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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.

Introduction

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.

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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Further reading

Books:

  • 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.

Report:

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

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