If you’re reading this, you may be a member of that generation on the verge of witnessing potential political and economic turmoil, as you and your peers begin retiring in the next 10-20 years. As millions of baby boomers around the world begin to phase out of the workforce, their exit will create severe labor shortages, which will have a critical impact on businesses and the economy.

Perhaps you work in an industry, such as energy, pharmaceuticals or health care that is already seeing labor shortages in skilled disciplines. Maybe your own firm has several longstanding unfilled jobs.

In our first article of this three-part series on retirement, we discussed the implications of the trend from DB plans to DC plans in companies and its impact on employees’ retirement. In the second article, we explored insights from behavioral economists and psychologists into how individuals perceive risks associated with planning for retirement. This article takes a look at the effects of an aging workforce and explores how businesses can achieve competitive advantage by leveraging the skills, strong engagement and work ethos of older workers by keeping them employed. We examine the current indicators of an aging workforce in a number of geographies and industries, where the value in older workers lies, and how to attract and retain them.

Changing demographics

The world's population is aging at an unprecedented rate. Improved life expectancies and lower birth rates have changed the workforce profile dramatically. Over the last 20 years, around the world, the percentage of the population over age 65 has risen sharply. 

Life expectancy remained stable through the 1970s; after that, it improved considerably, with post-65 life expectancy increasing by 50 percent in the last 20 years.

Japan in particular has witnessed a significant increase in the proportion of its population aged over 65, from one of the lowest developed-country rates, at 9.5 percent in 1982, to one of the highest, at 20.8 percent by 2006. The expected increase in the proportion of citizens  aged over 65 is set to increase immensely for much of Europe, including Germany, Netherlands and the UK. (See Exhibit 1.) Although the retired population will make up a greater share of the population in the US than it does today, the overall level will be lower in the US than in other major developed economies.

While these demographic changes are well rehearsed, more interesting is the consequent effect on the workforce. Prior to the 1930s, workforce participation among those over 65 was more than 60 percent; by 2000, workforce participation-, among the population aged 65 and older declined to below 20 percent in many industrialized countries. (See Exhibit 2.) Lower workforce participation and significantly longer periods of retirement have become commonplace for those 65 and over. Retirement itself thus may be a “modern” phenomenon.

Today, we see a new trend emerging. Just as baby boomers have challenged the conventional wisdom about employment, they are beginning to redefine retirement. (See Exhibit 3.)

Workforce and demographic trends

In the US, employees currently approaching retirement age expect to transition from active employment in a different manner than those currently retired.

Governments are rethinking the provision of retirement benefits, mainly on cost grounds. In addition, the movement away from retirement as a single event toward retirement as a flexible process is forcing employers to adapt. A recent poll conducted by the American Association of Retired Persons (AARP) showed that while 80 percent of US companies believe that older workers will be critical to their workforce, only about 10 percent have begun to institute policies to deal with the needs of these workers. Employers that address their older workers according to the new paradigm of retirement and flexibility will be positioned to gain a competitive advantage.

Implications of an aging workforce

While governments are scrambling to address the societal and financial impact of the demographic shift through various strategies, including increasing retirement ages, restructuring social / welfare benefits, encouraging increased birth rates, and managing immigration policies, progress has been slow. In many cases the changes still support the old retirement paradigm and don’t address the changing needs of aging and longer-living populations.

It is understandable that governments may struggle with implementing necessary measures. In the world of modern politics, a national consensus is often needed to implement transformational change. Such change often comes with a significant price tag that manifests itself in the form of a steeper tax bill. It is little wonder that change is slow, and to the extent it occurs, incremental.

Companies, however, are not democracies.  As we will explore later, the competitive pressures under which they operate are often exceptionally acute. Perhaps it is in the private sector, not the public sector, where the greatest need as well as the greatest means to implement transformational change exists.  Sponsors of occupational plans are only just beginning to feel the impact of the changing demographics and paradigms. The issue is more acute in sectors like engineering, mining and health care where workforce shortages caused by increasing retirements are affecting the ability of these sectors to meet customer demand.

Many of the recent policy changes implemented by a number of governments are being reflected in modified scheme designs among corporate plans. Higher retirement ages, reduced availability of early retirement or stricter qualification requirements, and inducements for “on target” or later retirement mirror state changes. For countries outside of the European Union that are not subject to age discrimination laws, some actively require employers to recruit a minimum proportion of older workers or offer financial incentives to encourage employers to recruit at the higher ages. Corporate pension plans can also offer incentives to older workers, such as enhanced accrual rates above certain age levels, additional cash sums on reaching desirable target ages, higher contributions toward DC funds and partial retirement / work options.

What appeals to the aging workforce?

Let’s take health care. The vacancy rates for health care professionals, and nurses in particular, are a cause for concern globally. In the US, health care organizations have taken steps to address this problem by developing programs that retain existing older staff as long as possible and that also attract this age group at the application stage. Some of these solutions potentially carry across to other industries. Their secret?

1. Many US health care organizations work diligently to attract older workers by using senior placement agencies and  targeted advertising campaigns and by selling a workplace benefits package that has particular value to older workers.
    
2. These organizations are very accommodating of such individuals once they are on board. Flexible working schedules, sabbaticals, transitional retirement and seasonal work plans are several of the methods employed. Workers approaching retirement ages have a number of aims in retiring. For many, social interaction and continuing to be useful feature highly in their reasoning for partial-retirement / partial-work patterns. Offering flexibility in the employment terms makes for an attractive employer.  
    
3. The organizations stay close to such employees after they retire. Even when existing staff choose to retire, evidence shows that not everyone remains in retirement. Keeping in touch with recently retired colleagues affords a potential pool of talent should these workers decide that full retirement is not all it’s cracked up to be.

Seven years ago, AARP started identifying the best employers for workers over age 50. Of the 50 best employers, 30 in the 2006 roll call were health care organizations. Through recognizing the worth of older workers, they had developed effective and practical solutions to their recruitment challenges.

Creating competitive advantage

Much has been written about whether the generation headed for retirement will be able to afford it. Exhibit 4 shows the earliest age at which employees of a typical workforce could afford to retire, assuming a typical government and occupational pension scheme is in place:  

It is perhaps surprising that as many as half of the eligible employees aged 50 and over would either have to work longer or cut back their lifestyles in order to retire at a typical retirement age. This evidence of what people can afford contrasts with the increasing number of years people are expected to remain in good health after retirement.

This all begs the question: What should companies do as employees approach their mandatory retirement age? We assume they will not simply:

A. Expect them to leave at retirement age anyway and get ready to sign the “Congratulations” card  
 
B. Keep them on for a few more years  and ask them to lead training and mentoring sessions for less experienced staff
 
C. Start educating them now on forward planning, and check whether they have joined the pension scheme.

We hypothesize that there is competitive advantage to eliminating mandatory retirement in order to leverage the value of the older workers’ skills and knowledge, particularly in such areas as customer relations and reliability. This competitive advantage is realized by:

1. Recruiting and retaining older workers, and staying close to retirees who are not currently working
    
2. Continually training and expanding older workers’ skills sets
    
3. Offering flexible work arrangements that accommodate job sharing, phased retirement and flexible schedules

The value is delivered to the business by retaining valuable knowledge and skills, reducing the cost of recruitment and offering remedial training. Additionally, older employees want to work.  A number of researchers have concluded that older workers are not less able to perform modern economic activity when compared to younger workers, except for the most physically demanding tasks. (Harper, Stein). Why should your former employees go across the street and add value to your competitor’s business?

In the vanguard: Borders Group

In common with most employers in the retail sector, Borders Group, the parent company of Borders and Waldenbooks, has traditionally had a younger workforce profile. However, following publication of US census data in 2000, which underscored the anticipated growth of the 50+ working population alongside an expected reduction in the working population aged under 30 in a 10-to20-year horizon, the company saw an opportunity. Employee job satisfaction surveys were demonstrating very high satisfaction levels among Borders’ older workers (a minority at that time). Taken together, Borders realized that older workers could potentially be a great fit for its business.

By promoting the benefits of a diversified workforce with hiring managers and offering attractive benefits, Borders has been able to increase the proportion of its workforce aged 50+ from 6 percent in the late 90s to 18 percent today.

As well as flexibility in scheduling working hours from as little as four hours per week, the company makes available health and dental care plans to all staff, including part-timers. Importantly, the work environment provides intellectual stimulation and community connection.

The company values the stability that the older employees bring to the workplace, along with their life knowledge and experience. Stability has further value in lower turnover and with consequent savings in training costs. Presently, turnover among Borders’ over-50s workforce is six times lower than in its under-30s workforce.

As half its book sales are to customers aged over 45, the correlation between its staff profile and its customer base has provided further benefits: Customers like to buy from people like themselves. Those stores where the staff profile was more similar to the customer base have been financially more successful.

Reflecting on the obvious success of this policy, Dan Smith, senior vice president of HR for Borders Group, described his greatest challenge: “We don’t have to persuade older workers or those in partial retirement to come to work, for these individuals are motivated and engaged. Rather, the challenge is in constantly reminding existing younger staff of the very significant and proven benefits that these older workers bring to the business.” 

Maybe there’s a lesson for us all. It’s not whether older workers can do the job, it’s whether we think they can. With a focus on continued company growth and profitability, and the benefits to society of active and valued retired populations, maybe the baby boomers just created the right answer - again.