management only and it does not cover alternative downsizing schemes by governmental institution. It does not cover industrial trend of downsizing nor does it cover organizations outside the United States. No doubt some of the organizations in Europe and Australia and other parts of the world may have similar tactics but the study is limited to the trend in North America.

Chapter II- literature Review

- Introduction

During the 1980s and early 1990s, organizations engaged in downsizing their workforce through various means. For example measures like attrition, layoffs, plant closures and early retirement programs were common. With the population of works having upward sloping age earning profiles, organizations find it more beneficial to follow retirement policies that would eliminate the lifetime wage contract between employees and employers. Since these organizations are required to pay older employees more then younger ones, they tend to shy away from hiring or maintaining older workers. The solution is to lose out older workers and follow the attrition strategy where they continue to pay older workers minimal wage but do not have to really mandate them to work in the mainstream of the business or where their skills have much contribution. In actuality firms reshape their workforces by retiring them early to have a better chance of profitability. Early retirement programs proved to backfire because both the individual and the organization tend to have push attitude towards retirement. "These may lead to adverse selection issues such as not enough or too many people leaving, and sometimes to the perverse effect of the worst people staying and the best ones leaving." [Davidson et al., 1996] The author observed the net market reaction effect did not have much positive incentives included in their strategies. The resulting negative outcome outweighed the benefit of adopting such a strategy.

Early retirement may have started out as an organization's strategy for eliminating costs but as the implementation process is underway, organizations are realizing the implications of giving incentives to skilled workers retire early. In their endeavors management have only looked at the implication of retaining the employees and how costs will decline their financial working. However, they neglected to observe the implementation of the strategy in terms of resourcing. The elimination of employees from human resource of these organizations has dwindled significantly when compared to the kind of output they desire. Early retirement incentives have acted in opposing direction to the desired effect. Organizations are finding it hard to cope up with the strategy they have implemented. The following is a literature review of how adversely early retirement incentives have resulted in the job market.

Health and security

One of the most important elements in early retirement package is health related costs. These include insurance and out of the pocket medical facilities till the individual reaches the age of 65. Retirees expect to save up enough money in the course of his career to provide health security in their old age. Early retirement provide this benefit when employers agree to forego certain penalties for inducing them to leave their job early on in their career. Hence even if a worker retires, he still gains medical benefits from the company as if he is still working there.

Dulitzky study show that the cost of health insurance for male employees between ages 45-54 years is twice of that of ages 25-34 years. This cost increases as the average earning of the employee increases as well. He estimated 8.4% as the proportionate health care cost for older employees. The higher health care costs therefore discourage firms from hiring aged workers. The cost of maintaining their insurance becomes too expensive. Coupled with the change in the program at Medicare, firms are finding it hard to continue to participate in national health insurance when they have to compete with other companies in cost cutting. As a result they are bound to induce employees to retire to reduce costs. For example in a study by Hewitt Associates [Minneapolis Star Tribune, 08-22-1996, 06B], the survey shows around 600 firms found health insurance decreased from 92% to 87% between the years 1991-1996, the amount of which is proportionate to the increase in premiums from 85% to 95% paid to retirees.

Once employees gain the post retirement status, organizations include them health care coverage designed for retired individuals. By imposing this kind of policy they find it easier to limit the number of employees who can continue to benefit from the organization's health care plans since it cut down mandatory health care facilities like annual health care costs, family health care etc. Since Medicare limits its free utility after the 65 years for average income group, employees find company medical benefits more attractive since they don't have to pay for medical care while they are retired. They can benefit their personal medical care after the age of 65 years. Medical care then becomes the responsibility of the employee instead of the employer.

On the downside early retirement implicate organizations. Meaning that despite the decrease in payment of their salaries and mainstream medical benefits, they would still continue to cover group insurance. There is little elimination of cost in this area if one were to view from the medical and health benefit point-of-view. Administrative costs continue to be maintained until the group insurance finishes. In the mean time, retirees enjoy both health insurance even if they are retired.

Employees have also been known to start taking social security benefits as soon as they retire. When they retire early with the incentives from their employers, they are likely to benefit from social security on the basis of non-job. This provides them a gain of income of approximately a $12,000 annually. It is not uncommon nowadays for middle aged employees to benefit from social security, ex-employers and Medicare after early retirement. Financially they are more stable then the company from which they retire.

From the company's point-of-view, the cost of medical care remains constant and they still have to pay almost equal amount in funding insurance.

Tax deferral

Personal finance of workers mandates that savings should stem from taxable accounts. Part of the income derived from such savings will be tax free because the faxed funds are already taxed in long-term capital gains. When these are realized they are taxed between 18-20%. While income from assets of over a year are likely to be tax deferred until one reaches the age of 70.5, when the withdrawal of funds becomes tax free. For those who earn from a higher income bracket, their retirement plans withdrawal continues to have penalties in the form of taxation. When individuals are forced to retire early, taxable income decreases, allowing them to enjoy "free" income. This is one of the reasons how firms induce individuals to retire early [Franklin, 2001]. Under the Rule of 85, the State now allows workers to retire early when the composite age of the individual and his working years adds up to 85. These individuals become exempted from penalties

Furthermore, 53% of American workers, constituting of about 70,000,000 people do not have access to retirement plans at their workplace. As they grow older, this population begins to retire by relying on Social Security. Social Security is not equipped to assist Americans from this aspect and hence the workers rely on their retirement savings. Coupled with early retirement incentives more and more of these baby boomers tend to take up the offers to gain on Tax relief known common as Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). "This comprehensive pension reform legislation was enacted as part of the large tax cut package entitled In addition to addressing pension issues, this law reduces income tax rates, reforms and reduces estate taxes, adds tax incentives for funding higher education costs, and provides additional tax-relief measures." [Smith, 2001].

Financial targeting

Firms' main concern when adopting early retirement programs is when they desire to gain significant financial stability in their performance. Some organizations choose to adopt early retirement to further their chances of gaining a competitive positioning in the industry. However experts [Franklin, 2001] found that although organizations see early retirement programs as a leverage strategy for increasing organization viability, the steps towards changing and regaining organization effectiveness is a different concern. As soon as the organizations strategize to take on early retirement programs, they are looked upon as an unsound company, whose performance needs major improvement by employees.… [END OF PREVIEW]

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Cite This Case Study:

APA Format

Early Retirement Incentives.  (2002, July 7).  Retrieved July 22, 2019, from

MLA Format

"Early Retirement Incentives."  7 July 2002.  Web.  22 July 2019. <>.

Chicago Format

"Early Retirement Incentives."  July 7, 2002.  Accessed July 22, 2019.