Retirement and the Changing Workforce | Peter Cappelli

How Has the Retirement Process Changed?

Dan Loney: We’ve seen a wave of people heading into retirement around the pandemic over the last few years. Remote work obviously has become more commonplace, although that’s adjusting right now. And people are thinking about what they want from their career, as well as what that transition into retirement is going to look like.

Pleasure to be joined here in studio by Peter Cappelli, professor of management here at the Wharton School. He’s also director of the Center for Human Resources and author of the book The Future of the Office: Work from Home, Remote Work and the Hard Choices We All Face.

Peter, this is a unique topic because every company deals with employees who retire. What’s that process like for both the employee and the company?

Peter Cappelli: It’s an important issue for employees as well as those companies. We’ve been thinking about it more from the company side. I actually wrote a book about this a while ago called Managing the Older Workforce. The problem we were trying to wrestle with there is the fact that we now have older subordinates and younger supervisors.

I wonder if you ever remember going to retirement dinner when anybody retired at 65. I remember The Philadelphia Inquirer ran a news story about somebody who had retired at 65 and got a gold watch, which is what everybody used to do. What you may not know is that mandatory retirement was a management creation. It was invented at the Sears Roebuck company in the 1930s. They discovered that the senior people were not helping the junior people figure out how to do their jobs, because they figured the junior people are going to take my job. Sears decided, “OK, everybody’s gone at 65, so you might as well help these guys because you’re going anyway.”

It used to be a very predictable thing. I think the problem now is it’s been unpredictable for a very long period of time. I remember somebody at IBM told me years ago — this was back in the ‘90s — that virtually no one at IBM retired at 65. They took early buyouts, they left and went to work for startup companies. They seeded the entire disk drive industry. Suddenly was not an issue, because nobody stayed anyway.

Here’s the big change. From 1970s through 2018, the unemployment rate fell below 4% only one year. It was a buyer’s market for almost two generations. From 2018 to now, with the exception of the pandemic when everything was shut down, it’s been just about 4% or below 4%. That is a sea change, right? Moving from a buyer’s market to something you would think looks more like a seller’s market.

The big change for employers ought to be, “We can’t just take a big workforce, available whenever we want them, for granted anymore.” Older workers offer that opportunity they say they want for a trained, skilled workforce, good work ethic, readily available, and interested in coming to work for us.

Loney: But we’ve also seen with some employees that when they get later on in their careers, they look to make a shift because of wanting to do something different. They can bring something to the table.

Cappelli: Yeah, they want to keep working. And why do we want to keep working? Because we’re living seven years longer than our parents’ or grandparents’ generation, and you got to pay for that, too. Some of it is because work is so integral to American society. We don’t have this tradition of age 55 you start picking up your hobbies, that you would see in the European Union, especially. We need to keep working. And the problem has been that employers have been resistant to hire older workers, even on a part-time basis.

Now, the thing is, this is so dumb, right? Because older workers actually turn out to be better on every dimension, except for this one, tiny one, which is solving novel problems under time pressure when you can’t use calculators and computers. The only time you do that is taking SAT tests, I think. So, except for SAT tests, older workers have better motivation. They have better social skills. They have better job skills. Their absenteeism is lower. Believe it or not, their turnover is lower because they’re not job hopping. They got everything you think you would want. They want to work more flexible schedules. And the problem has been, why haven’t employers made more of an effort to embrace these folks?

Loney: Why do you think that’s the case?

Cappelli: Well, I’ve written a book about that. The answer, at least in part, it’s all variations of age discrimination, basically. And the assumption you hear all the time, that older workers are — fill in something bad. Burnt out. They’re not tech savvy, etc. None of which is true. But one of the problems that I was picking on is that younger supervisors are nervous having older subordinates. How do I manage somebody who looks like my dad?

The military has been on this problem for a while, and they have very good answers. Younger officers should embrace their older sergeants who report to them, but treat this guy as a partner. Treat her as somebody that you need to cooperate with, and don’t treat them like somebody that you’ve got to boss around. And don’t expect that you know more than they do. It’s not that hard a solution, really.

Loney: You mentioned the technology component. Is AI going to have an impact in this process as we move forward?

Cappelli: Yeah, I’m a big cynic on this. We have not seen it yet. And I encourage everybody who thinks this is just going to change overnight to remember driverless cars and driverless trucks, which by 2019 were going to be so prolific that there would be no need for truck drivers. Now, all those reports by all the consulting companies have been taken down off their website so you don’t see how stupid they look now.

But the reason they were so wrong is worth thinking about. They were talking about what technology could do in theory, not what was practical. What we’re seeing now in AI is these claims about what it in theory could do. We have an article on the Harvard Business Review site where we followed a company that tried to automate a simple clerical task. Opening envelopes, sorting out what’s in them, entering the data. Pretty simple. And they did it. It took a year. It took an initial $500,000. It took a team of six people to do it. They’re paying $200,000 a month in addition now in AI costs. And they cut their head count from 45 to 41. Well, you know, it was successful. The productivity is up because they took in more work. But boy, it’s hard to do. And it takes a long time to get this right.

The interesting finding from that, which the folks who did it realized, is that it’s not going to work well if you’re trying to automate something that’s cheap because you can’t save very much money. And that’s what we think, “Oh, it’s going to take over all these simple tasks.” No, it’s not, because they’re cheap now. “It could write all your letters.” Nobody writes these letters. Now they’re all form letters, you know.

Loney: You and I have talked about the role of the HR department in the office. How has the HR department transitioned around retirement and employees?

Cappelli: I think they’re mainly laying low. I mean, they’re not on the cutting edge of these things. On AI, they’re under pressure to do stuff because the bosses above them think it will allow them to cut head count, which is what they really want to do. But they’re mainly just claiming that they’re doing things that they’re not. Like, “We’re using AI.” Yeah, we’re using it. We’re using a search engine. They’re claiming a lot of stuff that they’re doing. But it’s really hard to find any examples where they will lay out, “Here’s what we fixed, and here’s how we did it.” Particularly, did it actually cut headcount or not? It’s just hard to see. Because it turns out it’s really, really hard to do. Doesn’t mean it’s not useful.

Loney: We saw more people coming back into the workforce after the financial crisis.

Cappelli: Yeah. Yeah. They had to.

The Value of Retaining Older Workers

Loney: They had to because their retirement savings were hurt. But now, with the pandemic, we’ve seen an increase in the types of benefits that companies are willing to provide. It makes you wonder if people want to stay on longer in the workforce?

Cappelli: Interesting question. I think the employer side, they are pushing these folks out. And the reason they’re doing it is they’re more expensive, and they think they can replace them with cheaper people. I mean, you can. But the thing to remember is age is really correlated with experience. If you went to the hospital and you said, “Give me the oldest doctor,” they would laugh at you. But if you said, “Give me the most experienced,” they would say, “Of course.” And you know what? The most experienced are often older.

We’re really hypocritical as to how we think about this stuff. There’s real opportunity for employers to think about engaging this workforce that has retired from full-time jobs, wants to keep working in some way. They want to be part-time. They want to be just in time. And they’ll work cheaper. But for some reason, the employers have not tried to engage them.

Loney: But the value that they can bring to an operation?

Cappelli: Is great. It remains an interesting problem as to why companies have not done this, even when they’re complaining about, “Gee, there’s nobody to hire. We can’t find people with the right skills.”

Loney: Is the pattern that we’ve kind of laid out here one that you think is going to continue longer term?

Cappelli: Will they see it? That’s a very good point, that we don’t want to assume that simply because there’s value and reason to go in that direction, that it will happen. You know, there was a reason, a clear economic story, to not discriminate against minorities and against women. You had this big labor pool. They were skilled, they were eager to work, and yet we discriminated against them until the government made us not do it. In this situation, it looks like the same story. We’ve got this big opportunity. It’s right there in front of you.

There was a sense before — well, the Biden administration, but Obama before that — that the lawsuits among older workers were really going up and were going to start changing the behavior of employers. Suing for age discrimination. I don’t think that’s going to happen now. It’s going to be harder for that to pull off. The government certainly is not going to push that. So, what will it take for employers to recognize this opportunity? That’s a really good question, you know. But I think the idea that is not true is that simply because there’s an opportunity, it will happen.

Loney: How do older workers change the entrepreneurial landscape?

Cappelli: The evidence is that older retired people are disproportionately going into entrepreneurship. You might say it’s because of the flexibility, but let’s be real. Entrepreneurs don’t have a lot of flexibility. They’re working really hard. They’re blocked from getting more traditional jobs, right?

I think the other thing that might happen is that labor supply companies — the leased employees — do it. Companies don’t want to hire older workers. But they do hire leased employees from companies like Manpower, Randstad. You end up hiring them, but you don’t know it. Are we going to see that? Well, those companies are more attuned to labor arbitrage, which is what we’re talking about.

Loney: Does it also potentially lead to a rise of contract work?

Cappelli: Yeah, and it’s an opportunity that’s there. It’s not exploitive in the sense that these folks who are retired, some of them need the money, but they typically don’t need as much money. Many of them don’t need the money in quite the same way. They do want flexibility. The thing about contract work is that it is more flexible, right? You’re working the length of the contract. You know what that is when you go in. So, you would think it’s a good fit. Again, why it’s not happening is a puzzle.