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Home > Balance Sheets Best Practice > Managing Retirement Costs

Balance Sheets Best Practice

Managing Retirement Costs

by Beverly Goldberg

Executive Summary

  • The large generation of baby boomers born in the years after World War II is nearing retirement age, and the generation that follows is far smaller.

  • Although the aging of the workforce may not affect every business, or every area of a business, management should, at the very least, conduct demographic surveys of their workforces, discover the retirement plans of older employees, and explore the skills needed to remain productive.

  • The costs of recruiting and training new workers must be evaluated and measured against the costs of programs aimed at retaining older workers to decide what approach, or mix of approaches, should be taken to ensure that major problems do not develop.

  • If necessary, retention programs aimed at convincing employees with needed skills to remain longer should be put in place. Among the programs already being used across the G7 nations (with varying degrees of success) are phased retirement, flexible hours, working from home, temporary work, job sharing, and consulting.

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The industrialized nations of the world are getting grayer. In the United States some 76 million individuals, known as the baby boomers, were born between World War II and 1964, wheareas the generation that followed numbered only 66 million. One-fifth of current workers in the United States will reach retirement age by 2020, and some industrialized nations, such as Japan, are graying even faster. This means that the number of people in the workforce available to replace the boomers as they reach retirement is much smaller than the number that will be leaving the workforce. Moreover, the trend to smaller families, which means smaller populations of younger people available to employers, has been continuing (Table 1), indicating that the problem of fewer replacements for retiring workers is one that will not disappear.

Table 1. Fertility rates* in the industrialized nations. (Source: United Nations Population Division)

Country 1960 2000
Canada 3.6 1.6
France 2.9 1.8
Germany 2.5 1.3
Italy 2.5 1.2
Japan 2.0 1.4
United Kingdom 2.8 1.7
United States 3.3 2.0

*Average number of children born to a woman over her lifetime

Although some analysts dismiss the warning that labor shortages will be a major problem—citing increased productivity and immigration as mitigating factors—others predict that the lack of skilled workers to replace retirees, a phenomenon that is often called the “boomer brain drain,” will be devastating. The truth is that the retirement of this huge cohort of workers will affect different nations, different regions within nations, different industries, and different companies in different ways.

Unfortunately, in large organizations, human resources and personnel managers—who were the first to feel the effects of this trend—have found it difficult to convince senior management of its importance, primarily because the problem is not immediate. In smaller organizations, where dealing with issues about employees may be in the hands of the finance department, the issue often does not surface as a problem, because hiring is done on an individual basis by those needing to find replacements for employees who leave. In the case of large organizations, the head of human resources should ask the CFO to help by conducting an in-depth analysis of the actual costs of an older workforce, as well as the costs of recruiting replacements. In smaller organizations, the CEO, COO, and CFO should work together to determine whether they are facing problems due to the age and composition of the workforce.

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Will Boomer Retirements Adversely Affect Your Business?

When matched to a skills survey, a demographic profile of your organization as a whole, and of specific departments and teams, will help to determine whether or not it needs to develop programs to forestall major problems. For example, in the United States, according to a recent Hay Group study, “a substantial number of mission-critical employees in the utilities industry from the executive suite down to the lineman are rapidly approaching retirement age in the next four years.” As a result, according to a Hay Group spokesman, “The electric and gas industries could easily collapse if they don’t put a plan in place for staffing, retention, recruitment, and training.”1 In the United Kingdom, a similar report to the Scottish Parliament indicates that there are likely to be recruitment problems in the electro-technical sector because there are not enough qualified workers to replace those who are due to retire in the next few years.2

In general, the companies that should be most concerned about the fact that a fifth of current workers will reach retirement age by 2020 are those that have the highest concentration of older employees, such as utilities, manufacturing, health care, and retail. All companies, however, may have certain groups of employees whose skills may not be easy to replace. Or they may have large numbers of employees in certain functional areas who may be eligible for retirement at about the same time.

So the sensible approach is to assemble a profile of the ages of the current workforce, the skills needed by workers in each job category, and the retirement plans of older workers to determine when they plan to retire, as well as what it might take to entice them to stay. At the same time, companies should examine whether younger people in the region are acquiring the skills that will be needed when older workers retire. If they find that this is not happening, companies must see what measures they can take to induce the current workforce to undertake additional skills training and to convince high school students to pursue those skills and vocational schools and colleges to provide training in them.

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Assessing the Costs of Retirement

Companies facing the loss of employees to retirement must factor in the costs of hiring workers to replace those who leave when deciding how to deal with the issue of retirement. Among the costs to be analyzed are:

  • lost productivity during the time it takes to find a suitable replacement;

  • the costs of finding a replacement for the departing worker;

  • the time needed for the new employee to adapt to the culture and become fully proficient at the job;

  • ancillary costs due to productivity losses by colleagues of the retiring employee as they adjust to the departure and then to working with the new hire.

Measuring the costs of lost productivity during the search for a replacement requires having records (or management knowledge) of the amount of work usually completed by employees in the same position over a given period. Management then must look at the amount of work not being done by the person leaving to determine how much can be taken over by others in the department. In addition, it may be necessary to hire temporary workers from an agency to do much of the work until the replacement is found. Taken together, the loss of completed work, the overtime put in by others in the department, and the cost of temporary workers provides a measure of the costs of the lost productivity.

Analyzing the costs of finding the replacement includes examining the costs of advertising the job opening; agency fees, or bonuses for referrals from current employees; time spent by managers on interviews; and, sometimes, costs of relocation (usually for highly skilled workers).

In general, the cost of replacing an experienced worker averages about 50% of the employee’s annual salary, but that proportion (and cost) rises dramatically for those with specialized skills. For example, according to InformationWeek magazine, “IT employee replacement costs are 2.5 times the annual salary of an IT professional leaving the organization.”3 In addition, this rule of thumb understates the cost of lost productivity when many employees in any given functional area must be replaced over a short period.

Some observers contend that the costs of replacing older workers may be largely or wholly offset by younger workers’ lower pay and benefits (although that assumes that younger workers with the needed skills are available). While some costs, such as higher salaries due to seniority, more accrued vacation time, and larger contributions to pension plans (and in the United States higher health care premiums) are real, many others that are given as reasons not to retain older workers are myths.4 For example, some claim that older workers take more sick days than younger workers. According to the US Bureau of Labor Statistics, in 2007 the absence rate of full-time workers aged 25 to 54 was 3.2 per 100, and workers aged 55 and over were absent at only a marginally higher rate: 3.6 per 100.

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Programs Aimed at Retaining Older Workers

Solutions to the problem posed by the likelihood that large numbers of baby boomers will retire simultaneously include keeping a portion of these would-be retirees in the workforce by modifying traditional work rules. A Towers Perrin survey of workers in the G7 countries found that, while about 40% of workers over age 50 indicated that they plan to retire from their current positions in the next five years, almost the same number stated that they plan to work in some capacity after retiring from their current jobs.5

The same study found that almost half of workers nearing retirement find the possibility of part-time work and flexible work for their present company enticing, while a little more than a third would be attracted by the possibility of working from home. About a fourth of those planning to retire say they would stay on if they were offered retention bonuses, credits to pension benefits for delaying retirement, or the ability to collect partial pensions while working. The same proportion would be interested in returning as contractors.

Many companies that already have encountered problems due to retirements have instituted programs both to develop replacements and to hold on to some older workers, including:6

  • training programs for younger workers who have the basics they need to acquire the specific skills that will be lost;

  • mentoring programs to transfer specialized knowledge from retiring workers to younger staff;

  • phased retirement policies that enable employees to reduce the number of days they work each week gradually over a period of years;

  • flexible work options that would allow employees to job share (two older workers sharing a single job) or to work on a reduced schedule;

  • telecommuting programs that allow people to work from home either a few days a week or full time;

  • consulting and contracting arrangements that can be used to increase staff at the busiest time of the year;

  • keeping in touch with retirees and offering them special bonuses for returning in some capacity after sampling retirement.

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Case Study

A Midwestern US Nursing School

One of the major causes of the general nursing shortage in the United States is the shortage of nursing faculty to train those who wish to enter the field. This shortage is the result of both the retirement of older tenured faculty and the lack of interest of nurses with advanced degrees in teaching rather than nursing, primarily because nurses with specialized skills earn more than nursing faculty.

In the case of this Midwestern state university-based nursing school, the problem was particularly severe because of the aging of the state’s population: like many other states in the northern Midwest, the population in general is older, with a consequent increase in the demand for nurses. The university’s board of regents asked the nursing school to increase the number of nurses they graduated each year and made available some funding for the effort.

After careful examination of the issue, a program was developed that included the following actions:

  • Recruiting recently retired faculty to teach as adjuncts at a salary higher than that usually paid to part-time university faculty.

  • Working with hospital administrators in the region to find out which current older nurses were planning to retire in the next two to five years because the work had become too physically demanding. These nurses were offered scholarships for advanced degrees in exchange for promises to join the faculty for a given number of years.

  • Meeting with principals of high schools in the region to see whether they knew of older teachers, especially science teachers, who were planning to retire because of burnout or boredom. Such teachers were offered scholarships for degrees that would enable them to pursue a new career teaching nursing students (a more dedicated and mature student body), again in return for a promise to teach at the university’s nursing school.

  • Running advertisements in other regions promoting the advantages to nursing teachers of relocating to the region and offering them relocation expenses and recruitment bonuses.

Each of these approaches had some degree of success. Only a small number of new faculty were recruited as the result of seeking adjuncts and placing advertisements in other regions. However, the number of soon-to-retire nurses and teachers who applied for and were granted scholarships gives promise that the needed expansion of the faculty will occur over the next five years. The time frame is longer than expected because those who accepted are, for the most part, attending school only part time. The reason for this is that the scholarships only provide tuition and do not cover such things as living expenses.

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Senior managers cannot bury their heads in the sand when it comes to the issue of the approaching retirement of baby boomers, which will begin in earnest in 2010. Analyzing the possibility of shortfalls of needed skills now will give businesses time to put in place programs to prevent the loss of employees with those skills and to develop plans that will ensure that new employees with those skills will be available when needed.

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Making It Happen

Because senior management often dismisses the issue of the aging of the workforce, the CFO, along with the heads of human resources and personnel, must formally evaluate the likelihood that major problems will develop and estimate the costs of programs aimed at addressing such problems. Only by presenting hard evidence will they be able to convince senior management to take action aimed at eliminating these threats to the long-term success of the business. Such evidence should include:

  • a general demographic profile of employees, as well as profiles of various divisions, functional areas, and teams;

  • a catalog of specialized skills and educational levels of current employees in various divisions, functional areas, and teams;

  • the retirement plans of current employees, matched to their areas and skills;

  • when these analyses indicate a future skills shortfall, a further analysis should be carried out to determine:

    • recruitment costs when it comes to difficult-to-replace skills;

    • the general availability of people with those skills;

    • the costs of training people in those skills;

    • the costs of various programs aimed at retaining retirees with those skills for a period of time.

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1 Hay Group. “Study says utility industry faces severe manpower shortage as majority of its workforce plans retirement”: manpower_shortage.html.

2 Submission by National Electrotechnical Training (NET):

3 Luftman, Jerry with Rajkumar Kempaiah. “Tips for recruiting and retaining IT talent.” Information Week:

4 Grossman, Robert. “Keep pace with older workers.” HR Magazine:

5 Towers Perrin, 2007.

6 Goldberg, 2000.

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Further reading


  • DeLong, David W. Lost Knowledge: Confronting the Threat of an Aging Workforce. New York: Oxford University Press, 2004.
  • Dychtwald, Ken, Tamara J. Erikson, and Robert Morison. Workforce Crisis: How to Beat the Coming Shortage of Skills and Talent. Boston, MA: Harvard Business School Press, 2006.
  • Goldberg, Beverly. Age Works: What Corporate America Must Do to Survive the Graying of the Workforce. New York: The Free Press, 2000.


  • Towers Perrin. Perspectives of employers, workers and policymakers in the G7 countries on the new demographic realities. September 2007.


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