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Sweetening Early-Retirement Programs
An early-retirement program that entices more employees does not necessarily result in the greatest cost savings. When staff reductions become necessary, encouraging voluntary early retirement can be an attractive solution. Some employers worry, however, that extensive--and costly--sugar coating will be necessary to encourage an appropriate number of employees to retire. How justified are their concerns?
Certainly, increasing the level of retirement benefits will increase the number of employees who are likely to accept early retirement. Yet an early-retirement program does not necessarily have to achieve a very high acceptance rate to be cost-effective. In fact, an employer can save as much money from an early-retirement program with a moderate level of benefits and a relatively low acceptance rate as it can from a program with a high level of benefits and a high acceptance rate.
Exhibit 1 illustrates this point. It shows the payroll savings and benefit cost of three early-retirement program offered to the same group of employees. As the benefit level increases, more employees accept the program, resulting in a higher benefit cost to the employer. Note, however, that the higher cost is offset by the greater payroll savings as more employees leave the organization. Thus, in this example, the employer's real savings--defined as payroll savings less additional benefit cost--are identical in each case even though benefit levels differ radically.
Suppose, however, that this organization could increase the …