The days when an executive could look forward to a leisurely retirement out on the golf course are over, thanks to a possible looming job shortage, low savings rates and an insecure Social Security system. The impact of these factors on both workers and companies was the subject of the Symposium on Older Workers, co-sponsored recently by the AARP Global Aging Program along with Wharton’s Center for Human Resources and Boettner Center for Pensions and Retirement Research. Speakers included AARP CEO William D. Novelli, Olivia Mitchell, executive director of Wharton’s Pension Research Council, and Thomas Dowd, a deputy assistant secretary at the U.S. Department of Labor.

In his keynote address to the symposium, Novelli argued that recent shifts in the demographic make-up of the workforce – including, for example, the fact that by the year 2010, 20% of the workforce will be over age 55 — represent a tremendous opportunity for the business community because of the collective knowledge and experience offered by this group of older workers – if only companies are able to adjust their concept of what older workers can learn and accomplish later in their careers. “In many businesses, people in their late 50s are considered at the top of their game, ripe for the best assignments, ready for the corner office,” Novelli said. “I seriously wonder about the value of involuntary retirement in any field, except perhaps those that require strenuous physical performance.”

The Graying of the Workforce

There is no doubt that the composition of the workforce is skewing older, as the baby boom generation rapidly approaches the “traditional” retirement age of 65 – but the meaning of that milestone is shifting just as quickly, said Novelli. “Today, less than 2% of American workers are in agriculture, and manufacturing employs only about 13% of American workers,” he noted, adding that as the economy has shifted away from hard, physical labor and agriculture, “brains and learned skills have dominated, if not completely replaced, brawn and endurance.” The result? A move to the knowledge economy, to which older workers with their added experience and wisdom are ideally suited and which increasingly makes the notion of a set “retirement age” obsolete. “Since work has changed, our ideas about workers must change accordingly,” Novelli said.

This demographic shift that Novelli described is more than just theoretical. According to the Census Bureau, between 1998 and 2000 the number of workers between the ages of 65 and 74 increased by one-seventh, to nearly four million. In 2002, the total workforce in the U.S. increased in size by 720,000 workers, and workers over the age of 55 accounted for nearly all of that increase. And according to the Bureau of Labor Statistics, by the end of the current decade 20% of the workforce will be over 55.

Some argue that it is less a case of demographics and more a case of older employees working later into life due to poor savings rates and the realization by boomers that they simply can’t afford to retire. But Novelli emphasized that regardless of its cause, the graying workforce is a reality. In recognition of more Americans extending their working lives, the Social Security Administration responded by raising the age of full benefits to 67 from 65. Novelli called on corporations to similarly adjust their notions of the work that older workers are capable of performing.

He outlined a “10-year social impact plan” aimed at altering the way companies view, re-train and compensate their older workers. Broadly, Novelli’s plan seeks to reduce age discrimination in the workplace, encourage employers to adopt human resource policies with multiple options to meet the needs of older workers, and aid workers in remaining on the job or returning to the workforce by offering them more learning opportunities.

Novelli argued that these goals can be reached through, for example, the provision of part-time or alternative work schedules to allow older workers more flexibility in their work life as they age. “We are learning that work after retirement age can take new, more interesting or less stressful forms,” he said. This can mean shifting to part-time or flex-schedule work at an existing job, or undertaking a career shift and moving to a job that is less demanding. For example, Novelli highlighted a joint project that the AARP sponsors along with Home Depot to train older workers for employment in Home Depot stores.

Novelli also suggested that companies provide technology training courses tailored to older workers’ skill gaps in order to keep them current with new equipment: “Older workers can learn new things, although it appears that they do not learn them via the same training approaches as are applied to younger employees,” he said. Companies that allow older workers to learn at their own pace, or to take alternative classes from those offered to younger employees, would reap the rewards of a better-trained and higher-performing older cohort on staff, he said.

Most simply, however, Novelli stressed the alteration of the public perception that must take place – changing the expectation that reaching a certain age must equal “retirement” or idleness. “We should promote the idea to employers that turning away older workers is a waste of human capital. We will gain ground as employers realize that discrimination is wrong, not just for legal or moral reasons, but for business reasons as well.”

Changing Universe of Benefits

When Professor Olivia Mitchell suggested to the symposium that they “just don’t get old, don’t get sick, don’t retire … and you’ll be fine,” she had everyone’s attention. Mitchell, executive director of Wharton’s Pension Research Council and director of the school’s Boettner Center for Pensions and Retirement Research, talked about benefit plans for older employees and the restrictions in store for these plans as the workforce ages.

Once known as “fringe benefits,” employer-provided benefits include health insurance, life and disability insurance, paid time off, and pensions and medical benefits for retired former employees. As Mitchell explained, however, these benefits are now far from “fringe.” “In the U.S. and other countries, employers are the nexus for the whole insurance picture — healthcare and pensions, specifically.” In the U.S., the cost of providing these benefits to employees now amounts to nearly 30% of companies’ labor costs.

Some of this cost is due to legally required benefits, including the taxes paid by corporations to cover workers’ compensation and unemployment insurance as well as Social Security and Medicare taxes. But the lion’s share of the tab is filled by voluntarily-provided benefits, which come to 20% of total payroll costs, said Mitchell. As of now, and despite dramatic cost increases, nearly all companies continue to offer these voluntary benefits: 76% of employees were offered health insurance by their employers in 1987; 74% were provided coverage in 2001. As the workforce ages, the cost of providing health coverage in particular is expected to rise sharply.

Since these benefits are “voluntarily-provided,” companies are under no legal pressure to continue offering them, but they have certainly become a social expectation, said Mitchell. In fact, because providing health insurance to groups of people (which spreads the risk for the insurer) is so much less expensive than providing coverage to individuals, it is often very difficult for individuals to obtain insurance coverage if it is not through their employers. As a result, rather than discontinue benefits as costs rise, companies are instead passing more of these costs along to their employees.

Why Provide Benefits, Anyway?

As Mitchell pointed out, 100 years ago the American economy was primarily agricultural, with most workers self-employed or working in family-run farms or businesses. There were few wage-based jobs and therefore, few ‘benefits’ in the sense that we know them now. This employment picture began to change following World War II with the “golden age” of benefits emerging from the 1950s through the mid-1980s as the economy shifted to industrial and urban wage-based jobs. “Initially, the effort focused mainly on protecting workers against income loss in the event of workplace accident and illness — which led to insurance coverage for disability and premature death,” Mitchell explained. Later, pension programs were added.

Companies were able to provide these benefits at a relatively low cost; they received significant tax breaks for doing so, and economies of scale allowed them to receive a cost break for pooling their employees into a lower-risk group for insurance coverage. “It was also a big part of attracting top candidates, part of an overall attract-retain-motivate strategy,” Mitchell said. “Then, on the other end, defined benefit pensions were retirement-inducing. They were in place to get you to leave when you were past your prime.”

A lot has happened since the corporate benefits system first emerged, and the changes continue to advance more rapidly now than ever. First, few people today stay at one job for anywhere near as long as they did in the previous generation. “There are no 20-, 30- or 40-year careers anymore,” Mitchell said, which means that traditional pension benefits do not carry the same incentive value as in years past. Instead, “employees want benefits that can be tailored to their needs and their lifestyles at the particular point in time that they are with a company.”

These changes have translated to a demand from employees of all ages for flexible spending options for health insurance and medical care, as well as a move towards defined contribution pension plans — such as 401(k)s — over the traditional defined benefit plans of earlier years. Added to these shifts is the reality of the graying workforce, which has greater need for medical care, and simultaneous increases in healthcare costs generally, which have combined to make the provision of benefits to employees an extremely expensive proposition for employers.

To address the realities of providing benefits to a changed workforce, companies have shifted to what Mitchell calls a “disintermediated” benefits system, or an “a la carte” menu of benefits from which employees choose and are then partially charged for their participation. In practice, this means that companies no longer select a one-size-fits-all healthcare program, but rather provide several insurance options to employees for health insurance, dental insurance, even vision and prescription coverage. Employees choose what level and type of coverage they would like — or may opt not to participate at all. Similarly, rather than enrolling everyone in the same pension program that pays out a set amount at retirement (defined benefit), companies now provide programs such as 401(k)s for which employees must choose to enroll, then choose how much of their earnings to contribute (defined contribution pension plans), then also choose what funds to invest their retirement savings in.

Even though the menu approach has for the most part been welcomed — even demanded — by employees, Mitchell noted that as the cost of healthcare options rise, participation rates have dropped: “89% of employees who were offered healthcare coverage took it in 1987, but the figure dropped to 82% by 2001.” And the same effects can be seen in the pension programs: Rather than 100% employee enrollment in traditional defined-benefit pension programs, Mitchell said that in 1987, only 38% elected to contribute to their voluntary retirement funds, and in 2001 that number had risen to just 43%.

The menu approach allows employees a high degree of “choice” in what their benefits package actually looks like. But according to Mitchell, “choice” isn’t necessarily all it’s cracked up to be. Many employees, overwhelmed by the financial choices available in their pension funds, for example, are “overinvested in their own employers’ stock, despite several high-profile flameouts that we have seen over the last few years,” simply because it’s easiest for them to choose to invest their pension monies in their own company’s stock. “Menu construction seriously affects choices as well,” she added. “Most people focus on the top of a list of fund choices and stop reading after the first three or four. They are not choosing the best options; they are just overwhelmed by how much choice there is.”

In addition, many people simply aren’t saving enough to ever cover their costs in retirement. And others have opted out altogether, completely paralyzed by the overwhelming number of choices presented to them. “Employees have to answer: Do I want a particular benefit? Which one do I want? How much will it cost? How much do I need to spend on a benefit such as this? How do I annuitize this spending?” said Mitchell, who recently edited a book entitled, Benefits for the Future Workplace. “All of these are complicated questions — and they are a lot to ask from people” who generally are not sophisticated when it comes to making investment decisions.

So, What Next?

According to Mitchell, as the current crop of near-retirees age, they will be faced with the cumulative effect of these challenges to their benefits picture. Most have not saved nearly enough, or their savings have been hit by the recent fluctuations in the financial markets. They will likely not have health care provided in retirement by their former employers, and healthcare costs will only continue to rise. Those “lucky” enough to still be recipients of defined benefit pensions may be surprised when they discover how underfunded most corporate pension funds are. For example, “the unfunded portion of DuPont’s pension program is equal to the company’s global assets,” Mitchell said. And Social Security certainly won’t be the answer, either. “Social Security benefits payouts are dramatically increasing because of the baby boomers aging. By 2018 the system will be taking in less in tax contributions than it will be paying out,” she added.

The result? Mitchell predicts, as conference attendees heard from nearly every other speaker at the symposium, that baby boomers will need to remain in the workforce far longer than employees in the last generation, and much longer than they themselves may have anticipated. She returned to her earlier comment: “Like I said, just don’t get old, don’t get sick, don’t retire … and you’ll be fine.” Still, Mitchell did offer some advice for future generations of employers and employees. “We need to financially educate our citizens more and earlier, outside of the company-based benefits environment, because companies will not be the nexus of benefits and pensions in the future. Cleary, this is not a good model going forward. As it changes, people will need to consult financial professionals more and will need to understand the financial choices they are faced with in order to operate in this complex environment.”

Looming Retirements, Across the Board

To close the symposium, Thomas Dowd, deputy assistant secretary, employment and training administration, at the U.S. Department of Labor, discussed how the country and the labor force is entering a period of unprecedented change. For example, more than 25% of all U.S. Postal Service workers who were employed in 1998 will be retired by 2008, he said, arguing that figures like that are representative of what we will see across many industries in the years to come: “Most of our clergy will be pensioned off, the federal workforce will be drastically cut, and the demand for skilled workers will outpace supply.” To further complicate matters, Dowd pointed to scientific projections that “people aged 65 today will live to an average age of 83, which is significantly longer than in generations past.”

Dowd said a new perspective on what older members of society can bring to the workplace is required. “We must change the mindset we have about older workers. Don’t put an age category on who’s eligible to work. Older workers bring knowledge, experience and wisdom — something that is not taught in schools.” According to Dowd, knowledge workers now comprise about two-thirds of the labor force, outpacing factory workers by a ratio of two to one. To ignore the knowledge and wisdom offered by older workers is to leave American companies in the lurch, in need of skilled employees without being able to find them. This is one reason, he added, why so many companies are offshoring jobs. “When companies don’t find the talent needed, they seek it abroad. We must recognize that we are in global competition for workers.”

Finding Creative Workforce Solutions

Dowd said the current administration has invested $15 billion each year in workforce development programs under the umbrella name of the “Public Workforce System.” “It’s not a social service system; it’s an economic development system — a system that creates opportunities for future, ongoing growth.”

Included in this rubric were such programs as the High Growth Job Training Initiative, which identifies industries with a high demand for workers and provides funding to train workers in those fields. Relevant industries include health care, biotechnology, geo-space, hospitality, and retail. “Solutions focused on older workers are important. We call it ‘E3’ — employment, education and economic development — which together form a strategy to use this untapped labor pool. We need every available, willing individual to work and we must equip him or her with the skills necessary to do it,” Dowd said. He highlighted the job retraining efforts underway at the Forsythe Technical Community College in Winston-Salem, N. C., which is currently helping workers at all age levels transition to working in the biotechnology industry, as an example of one such successful initiative.

During the question and answer period, Dowd took questions regarding what programs the government has developed to allocate training dollars specifically for older workers. Many government training programs are youth oriented, the questioner said, and many don’t specify a target group at all. “We have one specific program for older workers, the Senior Community Service Employment Program,” answered Dowd. The program is contracted to the AARP Foundation to run employment placement for seniors who fall below the federal poverty line. These seniors are placed in non-profit community organizations and are provided whatever training they require to perform their new jobs. “Our other programs, minus the youth-specific programs, serve all age segments,” Dowd said.

Another audience member asked Dowd about the rising healthcare costs facing older workers, especially since many seniors end up taking temporary employment or seasonal positions that do not offer health benefits. “As big corporations move towards employing millions of temp workers with no benefits, where does the government stand on providing a gradual subsidizing of healthcare costs?” she asked. Dowd replied that the issue did not fall under his department’s jurisdiction.

Dowd was also asked whether the government has plans to support more model programs that demonstrate how to reintegrate older workers into the labor force in both the public and private sectors, citing the National Older Worker Career Center as an example. He responded that although proposals for such programs exist in the 2005 fiscal year budget, he was unable to disclose them to the audience. “We fund demonstrations of best practices all the time,” Dowd added, “but I have yet to see anyone doing any of them after the demonstrations. It seems like it’s more for getting conference speaking opportunities. We should be going out and finding great practices that are already in use and funding those instead.”

At one point, Wharton professor Peter Cappelli, director of the school’s Center for Human Resources, challenged Dowd’s premise that there would indeed be a labor shortage at all. Noting that there is still upwards of 5% unemployment in the United States today, Cappelli asked Dowd, “How can we have a shortage of workers if there is unemployment? It’s impossible.” Dowd replied, “The fact of the matter is, even if we have some unemployment, we still need to train people; we still need their skills to sync up with the skills that are in demand.”

And bringing the conversation full circle, back to the subject of the aging labor force, Dowd added, “The important thing to remember is that we need to recalibrate our notion of ‘Best By’ dates for American workers. Age is only an indicator of years spent acquiring and developing human capital assets — not a date at which you must retire.”