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 compensation implications of an older-than-average workforce
- the responsive strategies that companies must execute in order to maintain an effective workforce overall The boomer bubble has become one of the most pressing issues for which organizations are turning to outside advisors for solutions.
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:
- Increased health care costs
Health care costs inevitably increase as a workforce ages. Many employers are now looking strategically at their benefits package, redesigning their plans to meet their future needs relative to demographics, and their cost goals. Recent compounded annual increases in premium costs of up to 15 to 20 per cent cannot be sustained any longer. Most employers are looking at cost control measures.
- Retiree medical/dental benefits
Employers are revisiting these packages, largely as a result of CICA accounting implications. For the fiscal year beginning on or after January 1, 2000, the accounting method used by Canadian employers (private sector) for post-retirement benefits changed. Prior to that date, retiree benefits – including life, health, and dental – were calculated on a pay-as-you-go basis. With the introduction of section 3461 of the CICA handbook, post-retirement benefits must be accounted for on an accrual basis. In other words, these employers now have to account for a retiree’s benefits (for example, full liability from retirement date to end of coverage) on their balance sheets prior to an employee retiring.
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
- Funding of pension plans
Many plans are currently in a deficit position as a result of market returns, generous early retirement provisions, and demographics of enrollees. To curb costs, employers are looking to close membership to generous Defined Benefit plans and retracting early-retirement provisions. Ultimately in the case of pension programs, the most effective way to achieve greater control is through a Defined Contribution approach to pension management. Directcontribution pension plans don’t encourage early retirement, since the employee pays the full cost of retiring early. Employers consequently may continue the trend established earlier of converting from a DB to DC pension plan. Some broader human resources strategies for retaining the knowledge base of the aging workforce include:
- Enhanced flexibility
From a total compensation perspective, flexibility in when and where work is performed can meet the needs of older workers, while allowing tradeoffs in cash compensation and access to benefits.
- Part-time/contract workers and benefits
There’s no definitive solution to resolving benefits costs with this category of employees. Some, as noted, may be willing to prioritize cash compensation over benefits that employers find expensive. On the other hand, employers may find that benefits are required to attract and retain an older workforce. In some cases, benefit provisions will have to be extended to ensure coverage – for example, long-term disability coverage currently terminates at age 65. Since this will likely be challenged with elimination of mandatory retirement, proactive employers need to look at their benefit packages now.
- Phased retirement
Still in its infancy, this practice may be an opportunity for employers to retain older workers on a part-time basis. Some provinces allow employees to take a partial pension, while continuing to work for the same employer. In this regard, an employee receives partial pension earnings, as well as active earnings for the time they are working. At the same time, these older workers will likely demand the continuance of nonpension benefits as they work part-time.
- Work flexibility
A predominant theme in retaining older workers is flexibility. But that same flexibility is proving critical to attracting and retaining the younger component of the workforce. Studies indicate that the work/life balance (and medical coverage that extends beyond basic drug plans) are more ‘popular’ for these workforce segments than for the front-end baby boomers who have been the decision-makers primarily to this point.
- The impact on younger workers
The impact of the growing proportion of older workers on their younger colleagues must be recognized and addressed. While the loss of older employees to retirement, particularly waves of early retirement, created considerable challenges for employers in succession planning, the shift to later retirement ages has brought along its own succession issues – what might be called deferred succession. Older employees sometimes create a barrier to advancement by newer, younger employees when they don’t leave the workforce at the rate that they once did. The problem this creates for HR professionals is compounded by corporate trends toward a less stratified organizational structure. There are often fewer job levels to advance through and new workers can ‘max out’ the compensation potential of their base salary within five or six years, leaving them facing many more years of continued employment with little room for advancement. That lack of opportunity can manifest itself in any number of HR symptoms: low morale, absenteeism, declining productivity, or even long-term sick leave arising from stress.
- Motivation strategies
Keeping employees motivated has long been based on providing more than a base salary. Stock options, particularly in publicly traded technology companies were, until quite recently, a major component of compensation. But the dot.com crash, a less exuberant stock market, and the need to expense the value of stock options in financial statements have all but eliminated options as a broad employment incentive. Employees themselves are placing a renewed focus on tangible, old-fashioned remuneratives like base salary, cash bonuses, and benefits that translate into real cash advantages. This is especially true in the health care sector where the shift to older, part-time, and casual labour coincides with the desire of employers not to be saddled by pension obligations and health care costs. Workers in this situation may be satisfied accepting pay in lieu of benefits.
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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