Tribal Knowledge Feature Articles

July 2008

The Aging Workforce: Challenge or Opportunity?

      Much has been written about the aging of the working population and the potential implications this trend holds for employers, financial markets and the overall economy.  The possible workforce scenarios predicted to play out during the next five to ten years range from demographic doomsday (i.e., severe labor shortages because of baby boomer retirements) to a soft landing (i.e., minimal workforce disruptions as the boomers continue working past traditional retirement age.)

      Many organizations are beginning to recognize their longer-term business strategies could be compromised by a shortage of available talent if baby boomers do, in fact, retire en masse.  Thus far, the reported worker shortages have emerged in fields like nursing, engineering (e.g., in the energy industry) and even long-haul trucking.  For just about every industry, however, today's demographic realities raise important issues about what it will take to meet critical business needs for workers, skills and knowledge in the future.

      Recognizing the importance of these talent-management issues, Towers-Perrin analyzed the business case for enhanced organizational focus on hiring and retaining workers aged 50 and older.  The research, done for AARP, highlights the need for employers to consider the full range of economic implications associated with the aging of the workforce, taking into account both cost and productivity factors.  This paper summarizes the findings of the Towers Perrin analysis.  Stated briefly, the research suggests organizations that adhere to the conventional wisdom about older workers - specifically, the notion that older workers are more expensive and less productive than younger groups - may miss a critical opportunity to maximize their talent base.

      In the authors' view, the key to turning today's demographic challenge into a business opportunity lies in a two-pronged strategy:  careful workplace planning and developing targeted talent and reward strategies that align with key business goals while effectively managing labor costs and risks.

Employee Engagement and Motivation

      The analysis began by considering if a long-tenured, experienced workforce exhibits productivity differences that can generate financial benefits for organizations.  This part of the business case analysis required an evaluation of the assumption that older workers are less productive than younger groups.  To test this belief, the Towers Perrin study for AARP focused in part on Towers Perrin's research into the factors that shape employee behavior and, specifically, employee engagement.  The broad 2003 U.S. workforce survey data suggest that motivation tends to increase with age.

      This phenomenon emerges across a variety of industries.

      Towers Perrin's research into the drivers and effects of employee attitudes and behaviors indicates that motivation (the energy behind employees' workplace contribution) is directly related to engagement (the degree to which employees are emotionally and intellectually attached to their organizations and their work).  It comes as no surprise, then, that employee engagement also varies somewhat by age.  The Towers Perrin 2005 survey of approximately 60,000 U.S. workers revealed that workers in general demonstrate relatively low engagement levels.  However, older workers are somewhat less likely to be disengaged (and a bit more likely to be moderately or highly engaged) than younger groups.  Some of the industry's findings are even more dramatic in certain U.S. industry segments and in the global industry analysis.  As an example, in the analysis of results for the U.S. energy industry, workers aged 55 and older are 22 percent highly engaged, versus workers age 29 and younger who are 8 percent highly engaged.  Because disengaged workers are more inclined to leave their employers, these workers pose added retention risk.  Given the high cost of turnover, this risk brings the threat of higher cost to the organization.

      In addition to correlating with retention, engagement also affects employees' view of their ability to contribute to organizational success.  Specifically, the Towers Perrin 2005 workforce survey found that more highly engaged employees said they are far more likely to feel they can make a difference in business-critical areas such as quality and customer service.  They also believe they can influence key financial outcomes like cost, profitability and revenue growth.

      Of course, engagement is only one factor influencing worker productivity.  A rich academic archive on the direct relationship between productivity and aging exists.  Some studies, mainly those focusing on manual dexterity and work-and-motion observations, suggest worker productivity begins to decline between the ages of 30 and 40.  Others find no significant relationship between productivity and age, as measured by work output and supervisory ratings.  Researcher Neil Charness, for example, studied the tradeoffs between acquired knowledge and mental efficiency and concluded, "Knowledge can compensate, at least partially, for age-related declines in cognitive efficiency.  It does so more successfully when the task is one for which fact retrieval can substitute for computation of answers.  A knowledgeable older adult will outperform a computationally swift but less knowledgeable young adult".

      Ultimately, researchers have concluded, in a wide range of fields, experience in a domain (which is built over time and therefore increases with age) tends to offset the cognitive declines that may occur with age.  Even when it comes to fast-paced jobs that require speed of execution, advancing age may not be a significant disadvantage because communication and decision-making skills can often more than make up for any decline in manual dexterity.

Understanding the Cost Dynamic

      Having assessed the value side of the equation, the researchers turned attention to the cost side.  A key element of the cost analysis was examination of the assumption that older workers cost far more than younger workers (chiefly companies believe, because of higher wages and benefit expense).  The analysis for AARP suggests this assumption may contain more myth than fact in many cases.

      To assess the cost of older versus younger workers, four components were examined.  The components make up 97 percent of total compensation cost, according to Towers Perrin's data.

Cash compensation, including bonuses, was typical for the position.  While average pay tends to increase initially with service and age, this increase in pay can also result from gains in employee competence or movement up the career ladder in an organization.

Employer-paid health-benefits cost (primarily medical coverage representing the vast bulk of these costs).  On the one hand, it is true that health-care claims costs tend to be higher for older workers (1.4 to 2.2 times that for younger workers).

      On the other hand, actual costs also vary widely among individuals, even people within the same age group, because of factors such as health risks and health-care utilization.  In fact, the University of Michigan Health Management Research Center studies found that age may be less important than the incidence of specific health risks in driving up health-care costs.  Common risk factors examined in one study found that annual medical claim costs for individuals with five or more risk factors (such as high blood pressure, obesity, high cholesterol, smoking and alcohol use) were typically at least double the costs incurred by healthier individuals with two or fewer risk factors at virtually all age levels examined.

Retirement benefits represent another significant component of total compensation cost in major U.S. companies.  Plan design heavily drives variation in retirement costs.  Plan design can be structured in various ways to achieve HR goals such as rewarding long-service or career employees.  For example, traditional pension plans (which are declining in prevalence) provide strong incentives for employees to stay with the company until key age and service requirements are met.  Defined-contribution plans (the more common plan type these days) tend to be more cost-neutral with regard to age and are more portable.  Many employers also have limited their retiree medical benefits by freezing eligibility or scaling back these benefits by capping the maximum annual cost the company will cover or reducing the company-paid percentage.

Employer-paid work-life benefits costs (specifically, paid time off) represent about 8 percent of total compensation cost.  Paid time off (e.g., vacation, holidays, personal days) depends on length of service in major companies.

      To ensure employers have a complete picture of the cost of workers aged 50 and older, the study's business case analysis also looked at key one-time, turnover-related costs that are typically incurred when employees leave or join an organization:

The cost of departure, including exit cost (time associated with exit interviewing and expense of processing terminations); departing employee inefficiency (reduced productivity of departing employees in their final months of service with an organization); out-of-pocket costs for finding replacements (search fees, for instance); and vacancy costs (lost productivity during the average time required to fill the position).

New employee costs, including the cost of hiring (e.g., recruiting, advertising, travel for job interviews and relocation costs), orientation costs (initial training and onboarding) and incoming employee inefficiency (e.g., reduced productivity until a new employee gains proficiency in the job).

      Analysis was completed by examining separately the cost impact of doubling the retention and attraction of workers aged 50 and older (from 20 percent to 40 percent of the pool of employees to be hired or retained).  The results of these comparisons show that the cost impact of hiring and retaining more older workers can be quite modest:

Less than 3 percent for increasing retention of workers aged 50 and older in these positions in the four industries studied.

Only about 1 percent for increasing attraction of workers aged 50 and older in these positions.

      What's more, because turnover costs can be as much as 50 percent or more of annual pay for many positions, the analysis concluded that the benefits of a stable workforce and avoiding turnover cost can often exceed the incremental compensation and benefit cost for workers aged 50 and older.

      To develop meaningful cost comparisons, cost analysis was focused on specific positions in four key industries.  These four were selected because of their size, importance to the economy and their wide range of workforce demographics and talent needs:


Financial services

Health care


Balancing Value and Cost

      Bottom line:  Retaining or hiring additional older workers may not cost much more than retaining or hiring a younger group, and these workers can offer important performance advantages in the right roles as a result of their enhanced skills, experience, maturity and engagement.

Seizing the Opportunity

      How can organizations make the most of their experienced talent and turn the challenge of the aging workforce into an opportunity?  From their experience consulting to leading organizations, the authors believe the answer lies in understanding the current, and future, workforce composition and offering the right package of rewards and other programs to attract, retain and engage the people an organization needs.  The opportunity also exists to align employee and customer demographics and to become a chosen employer for the multiple generations represented in today's workforce.

      For example, some companies may be able to escape the anticipated talent crunch entirely if today's 50-and-older workers do, in fact, stay in the workforce longer than previous generations.  The trend toward earlier retirement seems to be reversing.  However, whether any organization will be successful in retaining its baby boomer talent will depend on offering rewards that effectively meet the needs of older workers.  The research shows these include competitive health-care and retirement benefits as well as important intangibles like work-schedule and work-location flexibility and respect for employee contributions.

      Health-care and retirement benefits top the list of what 50-and-older workers at large companies look for in deciding whether to stay with an organization, although intangibles like work-life balance, the opportunity to work with high-caliber colleagues and on-the-job recognition also play significant roles.

      To compete successfully for talent as the coming demographic shift unfolds, employers will need to create a work environment that is welcoming and stimulating for employees of all ages.  And they will need to offer the kinds of flexible job opportunities that respond to a broad range of employee preferences and needs.

      AARP's 2003 survey of more than 2,000 workers aged 50-70 sheds light on specific attributes workers 50 and older are looking for in the workplace.  Among those interested in working in retirement, the most important aspects include:

An environment in which their opinions are valued and in which they can gain new skills and experiences

The ability to choose their hours, take time off to care for relatives and work from home

An organization that allows people aged 50 and older to remain employed for as long as they want to continue working

The opportunity to have new experiences and learn new skills

Access to good health benefits.

      Organizations that offer the right mix of rewards and can structure or redesign jobs to match what 50-and-older workers are looking for will likely have a large, and growing, pool of talent available to them as demographic forces take hold.

How Employers Are Responding

      How are major employers responding to the emerging talent challenges and opportunities posed by shifting demographics?  Although the majority are taking some action, almost one-third of these employers are not yet addressing the issue.

      Because of regulatory impediments to formal phased retirement programs, a growing number of companies are implementing innovative strategies for bringing recent retirees with needed skills back into the workplace.  Examples that have been profiled recently in various news reports include the following:

Monsanto offers part-time re-employment opportunities to workers who have been retired from the company at least six months.  Workers who take the offer suffer no loss of retiree benefits.

SSM Health Care, a large Catholic hospital system, is addressing its nursing shortage by offering retired workers the opportunity to return to work with full pension benefits.  They can come back to the organization as soon as one day after they retire.  Workers can retire as early as age 60 and continue to work in the system under this program, which has received an exemption from the IRS.

A program called YourEncore helps organizations hire highly skilled retirees such as scientists, engineers and product developers on a contract basis.  Proctor & Gamble and Eli Lilly established the program in 2003, and it serves as an employment agency for retirees with specialized skills.  YourEncore functions independently of the employers, contracting with them and placing retirees on short-term assignments with the participating companies.

      Some companies are using increasingly innovative mentoring and related programs to help retain a portion of the tacit knowledge possessed by experienced employees.  Examples include the following:

Dow Chemical has had a formal mentoring program in place for a decade.  Mentors in the program meet regularly with a small group of protégés to share insights and experiences and check progress.

Northrop Grumman has established several "communities of practice" to facilitate knowledge sharing.  Community sessions take place via online and regular in-person meetings.  The communities often cut across disciplines and divisions to encourage participants to think beyond organization lines.

      For organizations that are beginning to realize aging workforce issues, here is a starting point to help a company avoid a demographically driven talent shortage in the not-too-distant future:

Look at workforce makeup.  Although relatively few companies thus far have taken a close look at how current demographic trends are likely to affect their future talent needs, more companies are starting to focus on this issue.  Consider factors such as the numbers of employees in various age groups and the percentage likely to retire in three to five years, and use this information to plan recruiting, retention and knowledge-transfer strategies.

Understand future talent requirements versus current supply.  Examine the company's workforce makeup and staffing trends (e.g., turnover, retirement patterns, etc.) and define its future talent needs, based on a careful analysis of the company's business plans.

Explore best practices.  Companies are already moving aggressively to attract and keep 50-plus workers through targeted recruitment and other programs.  Some innovative approaches already are taking shape; a few are noted in this paper.

      Our most important piece of advice is perhaps the simplest:  Start now.  Companies that do so will be in a better position to attract and retain talent as workforce demographics shift.  Moving quickly may mean seizing the competitive high ground when it comes to taking maximum advantage of the age 50 and older workforce.