Older and Wiser
As the Work Force Ages

Report on

The February 2007 Survey of Businesses Served by Professional Employer Organizations

March 15, 2007

Written by: NAPEO

Older and Wiser: As the Work Force Ages, Small Businesses Change, The Urban Institute calls it a "coming demographic collision."

"The traditional notion of retirement," say researchers at Rutgers University, "is obsolete."

"The nation appears headed toward a financial crisis among the elderly," says Boston College Magazine, citing the college's research, "that will change the face of growing old."

"We're shifting from lifetime pensions to lifetime work," Notre Dame Professor Teresa Ghilarducci told the PBS news show Frontline. "It's the end of retirement."

They are talking about the impact of the 77 million baby boomers—a quarter of the US population— who will be reaching the traditional retirement age in five years and how this will transform the labor force, the economy and even the quality of life for millions of Americans.

People over 45 years of age are now 40 percent of the workforce, up from less than 30 percent a decade ago. As they retire, they'll set off a labor shortage that experts say businesses must start planning for now.

On the other hand, many of these boomers can't—or aren't ready—to retire; while the number of people over 65 who are still working is small, it is growing fast—4 percent of all people with jobs, or almost 6 million workers.

Eighty percent of baby boomers AARP recently surveyed expect to work past traditional retirement age.

The National Association of Professional Employer Organizations wanted to know what the small businesses its members serve are doing about their aging work forces. Professional employer organizations, or PEOs, shoulder complicated and time-consuming human-resource chores, like handling payroll, for small and medium-sized businesses that want to focus on making a profit rather than, say, administering the employee benefits plan.

During three weeks in February and March, almost 400 PEO clients—most of them with less than 50 employees—responded to the survey. What they said offers a timely and unusual glimpse of how small business owners are coping with the aging of their work forces; indicates where these employers can make changes; and shows where they're already taking advantage of older workers' expertise.

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Survey Highlights
A fifth of the small businesses in the survey say their older workers are staying on past age 65. More than a third of these said at least some of their employees are still working because they can't afford to retire. To be sure, twice that many businesses said their employees were staying past 65 because they liked working or enjoyed the extra income.

"Either way, these older employees represent both an opportunity, thanks to their valuable experience, and a huge challenge, because small businesses have to get ready now for the graying work force," said Milan P. Yager, executive vice president of the National Association of Professional Employer Organizations, or NAPEO.

Small businesses, of course, aren't alone: Every American company faces a graying—and shrinking— labor pool ahead. But small businesses have fewer resources and less expertise to cope with these changes than Fortune 500 corporations. It is going to be especially challenging for them.

Consider these numbers: Five percent of American workers are now between 60 and 64 years old, or almost 7 million people. That number jumped nearly a quarter from five years ago. Many, experts say, have not planned adequately for retirement.

In NAPEO's survey, 16 percent of the companies responding said employees between 60 and 64 were 5 percent or more of their work force, or around the average for the U.S. labor pool as a whole; that, too, jumped from five years ago, when only 9 percent of these companies had that many older workers.

Three-quarters of the almost 400 companies reported having a 401(k) plan, the main retirement savings plan for most Americans these days, and half the companies contributed to it. Both are more generous than the national averages, probably because our client companies have already indicated an interest in providing benefits by hiring a professional employer organization.

But fewer than 2 percent had a phased retirement plan, a relatively recent innovation that lets older workers reduce their hours while starting to draw on a pension.

Who the Respondents Are
QUESTION 1: How many people work at your company? A third of the 390 companies responding to the survey employ 10 or fewer; 22 percent employed 11 to 20; 22 percent employed 21 to 50; 14 percent employed 51 to 100; and 8 percent employed more than 100. QUESTION 2: Where is your company headquartered? Twenty-seven percent are headquartered in the east north-central region: Illinois, Indiana, Michigan, Ohio and Wisconsin. Twenty-three percent are in the west south central region: Arkansas, Louisiana, Oklahoma and Texas; and 17 percent in the South Atlantic: Delaware, D.C., Florida, Georgia, Maryland, North Carolina, So8uth Carolina, Virginia and West Virginia. Smaller percentages (8% or less) are in other U.S. regions.

QUESTION 3: "What kind of organization is your company?" By far the most are in service businesses, 27 percent; 11 percent in construction; 10 percent in manufacturing; and 9 percent were nonprofits.

Analysis of the Survey Results
QUESTIONS 4 and 5: "Last year, were workers between the ages of 60 and 64 more than 5 percent of your work force?" "Five years ago (in 2002), did workers ages 60-64 comprise more than 5 percent of your work force?" Sixteen percent, or 60 companies, said more than 5 percent of their employees are between 60 and 64. Nine percent, or 35, said that was the case in 2002, a big jump—43 percent—to today's number.

Five percent of the entire U.S. labor force is in that age range now, and in the short term it's only going to increase, too.

But the oldest of the 77 million boomers—born between 1946 and 1964—turned 60 last year, two years away from collecting Social Security. They're more than a third of the work force. And it's not just their numbers: They fill most of the most skilled and demanding jobs.

"Baby boomers are going to be retiring in droves starting with the end of this decade," says Arlene Dohm, an economist with the federal Bureau of Labor Statistics. "There are certain industries and professions that are going to be hit very hard."

Among them, says the bureau: Everything from airline pilots to photographers to nurses, and dozens more types of jobs.

Others aren't so sure: Many baby boomers define themselves by their jobs, and many experts predict they'll work long past age of 65, at least part-time, for the satisfaction of continuing to do a job. Others won't be able to afford to retire. And automation, rising productivity and immigration may also help mitigate or fill the demand for jobs as the labor force shrinks in the years ahead.

Today's jobs rely far more on smarts than brawn, which means older people can do them, compared with the heyday of American heavy industry in the middle of the last century, with its assembly-line jobs and manual labor.

QUESTIONS 6 and 7: "Are any of these workers delaying retirement?" "If so, why?"

Almost a fifth—18 percent—of the companies said their workers were delaying retirement beyond age 65.

Thirty-seven percent of these companies said at least some of their employees were staying because they can't afford to retire; another 37 percent said some of their workers could retire but liked working; and 34 percent said employees stayed because, while they didn't need it, they liked the extra income.

"Many Americans' retirement expectations are like a piece of Swiss cheese—full of holes," said the Employee Benefit Research Institute last year after surveying more than 1,200 workers. At the same time that workers aren't saving enough, they have entirely unrealistic expectations about how much it will cost to live after retirement and how much income they'll have, said the influential nonpartisan think tank.

One in four workers in their 50s will need to work an extra year or two in order to retire, says Boston College's Center for Retirement Research. And hanging on to a job at that age, says the center, isn't easy: In the decade to 2002, one in five adults in their 50s lost their job.

As people live longer, the increasing pressure on Social Security—the third leg of the traditional retirement system, with pensions and savings—threatens the government program's financial health and most likely means smaller payouts in the future.

Traditional pensions, too, are falling by the wayside as more old-line industrial companies run into trouble, while the Pension Benefit Guaranty Corp., the government agency that backs them up, is $19 billion short of covering all its responsibilities. President Bush in his latest budget proposed raising what companies with shortfalls in their pension plans must pay into the fund, and there's more news; the shortfall has dropped by $4 billion recently. But it's clear the pension system is in trouble.

As long as a decade ago or more, perceptive people wondered whether the vast swell of baby boomers would have the 60 percent to 80 percent of pre-retirement income to be ready to retire.

"The prospect of a huge generation edging unprepared toward retirement raises worrisome questions about the living standards of the baby boomers in retirement, the concomitant pressure on government policies, and the stability of the nation's retirement system," wrote William G. Gale for the Brookings Institution way back in 1997.

As for people who in the past continued to work past 65, contrary to conventional wisdom they tended to be white collar, highly skilled and tended to continue working more for pleasure than money, according to AARP research.

That, of course, is changing as more Americans face retirement financially unprepared. And as workers get scarcer, companies will have to offer enough blandishments to keep these older people at their desks instead of in their hammocks.

QUESTION 8: "Are any of the workers with your company retiring before age 65?"

NAPEO also wanted to find out if some companies were likely to lose people to early retirement. Only 8 percent said yes; 40 percent said no; more than half said they didn't know.

It used to be that many people aspired to retire before they turned 65. In fact, at some companies, it used to be mandatory. Then the Age Discrimination in Employment Act was amended in 1986 to eliminate any mandatory retirement ages and bar discrimination of older people of any age.

People could start drawing Social Security at 62, and from the mid-1970s to the early 1980s, pensions began to pay out fully at ever younger ages, according to the Bureau of Labor Statistics. Well into the 1980s, many people were retiring earlier.

Now, though, that's reversed: People are living longer and healthier, which means they can work longer if they choose. It also means they'll need more money to subsist as their life spans extend. A person who turns 65 today will likely live another 20 years, says the Bureau of Labor Statistics.

Then there's this: The older person at loose ends without a job to go to is not just a well-known stereotype.

"The biggest mistake people make," says psychologist and author Nancy Schlossberg, "is not realizing there's a psychological component to retirement."

And it's not just when people retire that's changing, it's the way they're retiring. What's sometimes called "cliff retirement," as people suddenly stop working entirely—abruptly going over a cliff—is changing for all these reasons. Now, gradually phasing out of a job by, say, consulting or working part-time is increasingly common.

"There is much evidence over the past quarter century," wrote William J. Wiatrowski, a Bureau of Labor Statistics economist, "that a single standard retirement age no longer exists."

Older Workers: Perceptions and Realities
QUESTION 9: "Do you see any specific advantage in retaining older workers rather than seeing them retire?" Fifty-six percent said yes, 12 percent said no, and 32 percent had no opinion.

The U.S. Senate Special Committee on Aging just held hearings on what government can do to alleviate a labor shortage the committee predicts could grow to 35 million jobs by 2030, with a labor force growing only a fifth as fast as today.

The AARP recently surveyed employers in several states and found in Alabama, for instance, that by 2010 people between 44 and 64 will be the fastest-growing part of the labor force. Half of all workers will be 40 or older. Yet only one in three employers was planning for these vast changes.

"We need to rethink how employers offer jobs," said an AARP staffer in Alabama. "If we don't do this, we're going to have enormous brain drain in the state."

Between 2010 and 2030 the number of people over 65 will jump an astonishing 70 percent, while the labor force grows only 4 percent, Rudolph G. Penner of the Urban Institute testified before the Senate Finance Committee.

Foresighted employers are coming up with new ways to keep their older workers. Every year, AARP names 50 employers across the country that are the best places to work for people over 50. Most—but not all—are huge employers like Volkswagen of America Inc., MIT, the John Deere tractor company and mail-order retailer L.L. Bean Inc. (A few smaller ones: The YMCA of Greater Rochester in New York and Hospice of Marion County in Florida.)

AARP's judges consider whether the company recruits older people, offers training, workplace accommodations and flexible scheduling as well as retirement and health benefits.

Consider Maine's L.L. Bean: the AARP cited in-house classroom training that reached 75 percent of employees and a workplace culture that valued older workers; part-time workers got medical coverage; there is a 401(k) and a more traditional defined benefit plan; flexible work schedules. More than a third of the employees are over 50; one in six new hires over the year were over 50.

Meanwhile, behind the 77 million baby boomers are only 46 million Generation Xers, a shortfall companies large and small will have to cope with in the next few decades.

Again, it's not just the numbers that's worrisome: The boomers have worked their way up to key positions and as the repositories of institutional memory for thousands of companies and governments.

"A tremendous amount of knowledge is walking out the door in a relatively short period of time," David Cole, chairman of the Center for Automotive Research in Michigan, told Knight-Ridder Newspapers recently.

QUESTION 10: "If yes, why (do you value older workers)?"

Almost three-quarters, or 155 companies, cited these workers' experience; 10 percent said keeping them is less expensive than training new workers; 9 percent said they serve as mentors and trainers; and 7 percent said they provide continuity.

These advantages seem to outweigh the perceived negatives of hiring older people for these small companies. Some of those perceptions: In another survey cited by the nonprofit National Older Worker Career Center, more than half the respondents said "older workers can't keep up with technology" and more than a third said "older workers cause expenses to rise."

Yet almost 60 percent of Americans between 65 and 69 are on the Internet, says the center; and studies show the absenteeism rate of older workers is actually lower than that of younger workers; consultants Towers Perrin found the cost of hiring an older workers wasn't much more than hiring a younger person.

"Stereotypes about older workers," the center said, "are not supported by the evidence."

But providing the benefits that keep people on the job, to be sure, is expensive, and can be more expensive for older workers. The cost of retirement benefits, for instance—most appealing to younger workers— are small potatoes compared with the skyrocketing cost of health benefits—small business's biggest headache: "More important that taxes, labor quality and government red tape," says the SBA.

The SBA reported a few years ago that companies of all size have cut health benefits to their workers, and says now it doesn't see any reason why that should have changed, given the big jumps in insurance premiums in recent years.

And it is a fact of life for employees of small businesses that they will have fewer benefits than workers at big companies, says no less an authority than the federal Small Business Administration.

Good benefits, of course, while expensive, are going to be increasingly important in attracting the best workers as the labor force ages and the market tightens.

"The quality of your benefits package," says the National Federation of Independent Business, the small-business lobby, "is definitely something employees will look at when deciding whether your business is a place where they would want to work.

"Since the quality of the employees you attract has a direct impact on the quality of your business (and the quality of your bottom line), offering a full benefits package is an important criterion to consider, albeit an expensive one."

QUESTION 11: "Has your company offered employees a buyout package? (A buyout package generally includes financial incentives for employees desiring to retire early)."

Of the 385 companies, only two, or half a percent, said yes.

This response is fairly predictable, since buyouts are really more common with much larger companies such as Fedex, U.S. auto-makers and many big-city newspapers, all facing tough markets. GM, in the largest such move ever, offered almost all its 113,000 hourly workers represented by unions a buyout last year; more than 34,000 took them. Even the federal government is doing it.

"Some organizations will welcome the cost relief that will come when their older, higher-paid workers leave," says the American Society of Employers.

While there have been some big, splashy buyouts recently, they are really a 20-year-old trend. As big companies went through the wrenching changes of the last two decades, buyouts were a more humane way to trim oversized work forces than outright layoffs. But they also bring high upfront costs and the risk the best employees will walk out the door, leaving the deadwood behind.

"Companies have lost key performers," Ed Jensen of Accenture told USA Today. "They've been surprised by who has accepted (buyouts)."

With unemployment low and the possibility of the labor market tightening still further, the probability of lots more buyouts (outside industries like autos) of layoffs is less.

"For decades, employers have looked for benefits packages to ease older workers out of the workforce, either to implement downsizing or to make room for the huge cohort of baby boomers eager to work its way up the career ladder," says the Urban Institute. Today's employers, though, need "a 180-degree shift in traditional benefits thinking" to avoid a "coming demographic collision."

QUESTION 12: "Did your company have a retirement plan prior to entering a PEO arrangement?"

Thirty-nine percent, or 149, did not; 36 percent, or 135, did.

Professional employer organizations, or PEOs, shoulder complicated human resource chores like choosing and administering a 401(k) plan.

Even among these PEO clients, though, a quarter of the companies responding said they still don't offer a retirement plan.

That sounds like a lot, but it's far better than for all U.S. companies with 25 to 99 employees: fifty-five percent don't offer any kind of retirement plan, traditional pension or 401(k), the Employee Benefit Research Institute found last year. And all U.S. companies with fewer than 10 employees: Eighty-four percent.

Even more ominous, some studies suggest these already high numbers are rising.

As we've seen, small businesses in particular struggle to provide these benefits. The SBA found a few years ago that access to pension plans was the least common benefit at small businesses, while paid vacation leave was the most frequent.

These benefits are relatively expensive, to be sure. To set up a 401(k) could cost even a company of only 10 people $3,000, says Slavic401k.com, and either lots of expertise or lots of legwork.

Because they don't enjoy the same economies of scale, the smallest businesses may have to spend 14 times as much relative to what the largest companies might spend on the cost of administering a 401(k), says the federal Small Business Administration.

A professional employer organization could be one solution for some companies: It can help hold down that cost and has the expertise to pick the best plan for clients.

QUESTION 13: "If your company has a 401(k), does it contribute?" More than three-quarters, 73 percent, have one, and 53 percent contribute to it.

This is surprisingly generous, since many small businesses can't afford or don't have the expertise to offer retirement plans at all. One explanation is simply the group of companies we surveyed: Small businesses that hire professional employer organizations tend to be more interested in offering benefits and are more able to do so with professional advice from a PEO.

And these retirement plans must get more generous to attract good employees. The best 401(k)s, in short, will help lure the best employees.

Mercer Human Resource Consulting found in a survey last year that employer matches are, in fact, becoming more generous. More than a third of the companies the consulting firm questioned offered a 100-percent match, up from only a quarter in 2002.

401(k)s are more than a quarter of a century old, and have all but replaced traditional defined-benefit pension plans for most workers. In the two decades to 2001, the number of workers who relied solely on 401(k)s and similar plans rose from almost 20 percent to almost 60 percent, says Alicia Munnell, a professor of management at Boston College. Meanwhile the percentage of people relying solely on traditional pensions tumbled from almost 60 percent to 13 percent.

QUESTION 14: "Do you offer a phased retirement plan?" Only 1.6 percent, or six companies, do; 63 percent do not; and 36 percent are not familiar with this type of plan.

These are a relatively recent innovation that lets older workers keep working at reduced hours while starting to draw on their pensions. There are advantages for business, too, of course: Companies can continue to draw on these older people's experience at a lesser cost.

These programs are relatively rare because "the law doesn't make such programs easy," says employment lawyers at Faegre & Benson. "Historically, pension benefits can be legally paid only when a person stops working entirely. But the rules are changing and the Internal Revenue Service has proposed regulations that make phased retirement more plausible in handling retirement plans."

Meanwhile the U.S. Senate Special Committee on Aging held a hearing in February on the "The Older Worker Opportunity Act," S.1826, which tries to address the problems of businesses' growing need for workers and older workers' desire—or need—to stay in the work force on a part-time basis.

The bill would provide a tax credit to employers who offer flexible or part-time work for older workers while protecting them from loss of pension or health benefits. That lets these workers "gradually transition into retirement instead of entering full retirement abruptly."