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The Aging Workforce: Implications For Total Compensation Strategies

By: Sandra Haydon & Joy Sloane

In some sectors of the economy, half the payroll will be eligible for retirement over the next decade. Combined with declining birth rates, the aging labour force will create new problems for employers. Sandra Haydon, of Deloitte Human Capital, and Joy Sloane, of Morneau Sobeco, examine how this will impact compensation strategies.

As the baby-boom generation – those among us aged 35 to 54 in 2001 – inches toward retirement, workforces in general are collectively becoming older. The baby-boom bubble has triggered two compelling issues as workers, particularly those in the knowledge sector, approach retirement age:

The consequences of not dealing effectively with the demographic shift has profound implications in an array of workforce factors, from pension and benefit costs to employee retention, productivity, morale, and succession planning. And these issues have an impact not only on older workers, but on younger ones as well.

Simple population demographics, coupled with a variety of socio-economic factors, have created a working population with a rising mean age. Studies have estimated that in some sectors of the U.S. economy, half of the payroll will be eligible for retirement in the next decade. The socio-economic factors have also meant that workers younger than the mean age are confronting a period of gainful employment much longer than the one experienced in the recent early-retirement boom, with more limited opportunities for advancement and in traditional compensation. Companies and entire employment sectors are looking for advice on how to manage the challenges of the shifting employment demographic.

While the causes of workforce aging are demographically straight-forward, the consequences are complex. The birth rate in industrialized nations like Canada is declining, falling below the point of natural population replacement, at the same time that life expectancy is increasing. While immigration can address shortfalls, an absolute decrease in the working population can still result, particularly in areas dependent on specialized labour. The heart of the workforce is trending toward older employees. An overall increase in average worker age is also prompted by white-collar careers that begin comparatively late. Few people now enter the workforce at 16. Skilled labour and a knowledge economy requires more education and that means a delay in beginning full-time employment compared to previous generations. Human Resources Development Canada has estimated that the proportion of workers aged 45 to 64, which stood at 29 per cent in 1991, will reach 41 per cent in 2011.

General population trends and circumstances unique to certain economic sectors can exacerbate the aging trend. The education sector, for example, is top-heavy with teachers and professors who entered their professions during an expansionary period and are approaching retirement age – without mandatory retirement requiring them to relinquish their positions. Tenureship in the boomer generation locked up academic positions and discouraged younger candidates from entering the workforce. In public education, a decline in the population overall reduced the demand for teaching professionals and similarly minimized opportunities for new workers. Across the broader public sector, initiatives to reduce the size of government have meant staffing cuts that generally remove those with the least seniority – the younger workers – first, leaving behind a much older work force.

In health care, the demographic mix has been driven by industry economics. A move to rely more on part-time and casual labour, which limits pension obligations for employers, tends to result in a proportionate increase in older-than-average workers, who are typical of these labour pools. Indeed, any industry that moves toward part-time and casual labour is inviting a rise in its mean employee age, as many people indicate a desire to continue working at least part-time after retiring from their fulltime jobs. In the education sector, it’s already a well-established trend for teachers to retire with a full pension and immediately return to work in supply positions on a contract basis.

We can consider several key consequences of the aging workforce trend. One is the absolute cost to the employer in terms of benefit expenses, in particular health care, that rise along with the age of workers. Another is the consequences for employee productivity.

Who’s Retiring – And Who Isn’t

Retirees tend to fall into two categories. People retire at an early age if their financial position will let them. In the late 1970s and early 1980s, according to Statistics Canada, the median retirement age was steadily around 65, the minimum age at which benefits could be drawn from the Canada Pension Plan. When the minimum age was lowered to 60 in 1987, mean retirement ages began to drop as well and the 1990s saw a steady downward trend. Where 29 per cent of Canadian workers retired before age 60 in 1987-90, 43 per cent did so between 1997 and 2000.

The ability to retire early is based, not unexpectedly, on having a sufficiently large personal nest egg, which can include a generous pension plan and post-retirement benefits. The longer a person has been employed, the more likely they are to retire at an earlier age. Workers – such as public sector employees – who enjoy well-funded pension plans, in relatively secure jobs that permit them to accumulate the working years required to leave well before age 65 are the most likely to make an early workforce exit.

Those who go on working, do so either because they enjoy what they’re doing or because of fiscal realities. While the mean retirement age of education workers dropped from 60.7 to 57.4 between 1991- 95 and 1996-2000, according to Statistics Canada, agriculture workers saw their mean retirement age increase, from 65.8 to 68.8. Workers who have changed jobs several times and have been through periods of unemployment are less well-positioned to retire early. So are workers who were delayed in entering the workforce, which applies in particular to women, many of whom likely will not be able to secure enough pensionable service to fund a meaningful pension. However, now that mandatory retirement ages are falling by the wayside, people will be in a position to work well beyond age 65.

It has also become more difficult for some people to retire early because of shortfalls in their retirement nest eggs. As organizations have gone through downsizing exercises in recent years, older employees were naturally inclined to accept early retirement packages if their financial situation permitted them to do so. But stock market declines have decimated RRSPs and played havoc with pension plans.

Employees who thought they’d be getting out at 55 are carrying on working just to replenish their lost savings. Employers are facing several overlapping challenges. They may want to retain older workers and their valuable knowledge and experience, particularly when the higher cost of providing health benefits is measured against the cost of recruiting, training, and retaining replacement staff. But the realities of an older workforce, principally benefits costs, must be confronted and managed. Emerging and responsive trends include clamping down on benefit costs and passing a greater proportion of premium costs on to employees, while enhancing work flexibility for the benefit not only of older workers, but younger ones as well.

Impacts Of Increasing Age

The increasing age of the workforce creates a number of challenges for employer benefit programs. These include:

The elimination or reduction of these benefits may in turn motivate the older employees to stay in the active workforce longer, if they need (or anticipate that they need) access to these benefits. Conversely, since there are typically long notice periods of change, this may motivate earlier retirement, in the short term, to maintain current coverage. But this could then contribute to a desire for more flexibility in future employment relationships

Flexible HR Responses

There are, fortunately, creative and flexible HR responses, in the form of non-cash incentives that can combat such HR headaches as declining productivity and absenteeism. Enlightened companies have come up with non-cash programs that address quality-of-life issues, making one company more personally satisfying (and considerably less stressful) to work for than another. These programs include additional vacation time and greater flexibility in awarding time off. There are many variations on the sabbatical model, in which pay can be deferred so that four years of pay can be stretched over five to allow for a year of unpaid leave. Flex hours and work-at-home arrangements also address employee needs without any increase in compensation, while at the same time maintaining or even increasing productivity.

While the aging work force is responsible for much creative thinking about employee compensation, it’s clear that the implications of this demographic shift are felt all through the employee ranks. Companies that deal with the HR challenges of the baby-boom bubble successfully are considering their workers as a whole, and not as discreet generational units.

Sandra Haydon is senior manager at Deloitte Human Capital and Joy Sloane is a partner at Morneau Sobeco.

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