This suggests that earlier retirement ages may be necessary for jobs involving heavy manual labour, manufacturing, mining and transport. Jobs in personal services involving high degrees of emotional involvement and high-stress jobs may also lend themselves to earlier retirement. Early retirements are problematic from a benefits perspective for a number of reasons. Firstly, the employee has less time to save for retirement. Given that all employees typically have the same contribution rate, shorter working lives would result in lower retirement benefits, assuming that the other factors affecting retirement outcomes remain constant.
Secondly, the cost of securing life annuities is higher at younger ages for the same level of income required, which means even lower retirement incomes.
Finally, retirement typically signals the end of the employer’s medical scheme subsidy where employers do not offer post-retirement medical subsidies to employees. For many workers, funding their current medical scheme membership in retirement on a lower income and without a subsidy represents a significant hardship. Unfortunately, the reality of early retirement is that the medical conditions that shorten the working lifetime of an individual will persist in retirement and require the individual to participate on a more comprehensive and therefore more costly benefit option.
The potential loss of medical scheme cover or the inability to afford adequate cover, combined with higher medical expenses, may result in many early retirees paying substantially more for healthcare during retirement6, which would need to be funded from a relatively low level of income. Employers facing high rates of early retirement due to ill-health could structure contribution rates so that workers with earlier expected retirement dates contribute more towards their retirement funds during their shorter working lives. However, the increased cost to the employee or employer is unlikely to be appealing and may affect their standard of living during their working lifetime. Choosing the appropriate combination of cash lump sum and annuity at retirement can help stretch the retirement benefit further. For workers in a poor state of health at retirement, an impaired annuity, which factors in their potentially shorter life expectancy, may deliver value for money while still preventing the retiree from outliving their retirement savings. Appropriate financial planning, which includes advice on funding for post-retirement medical costs, is essential for individuals to ensure that they consider all potential outcomes and plan accordingly.
Implications
Although many employers have a wellness programme to address elements of physical and mental health, if these are not fully integrated with employee benefits and services, then their effectiveness will be severely compromised. In other words, an integrated employee benefits system needs to account for effective management of the sick leave benefit and the chronic conditions driving the disability claims experience within the company. Additionally, when considering the wellness of employees, employers should take into account that certain jobs lend themselves to an early retirement due to ill-health and that benefits packages may need to be adjusted accordingly.