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The traditional notion of retirement -- a period of time to enjoy rest, relaxation, hobbies and favorite activities during the Golden Years -- is rapidly becoming a mirage for most baby boomers. The bull market meltdown, stratospheric deficit levels, rising life expectancy, surging health care costs, lack of retirement savings and a brewing labor market shortage, are forming a "perfect storm" that will force or entice boomers to work during their golden years. The evidence is clear and convincing. After declining for decades, the labor-force participation rate for Americans aged 65 to 69 jumped to 26.1% in 2002 from 21.9% in 1994, according to the Bureau of Labor Statistics, with a comparable increase for folks 70 to 74. Economic Influences
Towers Perrin’s 2003 Retirement Study reported that more than three-quarters (78%) of employee respondents say they plan to work past retirement age either for financial reasons or simply to stay active. Fewer than one in four employees (22%) say they’ll retire as early as possible and will not seek other employment. Merrill Lynch’s Retirement Preparedness Survey reached a similar conclusion. Results show 79% of Americans yearn for retirement and 75% see retirement as a chance to relax and travel. Yet 54% intend to work full or part-time after age 65, citing financial reasons. Further evidence that retirement will be delayed primarily for economic reasons can be found in an article in Contingencies magazine (July/August 2002) by Kenneth A. Steiner and Karen E. Kost. The authors looked at the actual effect of the bear market on the retirement plans of older workers. They concluded that the recent decline in 401K account values will require older employees to work 3-5 years longer in order to meet their retirement goals. This however, is not the extent of the economic woes for future seniors. The other two pillars of retirement income security -- pensions and personal savings -- are no longer adequate to ensure that most Americans will have enough to live on when they retire. The number of Fortune 100 companies offering a fixed-benefit pension has dropped from 68 percent in 1998 to 50 percent in 2002, according to Watson Wyatt Worldwide. And federal data show a steady fall in private sector workers who have pensions: from 38 percent in 1980 to 21 percent in 1998. The Pension Benefit Guaranty Corporation (PBGC) in 1990 insured 87,564 small defined benefit plans, with fewer than 1,000 employees; by 2003, that number fell by 70 percent to only 25, 812 plans. What makes the decline of traditional pensions more problematic is that only 21 percent of Americans age 21 and older own an IRA, a Keogh, or both according to the Employee Benefit Research Institute. Only 40% of the workforce are currently saving for retirement, and nearly half of the rest have less than $25,000 in savings. Overall, it means that American retirees will have $45 billion less in retirement income in 2030 than they will need to cover basic expenses, according to the EBRI. If the recent call by Alan Greenspan to scale back future Social Security benefits comes to fruition, though admittedly a very remote proposition, the future economic security of baby boomers is in even greater jeopardy. Labor Shortage Influences
Boomers will also delay retirement as a result of the financial and non-financial incentives that government and business will offer to help ease a future shortage of workers. An article in the September 2003 issue of Business 2.0 predicts a shortage of 5.3 million skilled workers by 2010, increasing to 14 million by 2020. Including unskilled workers, the gaps will be 7 million in 2010, 21 million in 2020, and a staggering 35 million in 2030. Since 13% of the population is now 65 years of age or older, and is expected to reach 20% by 2030, our country’s public policy will have to encourage older workers to continue working beyond the traditional retirement age. The beginning signs of this impending shortage are becoming noticeable. According to Joyce Gioia, a futurist with the Herman Group, there are 13 places in the nation where unemployment is already under 3 percent. The first metropolitan area to become a seller's market encompasses Washington, D.C., Maryland, Virginia and Delaware, where, Gioia said, the employment market is causing serious problems and employee turnover has reached dangerously high levels in a number of organizations. In fact, unemployment in Northern Virginia has dropped to 1.8 percent. There are already labor shortages in various occupational groups, including: HVAC technicians, engineers, mechanics, actuaries, truck drivers, librarians, degreed specialists in early child education, IT security analysts and, of course, medical professionals. Some companies may attempt to mitigate the effects of the labor shortage through greater outsourcing to places like India, China and Ireland, but that will not erase the gap, at least in the long term. According to Forrester Research, American employers will move about 3.3 million white-collar jobs and $136 billion in wages overseas over the next 15 years. A report from UC-Berkeley’s Center for Real Estate and Urban Economics considers that estimate to be highly conservative. The Center believes that as many as 14 million jobs, or 11% of all U.S. occupations are vulnerable to outsourcing. Even if one assumes that the more liberal estimate from UC Berkeley will be closer to reality, that amount of outsourcing will still not eliminate the gap in any measurable way, especially as one moves to the year 2030. In addition, such factors as geographical distance, language and cultural barriers, and inconsistent quality control are paramount issues that will need to be addressed for outsourcing to be a viable alternative. Relaxing immigration standards to help attack the problem also seems remote given continuing post-9/11 vigilance. Although immigrants will fill some of the shortage relating to skilled and educated work, many more will be coming to the United States to take low-skilled labor positions, according to a report by economists from the Federal Reserve Bank of Boston. More importantly, the 1 million immigrants of different ages who come annually make up just a fraction of the 292 million people in the United States -- so their effect on the impending labor gap will be minimal. The economic realities that the Boomers face will greatly influence their decision to remain employed longer. In some respects, Boomers will have no other choice. Still, Americans will strive for retirement. According to John Rother, public policy head for AARP, “Americans value retirement so highly, they will certainly still retire. It is just that they may retire a little later with a lower standard of living.” Still, the upcoming labor shortage portend to be severe enough, that public and private employers, and federal and state governments, will find it necessary to create additional initiatives and incentives to keep as many capable older workers in the workforce as long as possible. Like the Boomers, they will have no other choice. Private Sector and Government Responses
Public and private employers will do their part to encourage older workers to delay full retirement by offering a variety of programs that support phased retirement, such as flexible hours, compressed work weeks, shorter work weeks, re-training programs and subsidization of health care expenses. An August 2004 study by Mercer Consulting and AARP also noted that workplace restructuring (changing the physical environment to make work easier) offers significant potential for keeping older workers in the workplace longer. One innovative example of leveraging the availability of the older worker can be found at Hoffmann-LaRoche, the pharmaceutical manufacturer, that’s created an on-site agency to recruit retirees for temporary job openings. This firm sees many advantages to rehiring retired employees, including their proven job skills and familiarity with company culture, norms and procedural practices. Another firm that’s specifically targeting the older worker is Home Depot, who entered into a cooperative venture with AARP to recruit workers 55 and older. To lure these individuals to come to work at Home Depot, the firm is offering flexible work schedules plus a benefits package that includes health, dental and retirement savings plans. In addition to the various initiatives that the private sector will undertake, government will scrutinize Social Security, IRS and pension benefit regulations to find ways of minimizing the current penalties for post-retirement employment. An announcement by the IRS in November 2004 is the first tangible indication of the retirement policy changes that are looming on the horizon. The IRS has apparently proposed regulations that would allow defined benefit and money purchase pension plans to make in-service distributions under a voluntary phased retirement program for employees at least 59-1/2 years old. While the proposed regulations may not be relied upon until they are issued in final form, there certainly appears to be a high probability that the final regulations will be fairly close to the original draft version. The Baby Boomer generation have always been known for their strong attachment to career and work. One may wonder whether their desire to work longer is selfimposed - or entirely the result of the economic and financial conditions of the times. It may actually be a combination of both, but certainly, Boomers are going to work longer, either because they have to, or because our economy needs them to remain viable and competitive in the world marketplace.