PERSONNEL MANAGEMENT Early retirement policies will deplete labor supply

Companies will have to deal with lack of younger workers to replace retirees.
KNIGHT RIDDER NEWSPAPERS
ST. PAUL, Minn. -- Early retirement policies and frequent cutbacks that target older workers help companies reduce costs but could ultimately backfire when a big wave of baby boomer retirements creates a labor shortage.
For decades, the policies of governments and private employers have encouraged early retirements. The thinking has long been that these policies are good for older employees, who should enjoy the fruits of a long working life, and they're good for the younger workers, who are making their way up the corporate ladder.
What hasn't yet sunk into the corporate mindset is that there won't be enough younger people to replace the boomers.
Consider: 76 million baby boomers will be retiring this decade and next, but only 45 million Generation Xers are in the pipeline to take their places, according to the Conference Board, a New York-based economic research group.
Social Security effect
Ironically, one of the forces that could help rescue employers facing a dearth of talent is the federal government, which is trying to keep people contributing longer to Social Security so that it remains solvent.
For close to half of U.S. residents, Social Security provides the majority of their retirement income. Dennis Nightingale, for one, says he will work until age 68 to boost his Social Security benefits. If this 63-year-old customer service representative in Eagan retires at 65, his Social Security check each month will be $1,500. If he delays his retirement until age 68, he will collect $1,800.
"That is definitely a big motivator," Nightingale said. "At least it was for me."
Therein lies the odd disconnection between government and corporate America.
Pension plans
Although the age for collecting full Social Security benefits will gradually rise from 65 to 67, many corporate pension plans today make it fiscally attractive for employees to retire before the mandatory retirement age. And, companies trying to reduce costs often offer early retirement packages to reduce the number of layoffs.
"While the federal government is trying to get people to stay in the work force longer, companies are trying to get them to retire earlier," said Dennis Ahlburg, a labor economist and senior associate dean with the Carlson School of Management at the University of Minnesota.
At 3M, for instance, retirees can draw from their pension at age 55, with all or most of their benefits.
Take Joe McGrath. For 30 years McGrath worked as a scientist and manager for 3M and was making a six-figure salary when he retired. At age 58, the Ph.D. chemist, who has many patents to his name, knew that he had productive years left. His plan was to retire at 60.
But in September, he and five other older scientists in the laboratory of the commercial graphics division accepted early-retirement packages too attractive to turn down as 3M cut its work force.
"I could get 45 weeks of pay for retiring two years earlier than I wanted to," he said. "That's a pretty good inducement."
According to a report by the Urban Institute, the typical defined benefit plan may state that the normal retirement age is 65, but a worker starting at 25 is likely to find that the expected value of the pension accrues most rapidly between ages 51 and 55. Soon after age 55, the accrual might turn negative.
"Say they have worked more than 20 years for an employer," said Rudolph Penner, lead author of the report. "They find that in their late 50s, if they work an extra year, the value of their pension doesn't go up high enough to compensate them for the fact" that they worked an extra year.
Incentives to stay
As the number of retiring boomers gains momentum, companies are likely to find themselves in the same position they did during the labor shortage of the 1990s, according to a report from the Conference Board.
"It is thus highly likely that industry will have to develop stronger incentives to persuade many more still-motivated, capable veterans to fill the gap by delaying their retirements," said the report.
The problem is, several legal and institutional barriers prevent more flexible arrangements for older workers.
Phased retirement plans, which allow workers to gradually reduce their work schedule as they age, are fraught with risks for employers under tax laws, benefits regulations and age discrimination rules, experts say.
Given the current tight job market and economic pressures, the issue isn't on the radar screens of many employers.
"Everyone is trying to downsize, downsize," Ahlburg said. "When the economy picks up and companies realize there's not a hell of a lot of younger workers around, they may look at the incentive structures in their pensions."