Unemployment and Older Workers

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

This is one in a series of papers that explore issues of our aging society. This report examines how
unemployment has a different impact on the older worker. As workers age, negative—but
previously temporary—events such as unemployment may push otherwise firmly entrenched
workers out of the labor force. Older workers are less likely than others to experience a spell of
unemployment, but those older workers who do experience unemployment have a higher
incidence of withdrawing from the labor market. Some studies have found that unemployment in
older workers contributes up to a one-third increase in the probability of retirement.
The pattern of unemployment leading to unexpectedly early retirement is not a new development.
Rather, it is the relative scale of the phenomenon to the overall workforce that is new. The
shifting demographics of the workforce have made what was once a fairly small policy issue
grow in importance.
Depending on the age of the older unemployed workers, new alternative income sources such as
retirement benefits and early Social Security benefits may be used while previous pillars of
support such as unemployment compensation become less helpful in replacing income. Facing
lowered expected wages and lower chances of rehire, older workers find themselves faced with
new decisions: should they search for a new job; create a new job through self-employment;
spend down any non-retirement personal savings they may have accrued during their working
years; opt to withdraw funds from retirement savings plans, and/or opt to receive Social Security
benefits?
One policy issue is how to address the inherent tensions among the Unemployment
Compensation (UC) system, alternative working arrangements, and eligibility for and receipt of
various types of retirement income including Social Security benefits. Another is how federal
programs might better balance providing income support for older Americans with providing
appropriate work incentives for those who would prefer to remain engaged in some type of work.
This report will be updated as needed.

Overvi ew ....................................................................................................................... .................. 1
Options for Older Unemployed Workers.........................................................................................1
The Aging Demographics of the Population...................................................................................2
Labor Force Participation................................................................................................................4
Definitions of Retirement and Labor Force Participation.........................................................5
The Process of Retirement..................................................................................................6
Unemployment and the Disruption of the Retirement Process...........................................6
Unemployment and Older Workers.................................................................................................7
Unemployment Compensation..................................................................................................7
Dislocated Older Workers.........................................................................................................7
Encouraging and Discouraging Older Workers to Remain in the Labor Force...............................8
Incentives to Continue to Work.................................................................................................9
Age Discrimination in Employment Act of 1967 (ADEA, P.L. 90-202)............................9
Unemployment Compensation............................................................................................9
Employment Service (ES).................................................................................................14
Social Security..................................................................................................................14
Pension and Retirement Savings.......................................................................................15
Disincentives to Continue to Work.........................................................................................16
Unemployment Compensation..........................................................................................16
Employment Service.........................................................................................................17
Social Security..................................................................................................................18
Income and Older Americans..................................................................................................18
Policy Issues............................................................................................................................19
Figure 1. Age Profile of the U.S. Population 2000 to 2050.............................................................3
Table 1. Annual Average Labor Force Participation Rates and Unemployment Rates in
2005, by Age................................................................................................................................5
Table 2. Age at Which Potential Earnings Substitutes Become Available and Changes in
Social Security, Pension, and Retirement Savings Incentives......................................................8
Table 3. Treatment of Typical “Bridging” Older Worker Labor Force Behaviors in State
Unemployment Compensation Systems, January 2007..............................................................11
Table 4. Sources of Income and Percentage of Individuals Receiving Income in 2005, by
Age ............................................................................................................................ ................. 19

Author Contact Information..........................................................................................................20

This report examines how unemployment has a different impact on the older worker. As workers
age, negative—but previously temporary—events such as unemployment may push otherwise
firmly entrenched workers out of the labor force. Older workers are less likely than others to
experience a spell of unemployment, but those older workers who do experience unemployment
have a higher incidence of withdrawing from the labor market. The workers find themselves
faced with new decisions: should they search for a new job; create a new job through self-
employment; spend down any non-retirement personal savings they may have accrued during
their working years; opt to withdraw funds from retirement savings plans and/or receive Social
Security benefits? Some studies have found that unemployment in older workers contributes up to ¹
a one-third increase in the probability of retirement. Once these workers have entered retirement,
they then face a different set of incentives that may make it less rewarding for these retired
workers to return to the labor market.
The pattern of unemployment leading to unexpectedly early retirement is not a new development.
Rather, it is the relative scale of the phenomenon to the overall workforce that is new. The
shifting demographics of the workforce have made what was once a fairly small policy issue
grow in importance.
One policy issue is how to address the inherent tensions among the Unemployment
Compensation (UC) system, alternative working arrangements, and eligibility for and receipt of
various types of retirement income. Another is how federal programs might better balance
providing income support for older Americans with providing appropriate work incentives for
those who would prefer to remain engaged in some type of work.

When older workers find themselves unemployed, they face a substantially different set of
decisions to make than if they were a few years younger. While all qualified unemployed workers
may receive unemployment compensation, older workers may replace lost earnings (conditional
on age) with retirement savings and pension programs. For example, workers who are at least

59½ years old may begin to take funds out of their IRA based savings without incurring the 10%

early withdrawal penalty. At age 60, qualified widows and widowers may begin to receive their
widow(er)s’ Social Security benefits. At age 62, all workers may receive a reduced, or “early,”
Social Security benefit. Finally, at some age between 65 and 67 (depending on their birth year)
workers can receive their “full,” or non-reduced, Social Security benefit.
Thus, depending on the age of the older unemployed workers, new options are incorporated into
their labor force participation decisions and UC benefits for unemployed workers become
relatively less important in income replacement. Previously, these workers were motivated to stay
in the labor market and use UC benefits to give themselves adequate time to engage in an
effective job search. As they age, the older workers’ job searches change. In order to attain new

¹^Se^e^,^f^o^r^e^x^am^ple^,^Se^wⁱ^{n C}^h^aⁿ^aⁿ^{d A}^{nn H}^u^f^f^Ste^v^eⁿ^s^,^“^J^{ob L}^o^s^s^a^{nd Em}^ploy^m^e^{nt P}^a^tte^rⁿ^s^of^O^l^de^r^W^o^r^k^e^r^s^,^”
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²⁰⁰^2,”^Da^t^a^Dⁱ^g^e^s^t^{, no.}⁸⁸^,^A^A^R^{P P}^u^blic^Polic^y^Institute^.

employment, older workers may (1) need to form new (potentially lower) expectations of wages
that reflect the loss of tenure and firm specific knowledge, (2) need to obtain new skills through
training programs in order to remain competitive in the labor market, or (3) wish to use a spell of
unemployment as a bridge to easing into retirement.

The pattern of unemployment leading to unexpectedly early retirement is not a new development.
Rather, it is the scale of the phenomenon relative to the overall size of the workforce that is new.
The shifting demographics of the workforce have made what was once a fairly small policy issue
grow in importance. Over the next 25 years, the age profile of the U.S. population and the U.S.
workforce will change dramatically. Members of the “baby boom” generation, those who were
born between 1946 and 1964, are currently between 40 and 59 years old. This boom creates a
peak in the U.S. population chart presented in Figure 1. As the baby boom ages, the demographic
profile of the United States substantially alters, as the share of the population aged 35-55
decreases and the share of older American increases.
The shift in the age profile has particular implications for older Americans and in the 55 to 69
year old demographic group. In 2000, this group comprised 12.0% of the total population.
Predictions for 2030 increase its proportion to 18.0%. This 6 percentage point increase is
equivalent to just under a 50% growth in the demographic group’s share of the population. In
2050, the proportion of the 55 to 69 year olds relative to the total population is expected to fall to

15.8%; however, this is still more than a 30% increase from 2000.

Figure 1. Age Profile of the U.S. Population 2000 to 2050
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^Ag^e
^Source:^{CRS graph}^{using e}^{stimates from U.S. Census Bu}^reau^Nat^{ional Populati}^{on Projections, Mid}^{dle Series.}
^{http://www.cens}^{us.gov/population/www/}^projections/^nats^um-T3.ht^ml/.
The demographic shift in the potential workforce will not affect all occupations equally. Research
suggests that the educational and health services industries will be disproportionately affected
when workers in those industries begin to retire since they currently have an age distribution ²
which is older than that of other industries.
Federal policy has recognized the problems that this demographic trend may create by
encouraging workers to extend their labor force participation through increasing the full-
retirement age for Social Security benefits while decreasing the rate at which earnings offset ³⁴
benefits and through abolishing mandatory retirement ages for most jobs.

²^A^r^l^eⁿ^e^Do^h^m^,^“^G^au^giⁿ^g^t^h^{e L}^a^b^o^{r F}^o^{rce E}^f^f^ect^{s o}^f^Retⁱ^rⁱⁿ^{g Bab}^y^-b^oo^m^e^rs,^”^M^onthly^L^a^b^o^r^Re^vⁱ^e^w^{, J}^u^ly²⁰⁰^0.
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^exe^m^p^t^).^T^h^{e st}^at^edⁱⁿ^t^eⁿ^t^o^f^t^h^e^act^{was t}^o^red^u^{ce t}^h^e^l^a^b^o^r^f^o^rce^p^a^rtⁱ^cⁱ^p^atⁱ^oⁿ^and^earnⁱⁿ^g^{s d}ⁱ^siⁿ^c^eⁿ^tⁱ^v^{es t}^h^at^recen^t
^retⁱ^r^{ees faced}^.^(T^h^e^p^r^evi^o^u^s^ru^l^e^{s f}^o^{r w}^o^rker^{s age}^s^f^r^o^m^a^g^{es 6}⁵^u^p^t^o⁷⁵^h^a^d^aⁿ^exe^m^p^tⁱ^oⁿ^o^f^t^h^{e f}ⁱ^rst^$¹⁵^,⁵⁰^{0 earn}^e^d
^a^{nd a}^oⁿ^e^-^thir^{d re}^d^u^c^tio^{n i}ⁿ^be^ne^f^{its the}^r^e^a^f^te^r.)
⁴^P^.^L^.^90-²⁰^2,^the^A^g^e^Dⁱ^s^c^rⁱ^mⁱ^na^tⁱ^on^{in Em}^ploy^m^e^{nt A}^c^{t of}^1967,^am^e^nde^{d in}¹⁹⁸⁶^by^P^.^L^.^99-⁵⁹²^r^e^m^o^v^e^{d the}
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^o^f^age.

These federal efforts to encourage workers to work longer have not been mirrored by supports to ⁵
keep older unemployed workers in the workforce. With a few exceptions, the UC system
generally does not treat common older worker employment patterns favorably. Depending on the
particular state, a desire for part-time work or self-employment may disqualify a worker from
receiving UC benefits. At the same time, retirement income may lower UC benefits, which are
especially important for those workers who are bridging into retirement. This retirement income
offset in the UC program will decrease the amount of income connected with an older worker’s
job search and may cause unemployed older workers to completely exit the labor market. As the
ratio of older workers to younger workers increases, the impact on the economy of older worker
responses to spells of unemployment increases.

Labor force participation rates measure the ratio of the civilian non-institutionalized civilian
population that (1) has a job or (2) has searched for a job in the previous four weeks. Labor force
participation rates climb rapidly in the population aged 20-24 as formal schooling is finished and
students enter the labor market. Between the ages of 25 and 54, labor force participation is fairly
consistent and high with approximately 83% being actively engaged in the labor market. Rates
begin a substantial decline as workers reach age 55. Just under 62% of those between the ages of

55 and 64, and just over 13% of those 65 and older are actively working or searching for work.

The unemployment rate is the ratio of those workers who did not have a job but had searched for
a job in the previous four weeks to all workers active in the labor market (either searching or
employed). Typically, unemployment is a large social concern for the youngest and least skilled
of workers. As workers age and gain skills and tenure, the likelihood that they are unemployed
decreases. In fact, one study found that the aging labor force accounted for half of the decrease in ⁶
unemployment in the 1990s. In 2003, 4.8% of prime-age (35-54 years of age) workers were
unemployed on average. Older workers continued to have lower rates of unemployment: 3.9% for
those aged 55-64 and 3.6% for those 65 and older. However, between 2000 and 2002, older
workers experienced rising unemployment rates that were greater in relative magnitude than those ⁷
for younger workers during the same period.
Table 1 lists the participation and unemployment rates for workers aged 35 and older in 2003.
Notice that labor force participation rates are heavily influenced by the age at which older
Americans become eligible for programs such as early retirement for Social Security (age 62).
The unemployment rates do not vary substantially for older Americans; this may be in part due to
older unemployed workers choosing to declare themselves out of the labor force. For example, it
is unlikely that all of the 56.2% of the Americans aged 62-64 who are out of the labor force would
prefer not to have a job. Some may choose to declare themselves retired rather than admit to
being unemployed. There is weak evidence that this may be true from the otherwise unexplained

10% decrease in the reported unemployment rate from 4.4% for Americans aged 60-61 to 4.0%

for those aged 62-64.

⁵^F^o^{r exam}^p^l^e,^t^h^{e UC p}^r^o^g^ram^d^o^{es n}^o^t^al^l^o^w^ext^r^{a t}ⁱ^m^e^f^o^{r o}^l^d^e^r^w^o^rker^{s’ j}^o^b^search^{es n}^o^r^do^{es t}^h^{e UC p}^r^o^g^ram
^a^llow^f^o^{r e}^a^s^y^f^u^lf^ill^m^e^{nt of}^{UC prog}^ra^m^re^quire^m^e^{nts by}^c^r^e^a^ting^se^lf^-e^m^p^lo^y^m^eⁿ^t.
⁶^A^bbig^a^{il C}^h^iot^o^aⁿ^{d Mic}^h^a^e^l^O^w^y^aⁿ^g^,^“^L^o^w^Uⁿ^em^ploy^m^e^{nt: O}^l^d^D^o^g^s^or^N^e^w^T^r^ic^k^s^?^”^Re^giona^{l Ec}^onom^is^t^,
^O^c^tobe^r²⁰⁰¹^{, Fe}^de^r^a^{l R}^e^s^e^r^v^e^B^a^nk^of^{St. L}^ouis^.
⁷^Sa^r^a^Six^,^“^U^pda^te^{on t}^h^e^O^l^de^r^W^o^r^k^e^r^{: 2002}^,”^Da^t^a^Dig^e^st^{, N}^o^.^{88, A}^A^R^P^,^J^u^ne²⁰⁰³^.

Table 1. Annual Average Labor Force Participation Rates and Unemployment Rates
in 2005, by Age
^Age^{Labor Fo}^rce^{Participation Rate}^Unemployment^Rate
^35-4^{4 83.8%}^3.9%
^45-5^{4 81.7%}^3.5%
^50-5^{4 79.8%}^3.3%
^55-5^{9 71.4%}^3.4%
^60-6^{4 51.6%}^3.2%
^65-6^{9 28.3%}^3.4%
^70-7^{4 16.3%}^3.7%
^{75+ 6.4%}^3.3%
^Source:^Cur^{rent Pop}^{ulation Sur}^{vey, 20}^05.
Table 1 demonstrates that workers aged 35-54 (prime-age workers) have the highest labor force
participation rates with more than 80% of the non-institutionalized civilian population active in
the labor market. There is a rapid decline of labor force activity as workers reach their late 50s
(55-59)—the approximate age when many buy-outs and some private pension plans allow for
early retirement. This is reflected in a pronounced drop in labor force participation of 8.4
percentage points (from 79.4% to 71.4%) from what was reported for workers in their early 50s.
This drop is followed by a subsequent 19.8 percentage point drop as workers enter their early 60s,
when widow(er)s’ Social Security benefits (age 60) and early retirement (age 62) become
available.
In the span from the 50-54 age group to the 60-64 age group, the labor force participation rate
falls to just under two-thirds of what it had been. This is not, perhaps, surprising given that at age
62 a reduced Social Security benefit becomes available. This reduction in Social Security benefits
has been constructed to be actuarially fair on average. (That is, it does not set a penalty for early
participation but rather reduces the Social Security benefit so that the discounted value of the
benefit is equal to that of the full retirement benefit for an average worker.)
For the purposes of this report, the term worker refers to all participants in the labor market.
Individuals who are not employed or not actively searching for a job and are at least 55 years old
are labeled as being retired, regardless of pension or Social Security benefit income. This is
substantially different from the definition often used in retirement analyses. Generally, retirement
is defined with reference to two characteristics: nonparticipation in the labor force, and receipt of
income from pensions, Social Security, or other retirement savings vehicles. An individual who
does not work for compensation and who receives income only from these retirement-based
income replacements would meet this definition of retirement.
Between these two extremes, however, are those who might be considered to have retired based
on one part of the definition but not the other. For example, of recipients of employer pensions

and retirement savings plans, 40% of the male recipients and 34.5% of the female recipients were ⁸
employed. Sometimes, these workers are employed in “ bridge” jobs that help to transition them
from full labor force participation into retirement. Other workers may be fully employed in ⁹
another career while enjoying the retirement benefits from a previous job. In such cases,
retirement from a particular job does not necessarily signal that the worker has withdrawn from
the workforce and moved into the strict definition of retirement.
On the other hand, some of those who retire from full-time employment continue to work part-
time to supplement their retirement-based income but receive the majority of their income
through Social Security, pensions, and savings. These workers would typically be classified as
retired, even though they continue to engage in paid employment. As these examples suggest, not
everyone who receives pension income is retired, and some people who work for pay may be
considered retired.
Generally, the transition from the labor market into full retirement is an orderly and fully planned
process. For many workers, their retirement plans may involve an abrupt move from being full-
time workers to enjoying a full retirement without any further labor force participation. Other ¹⁰
workers may have retirement plans for a gradual transition into retirement. These transitional
steps may include creating alternative work arrangements (moving from full-time to part-time
status) or switching to less demanding positions—which may not be in the same occupation or
industry (a bridge job). Furthermore, some individuals may churn or cycle from bridge jobs back
to “career” jobs and then gradually transition into full retirement with no labor force ¹¹
participation.
For some workers, however, an unexpected loss of employment may disrupt their retirement
plans and push the workers into an earlier—and unexpectedly abrupt—retirement as their UC
benefits are exhausted (or if they choose not to receive UC benefits, as they decide to stop
working earlier than they had originally intended). These unplanned retirements result in
permanent decreases in retirement benefits as the workers begin drawing benefits earlier (and in
the case of Social Security, early retirement penalties occur) while discontinuing the
accumulation of retirement assets (possibly leading to lower total retirement assets).

⁸^Se^e^C^R^S^R^e^por^{t R}^L³⁰⁶²⁹^,^O^l^de^r^W^o^r^k^e^r^s^:^Em^ploy^m^e^{nt a}^{nd Re}^tir^e^m^eⁿ^{t Tr}^e^nds^{, by}^P^a^tric^k^P^u^rc^e^ll.
⁹^{For e}^x^a^m^ple^,^indivⁱ^d^u^a^l^{s w}^{ho ha}^v^e^re^tire^d^f^r^o^m^c^a^r^e^e^rs^{in la}^w^-^eⁿ^forc^e^m^eⁿ^{t or t}^h^e^m^ilita^r^y^—both^of^w^h^ic^{h ty}^pic^a^l^l^y
^p^r^o^vⁱ^d^e^p^eⁿ^sⁱ^oⁿ^s^af^t^e^{r 2}⁰^y^{ears o}^f^servi^ce—o^f^t^eⁿ^w^o^rk^f^o^{r man}^y^y^e^{ars at}^o^t^h^e^{r j}^o^b^s^w^hⁱ^l^e^con^c^u^rren^t^l^y^r^ecei^viⁿ^g^a
^pe^ns^io^{n f}^r^om^pr^ior^e^m^ploy^m^e^nt.
¹⁰^For^a^de^ta^ile^{d s}^t^a^tis^tic^a^l^de^s^c^rⁱ^pti^on^of^the^s^e^pa^tte^rⁿ^s^see^P^a^t^rⁱ^c^k^P^u^rcel^l^,^“Ol^d^{er W}^o^rkers:^E^m^p^l^o^y^men^t^an^d
^Re^tire^m^eⁿ^{t T}^r^e^nds,”^Moⁿ^t^h^l^{y L}^abo^r^R^evi^ew^{, O}^c^tobe^r²⁰^00,^p^p^.^19-^30.
¹¹^For^m^o^r^e^dis^c^us^sⁱ^oⁿ^on^this^t^o^pⁱ^c^a^nd^how^the^r^e^a^r^e^im^pe^dim^e^nts^{to pa}^r^tia^{l r}^e^tir^e^m^eⁿ^{t a}^nd^pa^r^t^-^tim^e^w^o^r^k^{, s}^e^e^Le^gal
^and^Insti^t^uti^oⁿ^a^{l Im}^pe^dime^{nts t}^o^Partial^Re^tire^m^eⁿ^{t a}ⁿ^d^Part-t^ime^W^o^rk^b^y^O^l^de^{r W}^o^rk^e^r^s^,^b^y^Rud^o^lp^h^P^eⁿⁿ^e^r^,
^P^a^m^e^la^P^e^run^,^aⁿ^{d E}^u^g^e^ne^Ste^u^e^r^le^{, Urba}^{n I}ⁿ^stitu^te^{, h}^ttp:/^/www^.urbaⁿ^.org^/^U^ploa^de^d^P^DF/⁴¹⁰⁵⁸⁷^_^Sl^oa^nFiⁿ^a^l^.p^df^.

Many factors that help explain why unemployment has such a different impact on older workers
than on younger workers. Empirically, research suggests that older workers have an increased
difficulty in obtaining a similar position at the same level of compensation, because their higher
wages often are difficult to fully replace through reemployment. Workers lose their wage ¹²
premium attributed to longevity, tenure, or employment contract. Older workers also may lose
the wage premium for skills specific to their previous firm. If workers find new jobs in different ¹³
industries, they lose the premium for that industry-level knowledge as well.
UC in the United States is provided through a federal-state system that provides temporary partial
wage replacement to active job seekers who are involuntarily out of work. Older workers
generally have long-term, stable work histories and are less likely to be unemployed than other
workers. As a result, older workers who lose their jobs are more likely to receive UC benefits and
have higher expected benefits because of their stronger work histories and greater understanding ¹⁴¹⁵
of the UC system. Older workers are also more likely to exhaust their benefits.
Studies suggest that older unemployed workers take longer to find new jobs; are less likely to find
a job; and, their new jobs replace a smaller fraction of previous earnings. Older workers are much
more likely to be dislocated from their jobs. That is, they are more likely to have lost a job where ¹⁶
they had long tenure and the separation from the employer is permanent. Dislocated workers
have a lower chance of finding new employment. In addition, those who do find employment ¹⁷
typically earn substantially less than they did in their previous job. For older workers a job
dislocation has more of an impact on earnings than for younger workers. A significant proportion
of their previous high salaries may be attributed to job tenure; thus, wages from new jobs may be
substantially lower. Likewise, facing lower levels of replaced earnings, older workers are also less

¹²^R^o^g^e^r^G^o^r^{don a}ⁿ^{d A}^l^aⁿ^B^lin^de^r^,^“^M^a^r^k^e^{t Wa}^ge^s^,^R^e^s^e^r^v^a^{tion W}^a^g^e^s^,^a^{nd R}^e^tir^e^m^eⁿ^{t D}^e^cⁱ^sⁱ^ons^,”^N^B^ER^W^o^r^k^ing
^P^a^pe^r^W⁰⁵¹^3,¹⁹^81.^A^d^v^a^nc^ing^a^g^e^m^a^y^{pull w}^a^g^e^s^dowⁿ^w^a^r^{d a}^s^pr^o^duc^tiv^ity^f^o^r^m^aⁿ^y^w^o^r^k^e^r^s^de^c^r^e^a^s^es^{. Se}^e^a^l^s^o
^H^e^nr^y^Fa^r^b^e^r^{, “}^J^{ob L}^o^s^s^{in the}^Uⁿ^ite^d^Sta^t^e^s^{: 1}⁹⁸¹^-²⁰⁰^1,”^N^B^ER^W^o^r^k^ing^P^a^pe^r⁹⁷^07,^Ma^y²⁰⁰³^.
¹³^Diaⁿ^e^He^rz^a^nd^Phili^{p Ro}^ne^{s, “}^I^nstitutⁱ^oⁿ^a^l^Ba^rrie^r^{s to Em}^ploy^m^e^{nt of}^Olde^{r W}^o^rk^e^r^s”^M^onthly^L^a^bor^Re^vⁱ^e^w^,
^A^p^r^{il 198}^9,^pp^{. 1}⁴^-²^1.
¹⁴^Chris^t^o^phe^{r O}^’^L^e^a^r^y^a^{nd Ste}^p^he^{n W}^a^ndne^r.,”^Uⁿ^e^m^ploy^m^e^{nt Com}^p^eⁿ^s^a^{tion a}^{nd O}^l^de^{r W}^o^rk^e^r^s^,^”ⁱⁿ^P^e^te^{r Bu}^de^tti,
^Rⁱ^c^h^a^r^{d B}^u^r^k^ha^us^e^r^{, J}^a^nic^e^G^r^egor^y^,^a^{nd H}^.^A^lla^{n H}^unt^{, e}^d^s^.^,^Iⁿ^s^u^rⁱ^{ng H}^e^al^th^an^{d I}ⁿ^c^o^m^e^Se^c^u^r^ity^f^o^r^aⁿ^Agⁱⁿ^g
^Wo^rkfo^rce^(Kal^a^m^azo^o^,^Mⁱ^chi^g^an^:^W^.^E^.^Upj^o^hⁿ^Iⁿ^stⁱ^t^u^t^{e f}^o^{r E}^m^p^l^o^y^m^eⁿ^t^Rese^arch^,²⁰⁰¹⁾^.^(Hereaft^e^{r ci}^t^e^d^as
^O^’^L^e^a^r^y^a^{nd W}^a^ndne^r^,^Uⁿ^e^m^pl^oy^m^e^{nt C}^o^m^p^eⁿ^s^a^ti^on^an^{d O}^l^de^r^W^o^r^k^e^r^s^.)
¹⁵^For^m^o^r^e^dis^c^us^sⁱ^oⁿ^on^this^t^o^pⁱ^c^,^s^e^e^C^R^S^R^e^por^t^R^L³²¹^11,^Uⁿ^e^m^ploy^m^e^{nt C}^o^m^p^eⁿ^s^a^tio^{n (}^U^C⁾^{/ U}ⁿ^e^m^ploy^m^e^nt
^Ins^u^r^a^nc^e⁽^U^{I): Tr}^e^nds^an^{d C}^ont^rⁱ^butiⁿ^g^Fac^t^or^s^{in U}^C^Be^ne^{fit Ex}^haus^tⁱ^oⁿ^,^by^Julie^{M. W}^h^itta^k^e^r.
¹⁶^Se^wⁱ^{n C}^h^aⁿ^aⁿ^{d A}^{nn H}^u^f^f^Ste^v^ens^,^“^J^ob^L^o^s^s^a^{nd Em}^ploy^m^e^{nt Pa}^tte^rⁿ^s^of^O^l^de^r^W^o^r^k^e^r^s^,^”^Jo^u^r^na^l^of^La^bo^r
^Ec^onom^ic^s^,^A^p^ri^l²⁰⁰¹^.^(Hereaf^t^e^{r ci}^t^e^d^{as Ch}^an^aⁿ^d^S^t^even^s,^J^o^b^l^o^s^s^an^{d Em}^ploy^m^e^nt^Patte^rⁿ^s^of^O^l^de^r^W^o^r^k^e^r^s^.)
¹⁷^Se^e^H^e^nr^y^Fa^r^b^e^r^{, J}^{ob L}^o^s^s^{in t}^h^e^Uⁿ^ite^{d S}^t^a^t^e^s^{, 19}^81-²⁰⁰¹^{, N}^B^E^R^W^o^r^k^ing^P^a^pe^r⁹⁷⁰⁷^{, Ma}^y²⁰⁰^3,
^http:^//pa^p^e^r^s^.^nbe^r^.^or^g^/^pa^pe^r^s^/^w^9707.^pdf^.

likely to continue to work after job dislocation. Subsequently this increases their chances of early ¹⁸
withdrawal from the labor market.

If older workers do not qualify for, cannot afford, do not opt for, or have exhausted support from
the UC program, they may turn to other forms of income support intended for retirement
purposes. These earnings substitutes listed in Table 2 include participation in early Social
Security benefits and early withdrawal of personal retirement funds. These substitutes often
change the structure of work incentives for older Americans and may contribute to a decision to ¹⁹
permanently withdraw from the labor market.
Table 2. Age at Which Potential Earnings Substitutes Become Available and Changes
in Social Security, Pension, and Retirement Savings Incentives
^Age^Earnin^{gs Substitute}^{Changes in In}^centives
⁵⁵^{IRA savings p}^urc^{hased as life-}^{Removal of 10% early withdrawal}^penalty.
^{time annuity}
^59½^{IRA savings}^{No early withdrawal penalty.}
^{60 Widow(er)s}^S^ocial^Security^Earnings^u^p^{to maximu}^{m ($9}^7,50^{0 in 2}⁰⁰⁷⁾
^benefits^{subject to em}^{ployment taxe}^{s. (Shared}
^between^{employer a}^{nd employee}^{.) Each $}¹
^{of earnings over}^$1^2,96^{0 (2}⁰⁰⁷⁾^causes
^{benefit red}^{uction of $.5}^{0. Early r}^etirement
^{benefit red}^{uction ap}^plies.
⁶²^{Early Social Security retirement}^Earnings^continu^{e to be s}^{ubject t}^o
^benefits^{employment tax}^{es. Eac}^{h $}¹^{of ea}^{rnings over}
^$12,9⁶⁰⁽²⁰^{07) ca}^uses^bene^{fit re}^{duction $.50.}
^{Early retireme}^{nt be}^{nefit red}^{uction ap}^plies.
^{Year of full-}^Social^{Security retirement}^Earnings^continu^{e to be s}^{ubject t}^o
^{retirement age}^benefits^{employment tax}^{es. Early retire}^m^{ent be}^nefit
^{reduction ap}^{plies. Each $}³^{of ear}^{nings over}
^$34,4⁴⁰⁽²⁰^{07) ca}^uses^bene^{fit re}^{duction of $1}
^{benefits. O}^{nly earnings}^before^th^{e month of}
^{full retirement age a}^{re cou}^{nted a}^{gainst the}
^$34,4^40.
^{Full-retirement age}^{Social Security}^retirement^Earnings^continu^{e to be s}^{ubject t}^o
^(65-67)^{based on}^benefits^{employment tax}^{es. Ear}^{nings do n}^{ot reduce}
^{birth yea}^r^{benefit. Delayed retirement}^{credit applies if}
^Social^{Security is deferred.}

¹⁸^S^ee^E^v^a^l^ua^tⁱ^oⁿ^o^f^t^h^{e Wo}^rkf^o^rce^Devel^o^p^m^en^t^P^a^rtⁿ^e^rshⁱ^p^P^r^o^g^r^{am i}ⁿ¹⁹⁹⁴^,¹⁹⁹⁵^an^d¹⁹⁹⁶^{, N}^e^w^Je^r^s^ey^{: J}^{ohn J}^.
^Hel^d^ri^ch^Cen^t^{er f}^o^{r W}^o^rkf^o^{rce D}^e^vel^o^p^m^en^t^,^Ru^t^g^{ers Un}ⁱ^v^ersi^t^y^,²⁰⁰⁰^.
¹⁹^For^a^de^ta^{il de}^s^c^rⁱ^pt^io^{n of}^a^{ll ta}^x^e^s^tha^t^ol^de^r^w^o^r^k^e^r^s^f^a^ce^{, s}^e^e^“The^I^m^plic^{it T}^a^x^{on W}^o^r^k^a^t^O^l^de^r^A^g^e^s^,”^Nation^a^l
^Tax^J^our^nal^{, B}^o^{l L}^V^I^V^{, N}^o^{. 2}^,^J^u^ne²⁰⁰⁶^{, by}^B^a^r^b^a^r^a^B^u^tr^ic^a^,^Rⁱ^c^h^a^r^{d J}^o^hns^on,^K^a^r^e^{n Sm}^{ith, a}ⁿ^d^Eug^e^ne^Str^e^ue^le^.

^Age^Earnin^{gs Substitute}^{Changes in In}^centives
^{Full-retirement}^{Aged SSI}^{Needs-based be}^{nefit. After}^$6^{5 p}^{er month,}
^{age (65-6}^{7) based on}^{SSI benefits are}^reduced^$1^{for e}^{very $}²^of
^{birth yea}^r^{earned income. For u}^{nearned in}^c^{ome such a}^s
^{pensions, Social Security benefits,}^and
^{workers’ compensation, after}^the^{first $2}⁰^{per mont}^h
^{each $}¹^red^{uces t}^{he SSI be}^{nefit b}^y^$1.
⁷⁰^Must^{begin collection of Social}^Earnings^continu^{e to be s}^{ubject t}^o
^{Security be}^nefits^{Employment ta}^{x. Delayed retirement}
^{credit is terminated.}
^70½^Must^{begin to take IRA}
^{distributions}
^Source:^{CRS compilation of rules reported in t}^{he Social Security Administration’s 200}^{5 fact s}^heet
^{http://www.ssa.gov/legislat}^ion/²⁰^05_facts^{heet.doc, and CRS Repo}^{rt RL31}⁷⁷^0,^{Individual Retirement Accounts and}
^{401(k) Plans: Early Withdraw}^{als an}^{d Required Distribut}^ions^{, by Patrick Purcell.}
Although the earnings substitutes have disincentives for labor force participation, there are
several other public policies and programs that encourage and aid older workers in their
continued participation in the labor force. These policies and programs reflect several
underlying—but at times competing—objectives: alleviating Social Security financing pressures,
rewarding and encouraging longer labor force attachment, and eliminating employment
discrimination based upon age. The following examples of incentives and disincentives do not
comprise an exhaustive list of all legislation and programs that encourage or discourage work by
older Americans, but rather represent the keystones to this approach.
This act protects workers (40 and older) from age discrimination in their jobs. It eliminated
mandatory retirement age for most workers except where age is a bona fide condition of
employment. An example of a position where age is considered to be a bona fide condition
includes many (but not all) protective services workers. Until a 1986 amendment (P.L. 99-592),
workers over the age of 70 were not protected by ADEA.
For older workers, the UC system is a source of income security, just as it is for younger workers.
Unlike the case of younger workers, however, older workers’ UC benefits become a factor in the
decision to retire. Unlike receiving Social Security benefits or certain other retirement income
where benefits may be permanently reduced, receiving UC benefits does not have permanent
adverse effects on future UC benefits. For example, after approximately 15 to 18 months of
reemployment, a worker’s UC benefit is strictly determined by the new employment activity.
However, workers who are bridging to retirement through part-time work or self-employment are
sometimes excluded from receiving UC benefits and workers receiving some pension or other
retirement benefits may have their UC benefits substantially offset. Table 3 summarizes how
states’ UC programs treat factors that might impact older workers: part-time work, self-
employment, pension income offsets, and Social Security income offsets.

In most states’ UC systems workers who have had their hours reduced or who are working short-
term in part-time jobs while looking for a permanent full-time job are able to receive some UC
benefits. To encourage workers to remain in the labor force, all states disregard some earnings as
an inducement to take part-time work. The worker’s UC benefit will generally equal the
difference between the weekly benefit amount and earnings plus a small allowance.

Table 3. Treatment of Typical “Bridging” Older Worker Labor Force Behaviors in State Unemployment Compensation
Systems, January 2007
^{UC Of}^{fset of}^{Disregard Portion}
^{Explicitly May}^{Self-employment}^Compulso^ry^{Retirement Is}^{Pension Only If}^{of Em}^ployee^{No UC O}^ffset
^State^{Search f}^{or Pa}^rt-^Assistance^{Treated as “Good}^{Period in Base-}^{Contribution to}^{of So}^{cial Security}
^{time Only}^Progr^am^Cause”^{year Increased}^{the Pension}^b^Benefits
^{Pension Inco}^me^a
^Alabama^Y^Y
^Alaska^Y^Y^Y^Y
^Arizona^Y^Y^Y^Y
^{Arkansas Y}^Y^Y^Y
^{California Y}^Y^Y^Y^Y
^Colorad^{o Y}^Y
ⁱ^{ki/CRS-RL32757}^Connecticut^Y^Y^Y^Y
^g/w^Delaware^{Y Y}^Y^{Y Y}
^s^.or^{District of}^Y^Y
^le^ak^Columbia
^://wiki^{Florida Y}^Y^Y^Y
^h^ttp^Georgia^Y^Y^Y
^{Hawaii Y}^Y^Y^Y^Y
^Idaho
^{Illinois Y}^Y^Y
^Indiana^Y^Y
^{Iowa Y}^Y^Y
^{Kansas Y}^Y^Y^Y^Y
^Kentucky^Y^Y^Y^Y
^{Louisiana Y}^Y^Y
^{Maine Y}^Y^Y^Y
^Maryland^Y^Y^Y

^{UC Of}^{fset of}^{Disregard Portion}
^{Explicitly May}^{Self-employment}^Compulso^ry^{Retirement Is}^{Pension Only If}^{of Em}^ployee^{No UC O}^ffset
^State^{Search f}^{or Pa}^rt-^Assistance^{Treated as “Good}^{Period in Base-}^{Contribution to}^{of So}^{cial Security}
^{time Only}^Progr^am^Cause”^{year Increased}^a^{the Pension}^b^Benefits
^{Pension Inco}^me
^Massach^{usetts Y}^Y^Y^Y
^Michigan^Y^Y^Y
^{Minnesota Y}^Y
^Mississippi^Y^Y
^Missouri^Y^Y^Y
^{Montana Y}^Y^Y^Y^Y
^Nebras^{ka Y}^Y^Y^Y
^Nevada^Y^Y^Y^Y
^{New Ham}^pshire^Y^Y^Y^Y^Y
ⁱ^{ki/CRS-RL32757}^New^Jers^ey^{Y Y}^Y^Y^{Y Y}
^g/w
^s^.or^{New Me}^xico^Y^Y^Y^Y
^le^ak^New^York^{Y Y}^Y^Y^{Y Y}
^://wiki^North^Carolina^Y^Y
^h^ttp^{North Dakota}^Y^Y^Y^Y^Y
^Ohio
^{Oklahoma Y}^Y^Y^Y^Y
^Oregon^Y^Y^Y^Y
^Pennsylvania^{Y Y}^Y^Y^{Y Y}
^{Rhode Island}^Y^Y^Y
^{South Carolina}^Y^Y
^{South Dakota}^Y^Y^Y
^Tennessee^Y^Y^Y^Y
^Texas
^Utah^Y^Y

^{UC Of}^{fset of}^{Disregard Portion}
^{Explicitly May}^{Self-employment}^Compulso^ry^{Retirement Is}^{Pension Only If}^{of Em}^ployee^{No UC O}^ffset
^State^{Search f}^{or Pa}^rt-^Assistance^{Treated as “Good}^{Period in Base-}^{Contribution to}^{of So}^{cial Security}
^{time Only}^Progr^am^Cause”^{year Increased}^a^{the Pension}^b^Benefits
^{Pension Inco}^me
^{Vermont Y}^Y^Y
^Virginia^Y^Y
^{Washington Y}^Y^Y^Y^Y
^{West Virginia}^Y^Y
^{Wisconsin Y}^Y^Y^Y
^{Wyoming Y}^Y^Y
^{Total 30}⁸⁴⁰²⁷³⁹⁴⁰
^Source:^{CRS compilation of rules reported in}^Co^{mparison of State}^Unemploy^{ment Insurance Laws 2007}^{, U.S}^{. Department of La}^{bor, Em}^{ployment and Training Administr}^ation,
^{Office of Workforce Secu}^{rity, 20}^07.
ⁱ^{ki/CRS-RL32757}^Notes:^{“Y” ind}^{icates that the sta}^{te has t}^{his policy/program.}
^g/w^a.^{UC benefits a}^{re offset only}^{by t}^h^e^{pension income}^{that ca}^{n b}^e^{directly attributed to the}^base-yea^r^months^{used in th}^{e calculati}^{ons f}^{or UC benefits.}
^s^.or
^le^ak^b.^{UC benefits a}^{re offset only}^{by t}^h^e^{pension income}^{that ca}^{n b}^e^att^{ributed to}^em^ployer^contrib^utions.

^://wiki
^h^ttp

Several states have a Self-Employment Assistance (SEA) program to aide workers in creating
their own jobs by creating small businesses. To be eligible for SEA payments, workers must be
eligible for UC, permanently laid-off from their previous jobs, identified as likely to exhaust their
benefits, and participating in self-employment activities such as entrepreneurial training, business ²⁰
counseling, and technical assistance. Workers enrolled in an SEA program receive weekly self-
employment payments (the same amount as the workers’ regular UC benefits) while working full-
time on starting a business.
The ES²¹ is linked to the UC system; generally, state laws mandate registration and participation
in ES programs in order to remain eligible for UC benefits. The ES system provides employment
and training programs and services to workers through a joint federal-state partnership.
Two federal ES programs attempt to aid older workers remaining in the workforce. The Senior ²²
Community Service Employment Program (SCSEP), places eligible applicants into a non-profit,
public service, or community service agencies where they receive on-the-job training. The second
program, the Alternative Trade Adjustment Assistance (ATAA) Program for Older Workers, was
established as an alternative to the benefits offered under the regular Trade Adjustment Assistance
(TAA) program. Participation in ATAA allows older workers who are eligible for Trade
Adjustment Assistance, but for whom retraining may not be appropriate, to accept reemployment
at a lower wage and receive a wage subsidy. Eligible workers age 50 or older who obtain new
employment at wages of less than $50,000 within 26 weeks of losing their job may receive a
wage subsidy of 50% of the difference between their old and new wages, equal up to $10,000, for
up to a two-year period.
Before December 31, 1999, workers who were under age 70 faced steep earnings tests and
substantial deductions in their benefits. The Senior Citizens Freedom to Work Act, 2000 (P.L. ²³
106-182) eliminated the retirement earnings test for those at or above full-retirement age, and
relaxed the earnings test for those between 62 and full-retirement age. Thus, workers at or above
full-retirement age are now able to earn unlimited wages without relinquishing Social Security
benefits. Those workers who are receiving early retirement benefits now have a greater amount of
money they may earn before their Social Security benefit is subject to reduction and the rate at
which their Social Security benefit is offset is smaller. Workers who are at or above full
retirement age (age 65 and six months if born in 1957) may keep all of their Social Security
benefits, with no earnings tests. Workers younger than the full-retirement age for the entire year,

²⁰^F^e^d^e^ral^l^a^w^req^uⁱ^{res t}^h^at^no^m^o^{re t}^h^an⁵^%^o^f^w^o^rker^{s recei}^viⁿ^g^re^gu^l^a^{r UC m}^a^{y b}^e^p^a^rt^o^f^t^h^{e S}^E^A^p^r^o^g^ram^.
²¹^T^h^e^W^a^gⁿ^e^r^-^P^e^y^s^e^r^A^c^{t of}¹⁹³³^e^s^ta^blis^he^{d a}^na^ti^onw^ide^s^y^s^t^em^o^f^public^e^m^ploy^m^e^{nt of}^fⁱ^ce^s^,^a^nd^{it w}^a^s^am^e^nde^d
^{in 1}⁹⁹⁸^t^o^be^pa^rt^of^the^One^-^St^o^p^de^liv^e^r^y^s^y^ste^m^{. Sta}^t^e^Em^plo^y^m^e^{nt Se}^c^u^rity^A^g^eⁿ^cⁱ^e^s^a^r^e^a^f^f^ilia^te^{d w}^{ith the}^U.S.
^Em^plo^y^m^e^{nt Se}^r^v^ic^e^s⁽^E^S)^a^{nd a}^s^sⁱ^s^t^{job s}^e^e^k^e^r^s^{in f}ⁱ^ndi^ng^jo^bs^a^{nd e}^m^ploy^e^r^s^{in f}ⁱ^nding^q^u^a^lif^ie^{d w}^o^r^k^e^r^s^.
²²^Se^e^C^R^S^R^e^por^{t R}^L³⁰⁰⁵⁵^,^O^l^de^r^Am^e^r^ic^ans^Ac^t:²⁰⁰⁰^Re^a^u^t^horⁱ^z^atio^{n Le}^gⁱ^s^l^ati^oⁿ^{, by}^C^a^r^o^{l O}^'^Sh^a^u^g^hne^s^s^y^f^o^r
^m^o^re^inf^o^r^m^a^{tion on}^the^prog^ra^m^.^{In FY}²⁰⁰⁴^the^p^r^og^ra^m^w^a^s^a^lloc^a^t^e^d^$4^{39 m}^illio^{n in}^f^unds^.
²³^T^h^e^r^e^tir^em^eⁿ^{t e}^a^r^ning^s^te^s^t^r^e^f^e^r^s^{to t}^h^e^a^m^{ount of}^e^a^r^ning^s^a^w^o^r^k^e^r^m^a^y^r^ecei^{ve w}ⁱ^t^hout^of^f^s^e^tting^Socⁱ^a^l^Se^c^u^rity
^be^ne^f^its^{. A}^f^te^r^this^am^{ount is}^r^e^a^c^he^{d, e}^a^rⁿⁱ^ng^s^a^bov^e^this^le^v^e^{l of}^f^s^e^t^Socⁱ^a^l^Se^c^u^r^ity^be^ne^f^its^until^a^{ll be}^ne^f^its^ha^v^e
^b^een^elⁱ^mⁱⁿ^at^ed^t^h^r^o^u^g^h^t^h^{e o}^f^f^s^e^t^.

have an earnings limit. For every $2 earned above $12,960 (in 2007) there is a $1 deduction in the
benefit. The earnings test is altered if a worker will achieve full-retirement age during the year. In
this case, for every $3 earned above $34,440 there is a $1 reduction in benefits until the month the ²⁴
worker achieves full retirement age at which point there is no reduction in benefits.
The Social Security Amendments of 1983 (P.L. 98-21) gradually increased full-retirement age for
those born after 1937 from 65 to 67 (for those born after 1959). As a result, workers born after
1937 effectively face lower Social Security benefit levels than workers born before 1938. Thus, a
worker would also find it more expensive to choose early retirement at age 62, forgoing a greater
percentage of his or her full-retirement benefit. An expected result of this degradation of benefit
level would be that workers would work longer and save more to replace their reduced benefits.
The changes in the earnings test and the increase in the full-retirement age are fairly new and
have only recently been analyzed. Before the elimination of the earnings test for individuals at or
above the full retirement age, most studies, such as that by produced by Gruber and Orzag (2000)
suggested that eliminating the test would have a modest effect on labor supply. One study,
Friedberg (2000), predicted that eliminating the earnings test would increase the hours worked by ²⁵
65-69 year old men by about 5%. The first study to investigate the preliminary effects of
removing the test, Song (2003), concludes that while the removal increased hours worked for
those with higher earnings, the effect on lower earners is not statistically significant and there is
no clear evidence of the effect of the removal on the labor force participation rate. But others ²⁶
have found no evidence of change in labor supply.
Recognizing that individuals might need to access their retirement funds before retirement,
Congress permits early withdrawals of some pension savings without penalty in certain ²⁷
situations.
Individuals may take “hardship distributions” from their 401(k) accounts without penalty in the
case of “an immediate and heavy financial need of the employee.” These needs include expenses
for medical care of the plan participant or family members, purchase of a principal residence,
college tuition and related expenses, expenses to prevent eviction or foreclosure on a principal

²⁴^Itⁱ^s^po^ssi^b^l^{e t}^h^at^mⁱ^d^-^y^e^{ar f}^u^l^l^-^r^e^tⁱ^r^e^m^en^t^aged^retⁱ^r^{ees h}^a^{ve e}^a^rn^ed^m^o^{re t}^h^an^t^h^{e y}^earl^y^earnⁱⁿ^g^{s l}ⁱ^mⁱ^t^.^Un^d^e^{r OA}^S^I
^ru^{les th}^{ese retirees w}^{ill receiv}^e^a^f^u^{ll OA}^{SI b}^eⁿ^e^f^it^f^o^{r an}^y^w^h^o^l^{e m}^oⁿ^t^h^th^{at t}^h^ey^{are retired}^{, reg}^a^r^d^{less o}^f^th^{eir y}^earl^y
^e^a^r^ning^s^.
²⁵^Se^e^L^e^or^a^Fr^ie^dbe^r^g^{, “}^T^he^L^a^bor^Su^pply^Ef^f^e^c^t^s^o^f^the^Socⁱ^a^l^Se^c^u^r^ity^Ea^rⁿ^ing^s^T^e^s^t^,”^N^B^ER^W^o^r^k^ing^P^a^pe^r⁷²⁰⁰^,
^J^une¹⁹⁹⁹^{. J}^ona^thaⁿ^G^r^ube^r^aⁿ^d^P^e^te^r^O^r^s^z^a^g^{in “}^D^oe^s^the^Socⁱ^a^l^Se^c^u^r^ity^Ea^rⁿ^ing^s^T^e^s^t^A^f^f^e^c^t^L^a^bor^Su^pply^a^nd
^Ben^e^fⁱ^t^Recei^p^t^,^”^NBE^R^W^o^rkiⁿ^{g P}^a^p^e^r⁷⁹²³^,^S^e^p^t^em^b^e^{r 2}⁰⁰⁰^,^su^ggest^t^h^at^t^h^{e ef}^fectⁱ^sⁿ^e^glⁱ^gⁱ^b^l^e^f^o^{r men}^b^u^t^do^es
^{matter f}^o^r^w^o^m^eⁿ^.
²⁶^S^{ee Jae S}^oⁿ^g^,^“T^h^e^E^f^fect^{s o}^f^t^h^{e Re}^m^o^val^o^f^t^h^{e Ret}ⁱ^r^e^m^en^t^E^a^rnⁱⁿ^{gs T}^e^stⁱⁿ²⁰⁰⁰^,^”^p^a^p^e^{r p}^r^esent^e^d^at^t^h^e⁴^th
^Iⁿ^te^rⁿ^a^tio^na^{l R}^e^s^e^a^r^c^h^C^onf^e^r^eⁿ^c^e^{on S}^o^cⁱ^a^l^Se^c^u^rⁱ^ty^{, May}²⁰⁰³^.
²⁷^{For ta}^x^-^de^f^e^rre^{d 40}^1(k⁾^plaⁿ^s,^th^e^10%^e^a^r^ly^w^ithdra^w^a^l^pe^na^lty^is^w^aⁱ^v^e^d^if^the^pa^rtic^ipaⁿ^t:^die^d^{; b}^e^c^a^m^e
^pe^rm^aⁿ^eⁿ^tl^y^disa^ble^d^{; use}^d^the^f^u^{nds t}^o^p^u^rc^ha^se^a^lif^e^tim^e^a^nnuity^{; re}^tire^d^oⁿ^{or a}^f^te^{r a}^g^e^{55; inc}^u^rr^e^d^m^e^dic^a^l^bills
^la^r^g^e^e^noug^{h to}^q^u^a^lif^y^f^o^r^itemⁱ^ze^{d de}^d^u^c^tio^{n tr}^e^a^t^m^e^{nt unde}^r^the^f^e^de^r^a^{l inc}^o^m^e^ta^x^;^tr^aⁿ^s^f^e^r^r^e^{d the}^f^unds^w^ithin⁶⁰
^d^a^y^s^t^o^an^o^t^h^e^{r t}^a^x-d^e^f^e^rred^retⁱ^r^emen^t^acco^uⁿ^t^;^o^r^,^recei^ved^t^h^{e f}^undsⁱⁿ^t^h^e^f^o^r^m^of^a^r^e^pay^a^ble^loaⁿ^.

residence, and funeral expenses. A spell of unemployment is not considered to be a reason for a

401(k) hardship distribution.

Withdrawals of tax-deferred IRA funds are taxed when received. However, Roth IRA funds are
not taxed when withdrawn since contributions to a Roth IRA are from taxable, rather than pre-tax
income. Withdrawals from IRA funds before age 59½ generally are assessed a 10% early
withdrawal penalty. There are exceptions, including the payment of health insurance premiums if
the worker is unemployed at least 12 weeks. Consequently, an unemployed older worker could
choose to access retirement savings accounts to ease the worker through periods of
unemployment.
Under current law, a pension plan cannot pay benefits unless the recipient has either separated
from the employer or reached the pension plan’s normal retirement age. Some employers would
like to pay partial pension distributions to workers at the plan’s early retirement age and limit
participation to workers in specific occupational categories. However, targeted participation may
cause a pension plan to violate the provisions of the tax code that prohibit retirement plans from ²⁸
discriminating in favor of highly compensated employees.
In some states, the UC system excludes workers who were employed in part-time positions and
who are searching for part-time work. If an older worker was already in a bridge job, working
fewer hours, the worker may no longer have enough recorded earnings to be sufficient for the
purpose of receiving UC benefits. This inflexibility also is seen in the treatment of searching
exclusively for part-time work. It is only in 29 states and the District of Columbia that a worker
need not be explicitly available for full-time work. Two states (Michigan and West Virginia)
summarily exclude workers from benefits if they search for only part-time positions.
As workers age, self-employment increases. In 2003, 6.9% of all non-farm workers were self-
employed. In comparison, 10.5% of those aged 55-64 and 15.3% of those 65 and older were self-²⁹
employed. After a spell of unemployment, the probability that workers begin their own business ³⁰
or are otherwise self-employed increases. However, while these workers may be actively
creating a job they generally do not qualify for UC benefits since they are not seeking non-self-
employed work.

²⁸^Se^e^C^R^S^R^e^por^{t R}^L³⁰⁶²⁹^,^O^l^de^r^W^o^r^k^e^r^s^:^Em^ploy^m^e^{nt a}^{nd Re}^tir^e^m^eⁿ^{t Tr}^e^nds^{, by}^P^a^tric^k^P^u^rc^e^{ll f}^o^r^m^o^re^de^ta^ils.
²⁹^Se^e^C^R^S^R^e^por^{t R}^L³²³⁸⁷^,^Se^lf-^Em^ploy^m^e^nt^as^a^C^o^ntrⁱ^b^u^tor^{to J}^{ob G}^r^ow^th^an^{d as}^aⁿ^Alte^rⁿ^ativ^e^W^o^r^k
^Ar^r^ange^m^e^nt^,^by^Lⁱ^nda^L^e^vⁱ^ne^f^o^r^a^de^ta^ile^d^de^s^c^rⁱ^ptioⁿ^of^how^s^e^lf^-^e^m^p^lo^y^m^eⁿ^{t is}^im^por^ta^{nt i}ⁿ^t^h^e^la^bor^f^o^r^c^e
^pa^r^tic^ipa^tioⁿ^of^olde^r^w^o^r^k^e^r^s^.
³⁰^Ch^an^and^S^t^even^s,^J^ob^l^obs^an^{d Em}^ploy^m^e^{nt Patte}^rⁿ^s^of^O^l^de^r^W^o^r^k^e^r^s^.

Although the ADEA prohibits most employers from having a policy of compulsory retirement on
account of age, there are a few occupations that have bona fide reasons for age-based compulsory ³¹
retirement. Most states allow workers to collect UC benefits if they no longer have a position
due to compulsory retirement, treating the situation as a spell of unemployment. However, eight
states consider compulsory retirement to be a voluntary quit and either exclude the workers from
collecting UC, or limit or reduce benefits.
Understanding the impact of unemployment on older workers is complicated by the way that non-
work income, in particular Social Security and pension income, may reduce unemployment
compensation. The Multi-employer Pension Plan Amendments Act of 1980 (P.L. 96-364) requires
that all retirement income from an employer when the earnings from that employer are used to ³²
calculate the UC benefit (a base period employer) be offset against the UC benefit. This is to
ensure that a worker who retires does not also collect UC benefits from the job from which they
retired. States are permitted to reduce UC benefits on less than a dollar-for-dollar basis by taking
into account the contributions made by the worker to finance the plan. This requirement applies
only to those payments on a periodic (not lump-sum) basis. As listed in Table 3, columns 4 and 5,
states can impose broader offsets than federal law requires for pension income. The District of
Columbia and Virginia offset all pension income (as well as excluding lump-sum payments). The
remaining states restrict the offset to pension income paid by base-year employers only. Some
states offset this income only if the amount were increased by the base-period employment.
Thirteen states do not disregard the employee contribution portion of pensions.
UC benefits may be offset by Social Security payments. Currently nine states and the District of
Columbia at least partially reduce UC benefits if the worker is also receiving Social Security
payments.
Few ES programs directly address older worker concerns.³³ In fact, the Workforce Investment Act
of 1998 (WIA, P.L. 105-220) eliminated set-asides that had been targeted for older workers in the
previous program (Job Training and Partnership Act of 1982, P.L. 97-300) for adult training
needs. Furthermore, WIA performance measures may give individual programs incentives to ³⁴
avoid enrolling older workers. Research indicates that most employment and training programs
don’t seem to help older workers find new, well-paying jobs. The loss of firm-specific
knowledge, job tenure, and the likelihood that the worker is in a low-demand occupation or in a

³¹^T^h^{ese o}^ccu^p^a^tⁱ^oⁿ^sⁱⁿ^cl^ud^{e so}^m^e^p^r^o^t^ectⁱ^v^{e servi}^ces^w^o^rker^s.
³²^A^b^a^se-p^erio^d^em^p^l^o^y^{er re}^f^e^{rs to}^an^y^fⁱ^r^m^f^o^{r w}^h^ich^th^{e UC recip}ⁱ^en^{t receiv}^e^d^{a wag}^e^d^u^rⁱⁿ^g^th^{e p}^e^rio^d^th^{at w}^ill
^de^te^r^m^ine^U^C^be^ne^f^its^{. Ty}^pica^ll^y^this^pe^rⁱ^od^be^gⁱ^ns^fⁱ^v^e^qua^r^t^e^r^s^be^f^o^r^e^the^qua^r^t^e^r^of^uⁿ^e^m^ploy^m^e^{nt a}^{nd e}ⁿ^ds^oⁿ^e
^qua^r^t^e^r^be^f^o^r^e^the^qua^r^t^e^r^of^une^m^p^lo^y^m^eⁿ^t.
³³^T^h^e^W^o^rk^e^r^P^r^of^iling^aⁿ^d^Re^e^m^ploy^m^e^{nt Se}^rv^ic^e^s⁽^W^P^R^S)^sy^ste^m^{, a}^sta^tistic^a^l^m^ode^{l de}^v^e^lope^{d b}^y^the^USDO^L^,^is
^u^s^ed^b^y^man^y^st^at^{es t}^o^ai^dⁱⁿ^earl^yⁱ^d^en^tⁱ^fⁱ^catⁱ^oⁿ^o^f^{UC b}^eⁿ^e^fⁱ^t^reci^pⁱ^en^t^s^w^h^o^{are l}ⁱ^k^el^y^t^o^e^x^ha^us^{t the}ⁱ^r^be^ne^f^its^be^f^o^r^e
^fⁱ^nding^a^ne^w^{job. W}^hⁱ^l^e^{it w}^a^{s de}^te^r^m^ine^d^dur^ing^the^de^v^e^lopm^eⁿ^{t of}^the^W^P^R^S^sy^ste^m^tha^t^a^g^e^w^a^{s a}^sigⁿ^if^ic^aⁿ^t
^vari^ab^l^e^,^US^DOL^d^e^t^e^r^mⁱⁿ^ed^t^h^at^t^h^{e u}^s^e^o^f^t^h^at^vari^ab^l^e^w^a^s^pr^ohi^bite^d^by^f^e^de^r^a^{l c}ⁱ^v^{il r}ⁱ^g^h^{t le}^gⁱ^s^l^a^t^ion.^Se^e
^C^h^rⁱ^s^t^o^phe^r^O^’^L^e^a^r^y^a^{nd Ste}^pheⁿ^W^a^ndne^r^,^UC^an^{d Ol}^d^e^{r Wo}^rkers^,^NA^S^I^Coⁿ^f^eren^{ce o}ⁿ^Heal^t^h^and^In^co^m^e^S^e^rvi^ces
^f^o^r^aⁿ^A^g^ing^W^o^r^k^f^o^r^c^e^,^J^a^nua^r^y²⁰⁰^0.
³⁴^{U.S. G}^e^ne^ra^{l A}^c^c^ounta^b^il^ity^O^f^fⁱ^c^e^,^{GAO Re}^{port 0}³^-3⁵⁰^,^a^re^por^t^{to t}^h^e^Ra^nk^ing^Mi^nority^Me^m^b^e^r^,^Su^bc^om^m^itte^e
^{on Em}^ploy^e^r^-^E^m^p^loy^e^e^R^e^la^tions^{, C}^o^m^m^itte^e^{on Ed}^uc^a^tio^{n a}ⁿ^{d th}^e^W^o^r^k^f^o^r^c^e^,^H^ous^e^of^R^e^pr^e^s^eⁿ^ta^tiv^e^s^,^Old^e^r
^W^o^r^k^e^r^s^:^Em^ploy^m^e^{nt As}^sⁱ^s^t^anc^e^Foc^u^s^e^s^oⁿ^S^ubsⁱ^d^iz^e^d^J^obs^an^d^J^{ob Se}^ar^c^h^,^but^Re^vⁱ^s^e^{d Pe}^r^f^or^m^anc^e^M^e^as^ur^e^s
^C^oul^{d I}^m^pr^ov^e^Ac^c^e^s^s^{to O}^t^he^r^S^e^r^v^ic^e^s^{, J}^a^nua^r^y^2003.

declining industry are likely to contribute to decreased reemployment wages. Generally, as
workers age, cognitive abilities begin to slow and physical condition begins to decline. These ³⁵
factors combine to depress reemployment wages.
Although the earnings tests and deductions have been substantially reduced since 1999, they still
constitute a substantial effective tax (up to 50%) on any meaningful work before the full
retirement age. These age-based changes are listed in Table 2. As mentioned previously, workers
who are at or above full retirement age (age 65 and 10 months if born in 1942) may keep all of
their Social Security benefits, with no earnings tests. Workers younger than the full-retirement
age for the entire year, have an earnings limit. For every $2 earned above $12,960 (in 2007) there
is a $1 deduction in the benefit. The earnings test is altered if a worker will achieve full-
retirement age during the year. In this case, for every $3 earned above $34,440 there is a $1 ³⁶
reduction in benefits until the month the worker achieves full retirement age.
As an older worker transitions from work-based income security to retirement-based income
security, the worker’s incentives to remain in the labor force change. This changing incentive
structure is a result of the worker moving from participating in a program designed to aid an
effective job search and quick return to the labor force towards a series of programs that are
primarily intended to ensure retirement income adequacy. While it is difficult to measure the
exact effect that the incentives and disincentives have on older Americans’ participation in the
labor force, an examination of the changing patterns of income sources as Americans age may
capture the end result.
The effect of these potential earnings substitutes (Table 2) and the changes in tax rates shown
(Table 3) may be seen in Table 4 where the changing distribution of income sources for older
Americans is shown. Table 4 describes the sources of income for Americans 35 years and older in
2005 by age category. From ages 35 to 44 approximately 84% of Americans have earnings
income and less than 3% report Social Security income. However, from ages 62 to 64 only 53.8%
have earnings income while 43.0% report Social Security income. From ages 65 to 69, one-third ³⁷
of the group has earnings income while 81.8% have income from Social Security.

³⁵^Oⁿ^e^N^e^w^J^e^r^s^ey^pr^og^r^a^m^f^o^r^dis^l^oc^a^t^e^d^w^o^r^k^e^r^s^f^ound^tha^t^of^the^57%^of^ol^de^r^w^o^r^k^e^r^s^w^{ho ha}^{d f}^o^und^a^ne^w
^pos^iti^on^thr^e^e^y^e^a^r^s^af^t^e^r^fⁱ^r^s^{t be}^comⁱ^ng^une^m^p^loy^e^{d, the}^y^w^e^r^e^ea^rⁿ^ing⁷⁷^%^of^the^pr^e^v^ious^j^ob.^Se^e^Ev^alu^a^ti^{on of}^t^h^e
^Wo^rkf^o^{rce Devel}^o^p^m^en^t^P^a^rtⁿ^e^rs^hⁱ^p^P^r^o^g^r^a^mⁱⁿ¹⁹⁹⁴^,¹⁹⁹⁵^aⁿ^d¹⁹⁹⁶^{, (}^N^e^w^J^e^r^s^ey^{: J}^{ohn J}^.^H^e^l^d^rⁱ^c^h^C^e^nte^r^f^o^r
^W^o^r^k^f^o^r^c^e^D^e^v^e^lopm^eⁿ^{t, R}^u^tg^e^r^s^Uⁿ^iv^e^r^s^ity⁾^,^2000.^Sim^ila^r^l^y^,^a^s^t^udy^of^Wa^s^h^ing^t^{on s}^t^a^t^e^c^o^m^m^unity^c^o^lle^g^e
^ret^r^aiⁿⁱⁿ^g^f^o^uⁿ^d^ol^d^e^r^dⁱ^sp^l^aced^w^o^rker^s^w^e^{re l}^e^{ss l}ⁱ^k^el^y^t^o^p^a^rtⁱ^cⁱ^p^at^{e i}ⁿ^scho^o^lⁱⁿ^{g al}^t^h^o^u^{gh t}^h^o^s^{e w}^h^o^dⁱ^d^h^a^d^sm^al^l
^pos^itiv^e^ra^te^s^of^inte^rna^l^re^t^u^rns^o^f^be^t^w^e^eⁿ^2%⁽^m^eⁿ^{) a}^{nd 4%}^(w^om^eⁿ^{). Se}^e^L^ouis^J^a^c^obs^oⁿ^{, R}^obe^r^t^L^a^L^onde^{, a}ⁿ^d
^Da^nie^l^Sull^iv^aⁿ^,^S^h^o^u^ld^W^e^Te^ac^{h O}^l^{d D}^ogs^N^e^w^Tr^ic^k^s^{? The}^I^m^p^a^c^t^of^C^o^m^m^u^nity^C^o^lle^ge^Re^tr^aiⁿⁱⁿ^g^oⁿ^O^l^de^r
^Di^sp^l^a^ced^Wo^rkers^{, Fe}^de^r^a^{l R}^e^s^e^r^v^e^B^a^nk^of^C^h^ic^a^g^{o, W}^P²⁰^03-²⁵^{, N}^o^v^e^m^b^e^r²⁰⁰^3.
³⁶^Itⁱ^s^po^ssi^b^l^{e t}^h^at^mⁱ^d^-^y^e^{ar f}^u^l^l^-^r^e^tⁱ^r^e^m^en^t^aged^retⁱ^r^{ees h}^a^{ve e}^a^rn^ed^m^o^{re t}^h^an^t^h^{e y}^earl^y^earnⁱⁿ^g^{s l}ⁱ^mⁱ^t^.^Un^d^e^{r OA}^S^I
^ru^{les th}^{ese retirees w}^{ill receiv}^e^a^f^u^{ll OA}^{SI b}^eⁿ^e^f^it^f^o^{r an}^y^w^h^o^l^{e m}^oⁿ^t^h^th^{at t}^h^ey^{are retired}^{, reg}^a^r^d^{less o}^f^th^{eir y}^earl^y
^e^a^r^ning^s^.
³⁷^For^m^o^r^e^de^ta^ile^{d a}ⁿ^a^l^y^s^is^of^s^our^c^e^s^of^inc^o^m^e^f^o^r^thos^e⁶⁵^aⁿ^d^ol^de^r^,^s^e^e^C^R^S^R^e^por^{t R}^L³³³⁸⁷^,^In^co^{me o}^f
^Am^e^r^ic^ans^Age⁶⁵^an^{d O}^l^de^r^,¹⁹^{69 t}^o²⁰⁰⁴^,^by^P^a^tric^k^P^u^rc^e^{ll a}ⁿ^d^De^bra^{B. W}^h^itm^aⁿ^.

The percentage of Americans who report UC income declines from 3.6% for ages 35-44 to 1.0%
by ages 65-69. This may be attributed to both a decrease in eligibility based on the types of jobs
that older workers hold, and the program rules that offset UC benefits by pension and Social
Security income.
Table 4. Sources of Income and Percentage of Individuals Receiving Income in 2005,
by Age
^{Source o}^f^In^come^35-4⁴^45-5⁴^55-6¹^62-6⁴^65-6⁹⁷⁰⁺
^Any^income^93.0%^{93.0% 93.2%}^{94.8% 96.8%}^97.0%
^No^income^7.0%^{7.0% 6.5%}^{5.2% 3.2%}^3.0%
^Earnings^84.1%^{82.7% 72.3%}^{53.8% 32.0%}^112.^1%
^{Retirement be}^nefits
^Social^Security^3.0%^4.6%^8.5%^43.0%^81.8%^90.3%
^Public^pensions^0.5%^1.6%^5.6%^9.3%^10.2%^12.4%
^{Private pensions or a}ⁿⁿ^uities^0.7%^1.6%^7.2%^15.9%^20.6%^24.9%
^{Income from a}^ssets^48.6%^53.4%^59.7%^57.1%^55.7%^55.3%
^Veterans’^be^nefits^0.4%^{0.8% 2.1%}^{1.8% 1.9%}^3.4%
^Unemployment^compen^sation^3.6%^{3.4% 4.2%}^{2.2% 1.0%}^0.2%
^Workers’^compensation^0.9%^{1.2% 1.2%}^{1.0% 0.6%}^0.3%
^Public^assistance^2.9%^{3.1% 3.3%}^{3.8% 3.6%}^3.4%
^Personal^{contributions}^5.7%^{2.8% 1.0%}^{0.7% 0.8%}^0.6%
^Total^(thousands⁾^43,1²¹^42,7^{97 21,6}¹²^7,68^{3 10,2}³¹^25,2⁷⁴
^Source:^{CRS calculations, CPS}^{Mar. Demographic File, 200}^6.
^Note:^{Individuals wi}^{ll have multiple sources of in}^{come. Therefore}^{, percentage}^{s will not add up to 1}^00%.
One policy issue is how to address the inherent tensions among the UC system, alternative
working arrangements, and eligibility for and receipt of various types of retirement income
including Social Security benefits. Currently, each state’s UC system treats these typical older-
worker employment and income patterns in a different manner. Some states allow flexibility in
the job search, allowing those workers who are only willing to work part-time to collect UC
benefits. Some states treat retirement and pension income and Social Security benefits as earnings
that offset the UC benefit. Other states offset only the portion of the increase in pension income
that is attributable to the time period that also qualifies the unemployed worker for UC benefits.
Ideally, there should exist a balance where the UC system will be able to recognize the need for
older workers to bridge into retirement and supplement their earnings with a variety of non-work
income sources while still maintaining the program’s work emphasis.
Another policy issue is how federal programs might better balance providing income support for
older Americans with providing appropriate work incentives for those who would prefer to
remain engaged in some type of work. The abrupt changes in income support eligibility or

program offsets on account of employment earnings can create extreme disincentives to remain
engaged (or re-engage) in the labor market for certain groups of older unemployed workers.
For example, from age 62 until the year before full retirement age, early Social Security benefits
are offset by rates of up to 50% as well as being subject to the employment taxes. This provides a
disincentive for full-time workers to take early Social Security benefits as they would see a fairly
small change in their total income while subjecting themselves to a permanent reduction in Social
Security benefits. However, viewing these same offset rules from the vantage point of an early
retiree, these offsets also erode the incentives for those early retirees to re-engage themselves in
the labor market.
^J^u^{lie M. W}^h^ittak^e^r
^Specialis^{t i}ⁿ^In^co^m^e^Secu^rit^y
^j^w^h^itta^k^e^r^@^cr^s.lo^c.g^o^v^{, 7-}²⁵⁸⁷