Should public employees who have retired and collect a pension be able to return to work and draw a salary?
In Vancouver, Washington, it's become a common practice for teachers to retire from the local school system and then begin new teaching careers just across the Columbia River, in Portland, Oregon. The benefits are simple: a full salary in addition to their pension benefits.
Bill Fromhold, who represents the Vancouver area in the Washington legislature, is well aware of this trend. And when he learned there was a shortage of teachers in Vancouver a few years ago, he had a brainstorm: If teachers were allowed to collect a salary after retirement and continue working in Washington State, the shortage might be averted. "We had a maturing teacher population and shortages in critical areas like math-science education," says Fromhold. "We needed to provide some incentive to retain teaching staff."
Fromhold's bill, which passed the legislature in 2001, is one of a number of return-to-work or "retire-rehire" laws enacted in recent years. Previously, this practice was condemned as double dipping--and shunned by pension designers with an almost religious intensity. But primarily because of teacher shortages, about half of the states have started allowing retired employees to come back to work full-time, enabling them to earn a salary on top of their pension benefits.
At their best, the laws work in the way Fromhold envisioned: as a powerful tool to attract qualified retirees back into the workforce to fill critical shortages. But they also have been tarnished by some individuals who can't resist a sweet deal. As retire-rehire laws become more popular, states are learning that their success depends largely on targeted language and airtight implementation.
Nowhere is this lesson clearer than in Washington State. Although the bill was written with teachers in mind, the legislature decided to apply the law to all state employees because of shortages in other areas, such as court hearing officers. And aware that current employees might be tempted to use the new law just to fatten their paychecks, the legislature stipulated that employees needed to be retired for at least 30 days. To ensure that retirees would need to compete for their old positions, the bill also outlawed written agreements to rehire someone for a job from which they had just retired.
Initially, the law was lauded. In the first year, about 500 employees used it, and a Seattle Times article noted that "lawmakers and educators alike are already hailing the 'retire-rehire' legislation...as a success." In particular, principals praised the legislation for enabling them to fill shortages in secondary school math and science positions.
But one year after the law's passage, the tide started to turn. The Seattle Times reported that two top employees in the state Code Reviser's Office had "retired" for the mandatory 30-day period, and then immediately returned to work. Their desks were never cleaned out, nor were their positions ever advertised. Furthermore, even though written rehire agreements were prohibited, both employees had verbal agreements that they would be rehired. Both employees earn nearly $100,000 a year in salary alone, and are now also collecting sizable pensions. After the Times report, legislators and the public felt "a very strong sense of outrage," as Fromhold puts it. But there wasn't much that anyone could do about it. Under the law, their actions were perfectly legal.
With public sentiment now against the law, the legislature took up the issue again this spring. Convinced that the actions of a few should not spoil the potential good of the program, the legislature decided not to scrap the law but to add more safeguards against abuses. Eventually, a bill passed lengthening the retirement time to 90 days, prohibiting verbal rehire commitments and imposing a three- year limit for using the program. But the legislature decided not to restrict the program to teachers, or to teachers in shortage areas, as other states have done.
Washington State is not the only place to learn the hard way about the unintended consequences of retire-rehire. In Louisiana, a law meant to bring retirees back for short-term help was used by almost 200 current, full-time employees in the Department of Corrections. An oversight in the writing of the law even allowed "retired" employees to continue accruing money into their pension plans.
In New Hampshire, the legislature passed a law that applied only to top-level officials and required no mandatory retirement period. After several officials took immediate advantage, the law was derided as a "golden parachute" and quickly repealed. During the period between the legislature's vote on the repeal and the time that the repeal went into effect, however, several other officials also "retired." They include Secretary of State Bill Gardner, who remains on the job and is running for reelection in November.
This is not to say that all states have had problems. In West Virginia, school districts are required to prove that there is a shortage before they are allowed to rehire a retired employee--thus eliminating a good deal of abuse. In other states, a portion of the workers' pension money is put into an escrow account for use after they truly stop working.
In order for retire-rehire laws to accomplish their objectives, states must take measures to prevent current employees from retiring just to get the benefits. "You need to tailor it to make it clear that it's for shortages," says Jeannie Markoe Raymond, executive director of the National Association of State Retirement Administrators. "You need to make sure that these rules do not prompt a change in retirement patterns."
Even if states are able to craft a law that will fulfill the desired intent, retire-rehire laws are not without controversy. The pension traditionalists feel that the pension system should be used only after employees stop working. Others, however, view pension money as a pot that could be tapped before one's working days are over.
"Retirement systems were meant for retirement, not for retainment of personnel," says state Representative Henry Mock, who led the effort to repeal New Hampshire's law. "If they have teacher shortages and more money will keep them, give them more money--don't do it under the disguise of retirement."
Proponents of the idea argue that as long as employees have reached retirement age, they have earned the money. If they would like to start withdrawing that money, and it doesn't cost the state any additional dollars, it should be their choice. A decade ago, that view would have been seen as radical. But now, the practice is widespread in the federal government. And last year the IRS--which technically prohibits retire-rehire laws but does not really enforce the ban-- started to study more liberal options.
In Washington State, Fromhold brings the argument back to the individual teachers: If nobody has a problem with their going to Oregon after they've retired, why can't they just stay in Washington? "The bottom line is, the person has earned their pension and they're entitled to collect it," he says. "We're not an island unto ourselves and it made little sense to me to have rules in place that don't recognize reality." Fromhold notes that some of the legislators who oppose retire-rehire laws have themselves retired from one profession and are currently collecting a legislative salary.
Hypothetically, then, would there be a problem with allowing everyone to collect a pension at the same time as a salary once they reached retirement age? To some extent, it depends on the design of the pension system. Many systems rely on people paying into the system to fund payouts to those who have retired. Once a retire-rehire arrangement goes into effect, those employees stop paying in. If retire-rehire laws are used on a limited basis, as they are now, pension systems can easily handle it. If everyone started using it, however, some systems could be destabilized.
An even bigger issue than actuarial concerns, however, is the public reaction to "double-dipping." Even if it doesn't cost the state any additional money, it often just doesn't pass the smell test. "The public often view the people who go back to work and collect a salary and pension as doing something shady," says Ron Snell, director of the economic and fiscal division for the National Conference of State Legislatures. "They think they're feathering their nest at the public expense."
Regardless of whether or not those employees are actually doing anything wrong, the mere appearance of wrongdoing is enough to keep retire-rehire laws fairly limited. "Somebody coined the term double- dipping and it seems to have stuck," says Raymond, of the retirement administrators' association. "Truly, they're not doing anything illegal. But there's an alarmist, knee-jerk reaction against it."