By Laura Kushner

Rehiring someone who has retired can be a viable option for cities struggling with workforce shortages. There are some serious pitfalls, however, if not handled correctly.

The Public Employees Retirement Association (PERA) is the statewide pension system that covers most city employees. If the retiree being considered for a vacant position is drawing a PERA pension, the law requires a complete separation from all Minnesota public employment for 30 days before taking a position that is covered by PERA. The retiree and employer cannot have entered into a written or verbal agreement specifying the employee will return to work. The retiree also cannot work as an independent contractor for the employer he or she worked for prior to retiring for at least 30 days.

Public employment includes paid or volunteer services to any Minnesota government, such as schools, cities, counties, townships, universities, or state agencies.

If the retiree has not followed these rules, he or she may have to repay any pension benefits received during the post-retirement employment to PERA.

If the employer and retiree do meet these conditions, there are some nice advantages to hiring a retiree. The employer likely will have an experienced employee who understands how city government works and maybe even is already trained into the job. Neither the retiree nor the employer will need to make any contributions to PERA.

Considerations before Social Security age

There are additional considerations for the retiree if he or she is not yet full Social Security or their pension benefits with PERA will be reduced or suspended. Full Social Security retirement age for anyone born in 1960 or after is 67. For those born prior to 1960, full retirement age varies between 66 and 67. This PERA earnings limitation applies if the retiree returns to work in a PERA-covered position.

The limitation is applied to only the portion of income earned above the limit. Specifically, for every $2 earned over the dollar limit, the retiree’s pension benefit will be reduced by $1 and held by PERA in a non-interest-bearing escrow account. If earnings exceed the limit and totally eliminate the remainder of the retiree’s pension, PERA will suspend the pension benefit entirely until the beginning of the following year or until termination of employment.

The retiree will eventually receive the money held in escrow, but PERA will hold it for at least one year.

For calendar year 2023, the earnings limitations are $21,240 for a PERA retiree employed in a PERA-covered position who will not reach full Social Security retirement age during the year. For a retiree who reaches full retirement age in 2023, the limit is $56,520.

These same dollar limitations apply to PERA retirees with regard to their Social Security pension benefits and in roughly the same way (for example, a $1 deduction from Social Security benefits for every $2 earned above the limitation). A retiree from the private sector will still be subject to the Social Security earnings limitation in the same way.

The PRO program

The Phased Retirement Option (PRO) program creates a flexible environment for members to transition into retirement, and employers can provide the necessary knowledge. If members are 62 or older, they may be eligible to participate in PRO and start their PERA retirement benefit without terminating their public service position.

The PRO option allows a retiree to work at reduced hours while receiving pension benefits; thereby giving time to train in a replacement and transfer knowledge. In a situation where the city hasn’t had enough time to find a replacement worker, a PRO plan may give the city extra time to find a replacement worker who can be trained by the retiree.

If your city is considering rehiring a retiree or offering a PRO plan, make sure the retiree or potential retiree calls PERA and the Social Security Office to understand the implications.

More information and fact sheets for working after retirement and phased retirement are available on the PERA website at mnpera.org.

Laura Kushner is human resources director with the League of Minnesota Cities. Contact: [email protected] or (651) 281-1203.