Posted: May 25th, 2022

literature Review Health and security

Early retirement incentives as a downsizing strategy sUMMARY: This is a thesis that analyzes and studies the use of early retirement incentives as a downsizing strategy by organizations. It has 23 references in APA format.

Chapter I- Definition of the Problem

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Definition of terms-alphabetical order

Chapter II- literature Review

Health and security

Tax deferral

Financial targeting

Institutional Rationale

Employees Impacted

Chapter III- Methodology

19-Data collection

19-Data analysis

Chapter IV- Data analysis

21-Analysis relevant to research

25-Analysis relevant to research

26-Analysis relevant to research

Chapter 5- Summary, Conclusions, Recommendations





Definition of the Problem


Over the last fifteen years organizations strived to renew their relationships with employees and at the same time tried to survive through economic downturn. In this renewal process these organizations have experienced multiple intricate processes like structuring, resourcing, forestalling decline in profits as well as incorporating new state policies. The struggle to survive hindered their actual target to create valuable environment for their workers. As a result they experienced low profits. In order to survive such a downturn management at the top often resort to the most effective and immediate means of recovery which include cutting down cost through downsizing. The first and perhaps the most effective strategy of downsizing had been of GE [General Electric]. Ever since its success, organizations throughout the United States and across the continent have followed suit. The trend may have been effective in GE but not all have the caliber and drive to organize an effective downsize. As a result many failed in their attempts.

On top of that demographics pattern indicate a generation gap, thereby declining the rate of savings and increasing the rate of retirees. In a study by Daniel Dulitzky [1999]

he predicted that the generation gap raised by baby boomers have changed the way organizations plan retirement programs for their employees. The alarming statistics have motivated companies to induce their employees to retire earlier then the required age limit of 65 years. The controversial issues in this strategy is the various incentives organizations use in order to lure employees for a golden handshake. All too often, early retirement proves ineffective and results in decline of the organization. What constitute the failure and what are the characteristic syndromes for inefficient early retirement incentives? Other questions involve, why organizations are keen to adopt this strategy instead of the downsizing and stoppage of new hires. Are there other better alternatives for rightsizing and how they can be achieved without levying high costs etc.

-Background of the problem

The process of early retirement, a strategy adopted by many companies serves to save them from paying more to retirees. Retirement plans like 401(K) and Social Security all aim towards savings for the working individuals. They are the allowance that they can utilize once they leave the professional field. In the last decade or so, the rate of savings have dipped, turned up again and dipped again several times. With this pattern, organizations are concerned whether they can sustain retirement funding. In turn they try to equip themselves with strategies to minimize long-term financial risks by inducing workers to retire early. These incentives include bonuses, stocks options, bonds etc.

Yet, whether early retirement is an effective strategy or not is still debatable. Studies show that [Wellner, 1999] externally when incompetent organizations realize that they need to downsize their immediate reaction is to eliminate job candidates. This has dual effects on the qualified candidate scenario. First of all the market become skeptic of the viability of the organization since it is generally accepted organizations that downsize have some financial problems. Secondly, those within the organizations become concern of their own position in the company for the reason that there is less and less chances of employment in the company. Those with qualified background do not hesitate to transfer their skills where they are required, that is they leave the company. Others who are not so confident of their own position become insecure and stick to their job, demonstrating better performance albeit inefficiently. As a result the organization make redundant of unqualified and undesired skills, in the process driving out the qualified skilled workers away as well. Early retirements therefore is a motivation to drive away skilled workers even though it is originally aimed at older workers with the theoretical background that they do not perform as well as the younger workers. These organizations do not realize that in the process they are also driving away their best people.

Thus, as organizations increase their endeavors to downsize “the amount of attention being paid to how organizations deal with early retirement issues has increased as well In large part, that research has focused on how organizations structure, and how older employees respond to, incentives to accept early retirement”(Feldman and Kim, 2000; LaRock, 1999; Longo, 1999).

Once established, the incentive strategy often worked as the common solution for high salaried employees. Those working in IT sector especially have gained financial status for retirement early on in their careers. Most feel compelled to start a new career using early retirement funds. The shift of interest rates, the motivation to retire early as well as the comprehension of how retirement plans works without deferring taxes have motivated a lot of young individuals to retire and enjoy a leisurely life or start a new career. Organizations on the other hand find it hard to search for the desired skills needed to replace the retired employees

. Yet employers will refrain from hiring older workers “even if an older person studies to get qualifications, employers will usually choose a younger person.” According to the Employers’ Forum on Age, two- thirds of information technology workers fear that they will be unable to get a job in IT once they pass 45 [The Economist, 03-23-2002, pp 27]. Furthermore, in a recent survey by the National Council on the Aging (NCOA), experts found that one out of four workers aim to retire early when they can afford it. This trend is aimed at their portfolio as well. Most of the retirees feel they need to be in control of their career. When they earn so much per year due to skilled work, they are most likely to join the early retiring group because they can finance their “life after retirement” standard of living. Only one concern is left and that is how much funding will they need and how will employers deal with it.

-Purpose of the study

Keeping the above background in mind the purpose of this study is to analyze whether the effectiveness of early retirement incentive strategies are as potent as it was viewed earlier during the 1990s when the first wave of realization occurred to organizations to induce individuals to retire early. The basic motive of organizations then was to adopt a risk free strategy and to save up on costs in terms of salary expenditure and long-term investments. However, today the working environment has changed. The study will revise the working environment, the kind of workers prevalent and the trend existent in today’s environment. The purpose is to provide organizations that endeavor to take up early retirement strategy as a strategy for minimizing financial risks in the future. It will provide the viability of taking such steps. The study is an assessment therefore it will provide the logical as well as statistical background of taking such steps.

-Problem Statement

It is the aim of the researcher to provide a comprehensive implication of early retirement strategies on organizations given the technological and legislative environment of today. The above background therefore provides the basis for research for the following hypothesis questions:

-Research Questions

1. What are the ramifications of financial risks in terms of human resources and financial costs when firms utilize early retirement strategies?

2. Are early retirement incentive strategies more effective to regain financial stability?

3. Why are early retirement strategies preferred by employees instead of employers?

-Definition of terms-alphabetical order

Some definitions of terms regularly used in the course of this research are as follow:

Benefits- include financial benefits, medical care, and social security.

Early retirement — the term used for retiring individual before the normal retirement age of 65.

Older workers — refers to employees who have exceeded 50 years of age but are not matured for retirement benefits.

Penalty — the punishment for withdrawing funds from a government program before its maturity. The lost of interest returns is punitive to the retiree and he/she has to pay to the government.

Pensions — the fixed amount of income offered by the government to the retirees.

Qualifications- academic as well as job qualifications.

Skilled workers- workers with specific skills like Information technology.

Resources- include sources of funding, skills and technology for the smooth operation of the company.

Risks — the danger pose to the company that may result in disruption of operation.

-Limitations of the study

The research is designed to educate managers contemplating the usage of early retirement programs as a means for cutting down costs in order to regain financial stability. 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. On the other hand its position in the stock market changes from unsound to sound. They are viewed as firms that have effective management whose sole concern is for the betterment of the stakeholders and hence boost their financial standing. However, this view differs from observer to observer. Alternatively, stock market also views the continued strategy for cost reduction as a sign for financial ruin. Organizations that continue to announce downsizing, retirement programs or cost cutting through salaries show that they are in trouble and need to restructure their organization financial objectives before external investors could invest in the project. The question remains whether the cost for early retirement is more or those of maintaining older workers.

Institutional Rationale

Early retirement strategy can occur for several reasons and in turn elicit different kind of reactions from the market. As mentioned earlier the perceived notion that workforce reduction is likely to increase marketability of the organization is not clear. The market may also interpret the real value of the firm by analyzing the kind of workforce it maintains after downsizing. Since the overall strategy to create value is existent in the kind of resource organization maintains the market hence often weigh the cost against the benefits from a short-term point-of-view instead of long-term. It also weigh the consequences of the having a low workforce and how such a workforce will enable the organization to increase its competitive advantage. Hence organization rationale does not necessarily means that it would be able to justify to stakeholders. The market might be sensitive to the early retirement programs and note the urgent need for reduction to reduce costs where its financial standing demonstrates viability. Consequently organizations may indicate to create value through reduced staffing but its skill pool is less to accomplish the task. Ultimately, it is not the early retirement program itself that concern stakeholders but the overall infrastructure [Davidson et al., 1996].

Previous models of organizational change occurred when organizations endeavor to re-orient their structure. In the process they usually cut down the workforce by firing them. This trend is still followed today. However, a new name is given-downsizing. Cameron experts suggested “organizational downsizing is either “reorientation” or “convergence.” Convergence downsizing is more of a defensive reaction to decline; focusing on internal efficiency through cost cutting, whereby a firm tries to do the same things better with fewer employees. Downsizing as reorientation, however, may be seen as a more proactive approach; the firm seeks to do different things, and it engages in more radical change requiring rethinking its primary mission, strategy, processes, and structure. Firms may also employ some type of hybrid approach when facing the need for large-scale downsizing” [Davidson et al., 1996]. The solution for such a hybrid process is to adopt a more “friendly” attitude towards the employees by motivating them to leave voluntarily. Of course, most employees are not willing to leave their good salaried position. To motivate them the organization will have to induce through the most effective means — benefits that they want to gain at the time in their lives when other companies will not be willing to offer. These include medical benefits, tax deferral, organization facilities or even some steady income through interests. Although these prove motivating but the downside of the costs involve come to almost about the same as compared to paying them when they are still working in the company.

Employees Impacted

From the employer point-of-view early retirement programs often affect the number of employees adversely. Issues like morale, job insecurity, work confidence etc. all get affected. In certain cases the announcement of early retirement also signals the doom period of organizations where the aged employees get to retire first because they are downsizing due to some financial instability. Despite the knowledge that downsizing strategies often aim at the expulsion of costs but employees feel that they are being targeted because of their incompetencies. A large number of employees therefore tend to leave their jobs or even apply for early retirement before the management get to choose who should retire first. There are no positive signals for the confidence of the employees. It only elicit discontentment between employers and employees.

In study June Delano of Eastman Kodak Company describes the process of downsizing as a way to declining management. According to him, organizations decide to reduce employee population

. To him “The loss of the talent that is needed for turnaround is a devastating consequence of poorly executed downsizing, and yet it is avoidable by the kinds of measures the authors suggest. Unfortunately, companies in trouble have rarely laid the groundwork for successful downsizing and they do not usually have the management talent to downsize well” [Bedeian, 1998]. Thus, early retirement programs require building employee loyalty and trust, defining clear performance measures and finally creating goodwill between management and existing employees. The troubled time for measures allow management to identify which employees they can afford to let go and which they need in the future. Without these precautious measures and preconditions outlined, they are likely to decline faster as compared to before execution of downsizing.

As outlined by the authors Arthur G. Bedeian and Achilles Armenakis [1998] “What managers need to do during successful downsizing is no surprise – it’s what good managers do all the time: describe a credible future, reward good performance, treat people fairly, and communicate often. Yet these practices won’t be common in a declining organization, even though that is where and when they are most needed.” It would not be surprising therefore those most high performers become insecure and envision a bleak future in the company. The result is that there is little incentive to stay and more incentive to leave. Although organizations at the time find these factors more viable, strive to induce such incentives, it is at the later stage that they realize their incentives have managed to target the wrong employees.

The literature review offers the explanation that organizations tend to think that early retirement programs provide for financial stability whereas they have to face the brunt of the expenditure for health care and security. The literature review also offers an window view to the implication of tax deferral and that employees prefer early retirement because they become exempted from such penalty. The financial target that organizations aim to achieve to stabilize through downsizing is not wholly achievable.

Chapter III- Methodology


The study of early retirement incentives as a strategy for organizational downsizing is a comprehensive study that requires long duration trend analysis. The researcher has taken the task by adopting the method of case analysis. The researcher considers this to be the most suitable method of analysis because it provides a way to analyze the trend as well as allows the author to review various expert view points. Variables and data collection for analysis have been taken into account and some basic conclusions derived from it.

– Variables

Analysis of data cannot be performed unless the researcher set variables. In the study for early retirement incentives, treated as a downsizing strategy, the researcher have taken into account of variables like age, salaries, contribution to retirement plans and the rate of interests for returns. Obviously these variables are not set to gauge parallel calculations but rather based on combinations for trend analysis. The variables therefore are not treated as factors for calculation but rather factors for interpretation to compliment the literature review.

-Data collection

The researcher will analyze various information mediums. These include primary sources like journal articles, statistical information from the U.S. statistics and academic study. The author will also look into secondary sources like newspaper articles, magazines and the Internet.

-Data analysis

Since data analysis rely on authenticity of data, the researcher have taken care to combine primary and secondary data together to provide a comprehensive view of the analysis thereby avoiding any kind of biases. The researcher has taken into account of both the employee and employers point-of-view to achieve this status.

-Research questions

After analysis of data, the researcher will then compare it with the research questions by analyzing the validity of the information. The researcher will also observe whether the hypothesis questions have been proved or not in order to come to the conclusions.

Chapter IV- Data analysis

– Introduction

The U.S. labor force is changing to an older work group. From the table below one see that the age group younger then 64 years are decreasing while those above 65 years is increasing. As a result of this, it is expected the growth rate for older workers will increase by the year 2040 [Dulitzky, 1999]. To eliminate the older workforce corporations have begun to decrease their tenure in the company in anticipation of securing younger workers before competitors take them. The cost of exiting older workers vs. those of keeping them however is a different matter. The logic behind the benefits of exiting older workers may have been viable a decade ago but in today’s technological-based organization in both the cases, that is to keep older workers and to exit them, is high and it must be noted that companies cannot depend on this kind of organization to uphold their financial position for long. Alternative strategies must be adopted as we study the ramifications of the hypothesis questions in the following sections.

Projected Growth Rate in Labor Force Between 2000-2040





Total labor force





20-64 years old labor force





65+ labor force





Total population growth





Source: U.S. Bureau of Census and Bureau of Labor Statistics data

-Analysis relevant to research question 1

1. What are the ramifications of financial risks when firms utilize early retirement strategies in terms of human resources and financial costs entailed in inducing employees to retire early?

In defined pension plans, employees and employers, both contribute certain percentage of their annual salary of employee to the pension fund. The funds are then invested in various financial instruments such as bonds, money market funds, stocks and the benefits gained from the wisdom of the employee’s own investment decision result in funding for retirement decisions. The financial risks involved in the investment opportunities takes into account of the contribution of the employees and employers both but the brunt of the risks lies with the employers. If and when the employers find that there are chances of high risks involved, they can only inform the individual of the ramifications. Conversely if the employee feel fit to continue with the investment it is his/her choice and if he/she plans to withdraw it is also his/her choice. The choice to benefit from the retirement plans is calculated by an organization formula based on the annual compensation for investing the fund and the age of retirement and the year of service contributed by the employees. The organization is then responsible for investment of the funds.

“Like many defined benefit plan formulae, the formula for employees in the present study is a function of compensation level, length of service, and age. The annual retirement pension benefit used in this organization was calculated by the following formula:

If employees retire before reaching age 65 or obtaining 30 years of service, the following penalties are applied:

Thus, if an employee retires at age 65 with 30 years of service and an average final salary of $30,000, he or she will retire with an annual pension of $16,380. If the employee retires at the same average salary but after only 25 years of service, the annual pension would be only $13,104” [Doerpinghaus, 2001].

When individuals retire early, organizations run short of fund for investments. But to quantify such a decision it charges or penalizes the individuals for early withdrawal of the retirement funds. However, when individuals are induced externally due to financial instability, the organization foregoes the cost of penalty. Furthermore it also foregoes the gain expected from the amount invested. If an organization is large and it is dependent on the investment from retirement plans for instance then it is abound to run high risks when the company decide to decrease the number of employees in its payroll. Consequently if the organization depend a set of employees’ salaries for its organization financial stability then early withdrawal or inducement to withdraw will often result in acute shortage in investment funds. Hence early retirement incentives as a financial “saver” strategy fail to generate the desired effects. In the long-term, the organization stands to loose out because it does not have continuous flow of funds for its smooth running. Furthermore, it in actuality is decreasing its resource pool by decreasing its financial pool.

As far as human resources is concerned, when organizations induce employees to leave the workplace they are in effect decreasing their skill pool. When this occurs the organization often have to cut down its departmental skill pool. The oldest member which is usually the most experienced and manager [but not always] is offered the incentive to retire early. Employees of such caliber are motivated to leave their prestigious position because 1. they have earned enough but still want to have the benefit of tax deferral and medical security, 2.they are motivated to utilize their income for starting a new career or hobby. Either way, employees are motivated to leave the company because they realize that in staying they will have to face increased burden of work and lesser pay as compared to before. Hence, the employees stand to gain when they retire early.

On the other hand organizations which had previously say for instance have 4 members in a department will now have 2 members with the burden of the work of four workers. The increased in work burden often reduce efficiency instead of the desired increment expected. As a result, the financial situation that they aim in cutting down costs remains the same but the skill pool is lessened due to exit of senior employees who would have supervised and speed up the work.

Hence where question one of the hypothesis is concerned, there is a high risk in terms of financial risks where maintaining lesser employees and exiting more employees through early retirement is concerned. The organizations that aim to save up on the risks of high costs when they plan to restructure the organization often lose out their main aim and run the risk of declining performance. Where human resources is concerned most of these organizations, when adopting the early retirement scheme they reduce their skill pools thereby decrease efficiency resulting in low profits. In both terms the organization does not achieve the desired financial stability.

-Analysis relevant to research question 2

2. Are early retirement incentive strategies more effective to regain financial stability?

Firms’ financial instability stem from unbalanced distribution of liquidity and assets. Coupled with this are the external factors like political environment dealing with new policies and law pertaining to how to run a business; technological environment and competitive environment. Internal factors include salaries, taxation, costs for operation and investment pool. At the beginning of 1990s, businesses experienced a wave of change where industries were offered a hoard of opportunities but at the cost of low price. Coupled with the technological development, businesses boomed. External factors caused internal factors to shrink. Organizations had to either cut down costs or merge with competitors in order to survive. Financing became an important issue where cost cutting is concerned. Downsizing hence became common and unstable financial position is not so uncommon among competitors. Most of the organizations targeted its employees first where financial stability was concerned. They downsized by any means they could adopt including early retirement.

IN the previous model of downsizing, firms believe firing and rehiring is costly and hence they tend to lose out in competition. Furthermore, when they fire an individual often they have to rehire them because they tend to lack skilled workers. As a result the cost of rehiring became an issue of financial stability. Whereas if organizations retire their workers, they can always call them back at the same salary they hired previously. At times the retired individuals study to gain competitive qualifications like studies in information technology at their own costs. This way the firms can rehire them at a minimal cost yet gain an experienced worker. This aspect of rehiring proved beneficial for the organization because it provide highly skilled work pool.

On the other hand, when organizations retire their workers early, they are required to pay out retirement fee, cost of maintaining their health care as well as the cost for their tax deferred withdrawal. As a result, the cost of retiring individuals proved as costly as maintaining them in the company. In the long run these organizations realize that early retirement incentives prove more costly to their investment pool. Hence, it cannot be said that early retirement incentives are effective strategy to regain financial stability.

-Analysis relevant to research question 3

Why are early retirement strategies preferred by employees instead of employers?

Data from the previous section indicate that there are exceptions to early withdrawal where penalty is concerned. Employees are able to use them when they are sure they can try to qualify for alternative to the early withdrawal. For instance early retirement plans allow employees to withdraw from as early as 59. 5 years without penalty. Whether the participation of old age benefit is IRA, 401 (k) plan or the nonprofit equivalent, a 403(b) plan, employees prefer to coffer retirement plans that allow high medical expenditure and lesser penalty. With the exception of Section 72 [t] of the Internal Revenue Code, the rest of the retirement plans allow for medical benefits without restricting the individuals. However the nature of the plan involves accidents, death and serious illnesses. Minor family medical care or funding for education are not included and hence when employees are induced with early retirement incentives they prefer to go for it instead of waiting for their own personal Medicare [Brennan, 1999].

Take for example the plans for IRA. According to Peter Brennan, divisional vice president with Oppenheimer-Funds in New York City [1999] “There are three methods permitted by the IBS. You can choose among life expectancy, amortization or annuitization.”

According to the periodic payments on life expectancy, an individual can withdraw money based on a set table by the IRS that uses life expectancy of 30 years and calculates it with the plan balance and the amount of withdrawal each year. Alternatively, a worker can name beneficiary to withdraw amounts but the amount left in the balance gets amortized.

By basing your periodic payments on life expectancy, you withdraw money based on tables established by the IRS. If your life expectancy is 30 years, for example, you’d calculate 1/30th of your plan balance and withdraw that much each year. Alternatively, you can name a beneficiary and withdraw an amount based on a longer joint life expectancy. “The Ills has indicated that you can assume an interest rate that’s 120% of the current mid-term federal rate,” says Brennan. “In today’s environment, that might mean a rate of 6% or 7% or so. You can assume a higher rate if you can justify your expectation that the plan will grow by that amount.” [Korn, 1999]. For this reason higher rates of return is assured with penalty free withdrawals if the individuals have next of kin and is able to add up to the balance of life expectancy. Such calculations often prove profitable for those with family expenditure piled up and needed extra amount for various expenditure. However, Statistics indicate that the majority of the working group in America are single and marry late. The kind of life they lead often entail more vacations and leisure life then family life. When they reach middle age they expect to have saved up a certain amount which will provide them a comfortable life. When they decide to marry at this stage of their life they do not expect themselves to pay for family expense. Issues like marriage costs, household cost, mortgage etc. come as large itinerary and they require lump sum. When they are offered the option of early retirement with a comfortable income annually, employees obviously prefer it more as compared to social security in case they lose their job.

As for annuitization, this is a more complicated calculation, incorporating annuity factors and present values depending on the circumstances:



Reason for

10% early withdrawal penalty? Taxable?








Home Buyer




or Death

For any

Yes, but there Yes

other reason are some exceptions

For any




Reason for 10% early withdrawal penalty? Taxable?

Higher No

On earnings,


not original contributions

First-Time No

On earnings,

Home Buyer

not original contributions

Disability No

On earnings,

or Death

not original contributions

For any On earnings,

On earnings,

other reason not original contributions

For any

On earnings,

reason not original contributions

Chapter 5- Summary, Conclusions, Recommendations


The above study indicate that the new wave of business strategies have forced organizations to adopt means to cut down their costs. The first target of which are the employees. Downsizing strategy have been common ever since 1980s but organizations are realizing the downside of downsizing rapidly. The reason being that downsizing often generate feelings of insecurity among workers and hence driving them to leave their jobs before the company even approach them for alternatives. Consequently organizations adopted the early retire incentive strategies where they are offered almost the same kind of benefits from the company they work for but they remain at home. The plus side for adopting this strategy is that organizations do not have to maintain a large workforce, enduring high costs and salaries. This way they can distribute efficient workers and generate high profits.

The downside of this strategy is that most of the time, the company end up retiring efficient workers because this option is given to all workers. Hence, the inefficient workers, insecure of their own skills and position tend to remain in the company while those who are confident of their skills choose to retire early. The financial incentives given also give them cause to leave because they can pursue other career paths without losing out on their salaries. As a result, organizations that aim to use early retirement as a strategy for downsizing lose out.

The early retirement strategy cannot be used as a means for financial stability because the strategy involve pay outs to the retirees. The cost of giving out medical facilities coupled with retirement contributions cut down the level of investment pool that is supposed to reap returns for the company. If the company that endeavor to retire its employee is large, then it stand to lose a lot of liquid fund for working capital. They also lose the long-term interest returns that should have been invested in the IRA or other retirement programs. Stakeholders observe such tactics as instable factors and hence are not interested in investing in such accompany. Of course stakeholders also apprehend that the company will restructure soon enough to regain organizational stability so that they can invest in the future. Hence, instead of simply holding and waiting for the organization to stabilize stakeholders shy away from companies that adopt early retirement strategy as a downsizing strategy. The reason being that they fear the organization will not be able to pick up speed to compete with other companies and hence will decrease the growth rate.

Early retirement strategy is also not feasible for most organizations because it should be treated as an overall organizational strategy, complimenting the industrial trend. However, when this strategy is adopted companies tend to lose out in terms of human resources thereby decreasing their efficiency. Any kind of strategy the organization endeavor to adopt will likely to fail because it does not have a workforce to back it up. The shrunk resource will likely project a failed financial standing and hence not preferred by companies.

Employees who are subjected to early retirement plans prefer it because they stand to gain in most instances. When they adopt early retirement, they gain medical facilities and security of finances because the company pays for it till they reach the age of 65. This mandate induce them to retire early and secure a better investment or even gain social security which will add to their monthly income. By the time they reach 65 years, they can then secure Medicare benefits. Hence, when individuals retire early, it is as if they are still working and gain similar facilities without working for any company. This is the reason why employees prefer to have early retirement benefits.


Any organization that endeavors to adopt early retirement strategy will have to reconsider the implication of such a strategy. First of all, it is clear from the above discussion that the logical rationale that early retirement saves the company from financial ruin is a myth. The cost of retiring workers early comes to about the same as it is keeping them to work for the company, especially if the workers are willing to learn new skills and follow the new IT age. This shows that any kind of future strategy pertaining to downsizing should not include early retirement. Even if the company considers it to be the best option that some modifications to the overall adoption process must be revised.

Secondly, early retirement strategy is not an effective means to financial stability. Any organization that is looking forward to strategic management early retirement should not be considered to be the last resort for its overall financial recovery. Other strategic development should be taken into account such as long-term employment programs where the collaboration of younger workers and older workers should be taken into account. Issues like training and development are only one time costs but its effects can be reaped after a long time afterwards as well. Hence it could be said that long-term downsizing strategy should not consider early retirement as the sole alternative.

Early retirement is an effective strategy for minimizing organization cost in that it reduces salary payouts but it increases lump sum payouts to the retirees, which decreases the pool of financial investment. Strategic development should be taken in to account that allows the management to hold on to the financial pool yet without disappointing the retirees.

Penalties of early withdrawal from IRA and other retirement plans have resulted in the downfall of early retirement incentive strategies. It forces the companies to bear the brunt of the financial responsibilities and leaves the retirees free from responsibilities.

-Recommendation given the above scenario, it is recommended that organizations look into the following options before considering early retirement incentive strategies.

First of all, organizations must modify the early retirement programs before implementing it. For instance larger organizations cannot a sudden cut off of its skill pool as well as investment pool. It will collapse instead of operating efficiently. What they need is to implement a skill sharing program where the retirees continue to operate from home and contribute to the mainstream operation at the same cost / salary paid out as their retirement. Inducing them to work from home and fewer hours will allow them to still pursue their dream careers and motivate them to remain loyal with the company they previously worked for. Furthermore, if any of these retirees take on study courses they should be given incentives to study for free and contribute knowledge gained to the company. This way, the payout through early retirement will not prove a waste. The sudden short fall in investment can then be quantified for money “invested” in skill development.

Secondly financial instability prevalent in the current industries often force the organizations to cut down their human resources which result in further inefficient operation. To resolve this, the researcher suggest that the company take steps to restructure its organization by involving employees in after retirement high returns investment programs. On the one hand they are retiring and on the other hand they are investing for a higher returns through a trusted organization. Hence there will be a surplus of investment pool and the organization will be free to hire skilled workers in the place of the exiting individuals.

Thirdly, the researcher suggest that since early retirement is a preferred method of downsizing, organizations should not neglect to include it as a management strategy. This strategy is unique in the sense that it allows the workers the option to choose to retire. But it should be accompanied by a comprehensive overall organizational strategy. This way the company will be able to accommodate for the loss due to workforce decrease. Furthermore, this strategy does not generate bad feelings between employee and employers as compared to the firing process adopted earlier. It should be adopted but it must be improved before fully implemented.


1. Author not available, [03-23-2002]. Britain: Early retirement? Don’t even think about it; Older workers., The Economist, 27.

2. Author not available, [09-14-2000]. Social Security Reform-Implications For Private Pensions., Government Accounting Office Report.

3. Author not available, [2000]. “Working in Retirement: The Antecedents and Consequences of Bridge Employment.” Academy of Management Journal.

4. Bass, S.A. And Quinn, J.F. [05-11-2000]. Help Wanted — 65 and Up., The Washington Post, A35.

5. Bedeian, A.G. & Armenakis, A.A., [02-01-1998]. The cesspool syndrome: how dreck floats to the top of declining organizations.. Vol. 12, The Academy of Management Executive, 58(10).

6. BLONDAL, S. And S. SCARPETTA (1998) “Falling Participation Rates Among Older Workers in the OECD Countries: The Role of Social Security Systems,” OECD Economics Department, Working Papers, May 1998.

7. Davidson, W. et al., [08-01-1996]. Early retirement programs and firm performance.(Special Research Forum: Human Resource Management and Organizational Performance). Vol. 39, Academy of Management Journal, 970(15).

8. Doerpinghaus, Helen I; Feldman, Daniel C, Early retirement penalties in defined benefit pension plans., Journal of Managerial Issues, 10-01-2001, 273.

9. Dulitzky, D. [1999]. Incentives for Early Retirement in Private Pension and Health Insurance Plans. The Retirement Project. The Urban Institute. Brief Series No. 3. 1999.

10. Feldman, D.C. And S. Kim. [2000]. “Bridge Employment During Retirement: A Field Study of Individual and Organizational Experiences with Post- retirement Employment.” Human Resource Planning 23:14-25.

11. Franklin, M.B. [Feb, 2001]. EARLY IRA EXIT. Kiplinger’s Personal Finance Magazine.

12. HOFFMAN, E. [07-17-2000]. Business Week Investor: HOW TO RETIRE: It’s Never Too Late to Make a Plan. Vol. 3690, Business Week, 120.

13. Kim, S. And D.C. Feldman. [1998]. “Healthy, Wealthy, or Wise: Predicting Actual Acceptances of Early Retirement Incentives at Three Points in Time.” Personnel Psychology 51: 623-642.

14. Korn, D.J. [Nov, 1999]. Early Withdrawal.(Penalties On Retirement Plans) Black Enterprise.

15. Kuczynski, S. [06-01-1999]. HELP! I Shrunk The Company! Vol. 44 no, HR Magazine.

16. LaRock, S. [1999]. “Early Retirement: A Global Perspective and a View of Retirement in 2009.” Employee Benefit Plan Review 54: 51-56.

17. Longo, T. [1999]. “The Young Retired.” Financial Planning (November 1): 1-5. Muller, C.F. And R.F. Boaz. 1988. “Health as a Reason or a Rationalization for Being Retired?” Research on Aging 10: 37-55.

18. Madrian, B., and N.D. Beaulieu. [1998].”Does Medicare Eligibility Affect Retirement?” In Inquiries in the Economics of Aging, edited by D.Wise. Chicago: University of Chicago Press.

19. Smith, L.M. Jr. [Sept, 2001]. Affording the Retirement Dream. USA Today

20. Toder, E., and S. Solanki. [1999].”Effects of Demographic Trends on Labor Supply and Living Standards.” (Mimeo.) Washington, D.C.: The Urban Institute Press.

21. Turner, D.C. Giorno, A. De Serres, A. Vourc’h And P. Richardson (1998) “The Macroeconomic Implications of Ageing in a Global Context,” OECD Economics Department, Working Papers No. 193.

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23. Wellner, A.S. [1999]. “Workplace 2018: Retirement Boom or Bust?” Training 36: 54-59.

Average Annual Final Compensation X 1.82% X Years of Service, where average annual final compensation was determined by taking the total of the 12 highest consecutive quarters divided by 3.

Employees could retire with “full” retirement benefits once they reached either age 65 or had obtained 30 years of service. Years of service are not capped; if employers work over 30 years, they continue to accrue service year credit.

Pension benefits were decreased by 4% for each year of service under 30 or 5% for each year of age under 65, whichever is less detrimental to the early retiree.

Dulitzky, D. [1999]. Incentives for Early Retirement in Private Pension and Health Insurance Plans. The Retirement Project. The Urban Institute. Brief Series No. 3. 1999.

Franklin, M.B. [March, 2001]. EXIT STRATEGIES. Kiplinger’s Personal Finance Magazine.

Author not available, [03-23-2002]. Britain: Early retirement? Don’t even think about it; Older workers. The Economist, pp 27.

Author not available, Report questions early-retirement incentives for public employees., Minneapolis Star Tribune, 08-22-1996, pp 06B.

Bedeian, A.G. & Armenakis, A.A., [02-01-1998]. The cesspool syndrome: how dreck floats to the top of declining organizations.. Vol. 12, The Academy of Management Executive, pp 58(10).

Smith, L.M. Jr. [Sept, 2001]. Affording the RETIREMENT DREAM. USA Today

Korn, D.J. [Nov, 1999]. EARLY WITHDRAWAL.(penalties on retirement plans) Black Enterprise.

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