Australia: Economic Conditions Forcing Older Workers to Defer Retirement

According to news reports, research conducted by Rice Warner indicates that deteriorating financial conditions will force 40,000 retirees in Australia to defer retirement and move into part-time work and others who retired since 2007 will return to the workforce.

Writing in The Australian, Adele Ferguson also says that "seniors groups believe the deterioration in retirement savings over the past year will force the Rudd Government to scale back the way it calculates earnings on retirees' investments."

Sources: Smart Company "40,000 retirees to shelve retirement plans – here’s how you can benefit" (January 5, 2009); The Australian "40,000 retirees forced to keep working because of economic downturn" (January 3, 2009)

McKinsey Study Suggests Boomers Have To Keep Working for Both Their Good and for Good of Global Economy

According to a new study from the McKinsey Global Institute, the only realistic way to prevent aging boomers from experiencing a significant decline in their living standards and becoming a multidecade drag on U.S. and world economic growth is for boomers to continue working beyond the traditional retirement age. This, in turn, will require important changes in public policy, business practices, and personal behavior.

The authors--Eric D. Beinhocker, Diana Farrell, and Ezra Greenberg--found that two-thirds of the oldest boomers are financially unprepared for retirement, and many are not even aware of their predicament, and that US labor force participation rates are declining: "Without an unexpected burst of productivity growth or a significant upsurge in investment per worker, the aging boomers’ reduced levels of working and spending will slow the real growth of the US GDP from an average of 3.2 percent a year since 1965 to about 2.4 percent over the next three decades."

While many boomers do want to continue working, a number of institutional and legal barriers-—health care costs, labor laws, pension regulations, and corporate attitudes toward older workers—-could prevent them from prolonging their careers. Thus, the government must reallocate health insurance costs for older workers, businesses and boomers must agree on more flexible work arrangements, policy makers must reform private pensions, and Social Security must remove disincentives to remaining in the workforce.

Source: McKinsey Quarterly "Why baby boomers will need to work longer " (November 2008)

Survey: Economic Environment Leading to Delayed Retirements in United States

A survey of retirement plan sponsors conducted by International Foundation of Employee Benefit Plans finds that plan participants appear to be responding to the current economic and financial crisis by delaying retirement, saving less, and re-aligning their retirement investments. Specifically, 46% of plan sponsors stated their employees and plan participants are considering delayed retirement, and 38% noted that their employees are concerned about not saving enough for retirement.

In addition to reporting a jump in the number of plan participants considering delaying retirement, the report "Plan Sponsors and Participants: Partners in Times of Crisis" finds that a quarter of plan sponsors citing an increase in the actual number of eligible workers postponing retirement. With respect to investments, nearly 30% of respondents report that defined contribution plan participants have decreased their overall retirement plan contributions and 34% believe plan participants have reduced their exposure to equities in favor of less risky investment alternatives.

Source: International Foundation of Employee Benefit Plans Press Release (October 29, 2008)

World Ecnomic Forum Develops Scenarios To Help Aging Societies Deal with Pensions and Healthcare

The World Economic Forum has issued a report arguing that the unprecedent rate of aging in the world is undermining the financial sustainability of traditional pension systems and healthcare and that urgent action is required in many countries. Through the use of scenario thinking, "The Future of Pensions and Healthcare in a Rapidly Ageing World-–Scenarios to 2030" aims to "bring the long-term consequences of ageing societies closer to the realities facing governments, businesses and NGOs today, and help everyone prepare for the challenges and opportunities that they imply."

In particular, the Forum argues that indicates that new forms of collaboration between key stakeholders--individuals, financial institutions, healthcare providers, employers and governments--will be critical to finance the ongoing well-being of current and future generations in a sustainable manner.

Source: World Economic Forum Press Release (September 23, 2008)

U.S. Economic Troubles Leading to Delays in Retirement

Writing for the Wall Street Journal, Jennifer Levitz reports that "many aging Americans are delaying retirement, electing labor over leisure in uncertain times" as the falling real-estate and stock markets erode their savings. Among other things, she notes how as houses decline in value, fewer people feel confident enough to retire, even if they plan to continue living in them, and as the stock market declines, older workers don't have years to make that up. As a result, they worry that their investments will diminish to the point that they won't have enough money to get through retirement.In addition to anecdotal evidence, she writes:

In February, the proportion of people ages 55 to 64 in the work force rose to 64.8%, up 1.5 percentage points from last April. That translates to more than an additional million people in the job pool, according to the U.S. Labor Department. The ranks of those 65 and over in the work force rose to 16.2% from 16% in the same time span -- meaning 212,000 more hands on deck. So far, the numbers for March continue to show a "sharp" increase, says Steve Hipple, a department economist.

Levitz also reports that investment advisers and retirement planners at more than a dozen firms "say they are seeing large numbers of older workers put off retirement as the housing and stock-market troubles have deepened."

Source: Wall St. Journal "Americans Delay Retirement As Housing, Stocks Swoon" (April 1, 2008); also reprinted in Atlanta Journal Constitution (April 1, 2008)

Illinois: Will County Report Warns Aging Workforce Could Impact Economy

The Workforce Investment Board of Will County, Illinois, has released a report saying that it is time to pay attention and take action on the county's aging and shrinking workforce as the issue could impact the county's economy. The report identifies specific sectors of business and industry in the county where the aging population (50 and older) is more prevalent: education (18.1%), manufacturing (15.2%), healthcare (12.7%), transportation/warehousing/logistics (12.8%), and finance-insurance (12.4%).

Pat Fera, manager of the Workforce Investment Board, notes that the report also includes a number of suggestions to help business and industry prepare for the retirement of Baby Boomers and the labor shortage:

Businesses will be competing more than ever for skilled workers--and the smartest businesses are taking steps to understand what their future workforce will want and likely demand. But there is no ‘one size fits all' strategy that insures companies they can continue to have the workforce necessary to remain competitive in our global economy. They need to assess their current workforce and seek out creative strategies to maintain the knowledge base of their aging workforce while attracting new workers to their industry.

Source: Workforce Investment Board of Will County "Impact of a Maturing Workforce in Will County" (December 2007)

Additional Source: Morris Daily Herald "Boomer retirement will impact Will Co. labor force" (February 14, 2008)

OECD Report on Netherlands Includes Focus on Increasing Participation of Older Workers

The Organisation for Economic Co-operation and Development(OECD), in issuing its "Economic survey of the Netherlands 2008" making assessments and recommendations on the main economic challenges faced by the Netherlands, has specifically focused, among other things, on the role of older workers in the Dutch economy. Although it finds that it has made a strong comeback, the economy is now facing labour shortages, related to the greying of the population and the continued weak labour market-participation of several groups.

OECD recommendations include the adoption of incentives to increase participation in the labour market, including at older ages, so as to widen the revenue basis and, to encourage older workers, strengthen job search requirements and continue making the tax-benefit system more work-friendly.

In his remarkes at a joint press conference held with the Minister of Economic affairs, OECD Secretary General Angel Gurría said:

To further increase participation of older workers, the government should move ahead with its planned reforms and make them more encompassing. Particularly, the new levy on pensioners who stopped working before the official retirement age could be implemented faster and not be applied only to higher income levels. In addition, measures should be taken to reduce the possibility of using the unemployment benefit system, in combination with generous severance payments, as a transition into early retirement.

Sources: OECD Executive Summary (January 31, 2008); NIS News Bulletin " OECD Urges Netherlands to be Tougher on Welfare Recipients" (February 1, 2008)

Federal Reserve Survey Evaluates Changing Demographics in Labor Force

A paper written by Riccardo DiCecio, Kristie M. Engemann, Michael T. Owyang, and Christopher H.Wheeler for the Federal Reserve Bank of St. Louis reviews the evidence of changing labor force participation rates, estimates the trends in labor force participation over the past 50 years, and finds that aggregate participation has stabilized after a period of persistent increases. In examining the disparate labor force participation experiences of different demographic groups, they note that the aging of the baby-boom generation is is likely to lower aggregate labor force participation rates (LFPRs) for the next several decades.

As baby boomers enter successive age groups, their LFPR should fall dramatically. For instance, the 55 to 59 age group had an LFPR of 72 percent in 2006, and the 60 to 64 age group had an LFPR of approximately 53 percent. Among those 65 and older, the LFPR was just over 15 percent. These numbers, coupled with the increasing proportion of the U.S. population beyond their prime working age over the coming years, suggest that successive generations will be unable to compensate for the baby boomers’ exit from the labor force and U.S. labor supply will decline.

In conclusion, they write "the principal challenge in the presence of a declining LFPR, therefore,will be to find ways to enhance the productivity of the individuals that do choose to work."

Source: Federal Reserve Bank of St. Louis Review "Changing Trends in the Labor Force: A Survey" (January/February 2008)

Economic Analysis by Federal Reserve Bank of Boston Suggests Older Workers Face Reduced Wages

A working paper issued by the Federal Reserve Bank of Boston provides strong empirical support for this hypothesis that the increasing relative supply of older workers would lower the wage premium paid for older, more experienced workers.

One consequence of demographic change is substantial shifts in the age distribution of the working age population. As the baby boom generation ages, the usual historical pattern of there being a high ratio of younger workers relative to older workers is increasingly being replaced by a pattern of there being roughly equal percentages of workers of different ages.

According to "Population Aging, Labor Demand, and the Structure of Wages" by Margarita Sapozhnikov and Robert K. Triest, econometric estimates imply that the size of one’s birth cohort affects wages throughout one’s working life, with members of relatively large cohorts (at all stages of their careers) earning a significantly lower wage than members of smaller cohorts. The cohort size effect is of approximately the same magnitude for men and for women. Their results suggest that cohort size effects are quantitatively important and should be incorporated into public policy analyses.

These results imply that older workers will face increasingly unfavorable relative labor market conditions as their ranks become crowded by the baby boom generation in the near future. Although the slowing of labor force growth may create tight labor markets, the pecuniary benefits of labor market tightness will disproportionately accrue to younger, less experienced workers. Loss of defined benefit pensions and increases in Social Security’s normal retirement age may result in baby boomers retiring at older ages than did the birth cohorts that immediately preceded them, but the boomers will suffer from the same cohort crowding effects on wages, as they consider retirement that they did earlier in their careers.

Source: Federal Reserve Bank of Boston Working Paper No. 07-08 (Abstract) (August 27, 2007)

United States: Federal Reserve Bank Study of Aging Demographics Suggests Retaining Older Workers Can Help Reduce Decline in Consumption Rates

In a paper discussing the consequences of population aging from a macroeconomic perspective and considering alternative paths the U.S. economy could follow in response to population aging, three Federal Reserve Bank economists conclude that, barring a significant increase in labor force participation, population aging will lead to a reduction in per capita consumption relative to a baseline in which the demographic composition of the population does not change.

Among other things, Louise Sheiner, Daniel Sichel, and Lawrence Slifman suggested that an alternative to reducing consumption is to raise output by increasing labor force participation and presented the results of simulations with higher labor force participation by the elderly. Accordingly, one of the main macroeconomic policy questions for the nation is "How much can we (and should we) raise labor force participation?"

In all likelihood, a rise in participation rates for workers aged 55 and over would be necessary. An increase of this magnitude would probably require major adjustments to both business and government policies. For example, businesses could re-structure their operations to include more opportunities for part-time or flexible work schedules, which are often appealing to older workers, or the government could make adjustments to such things as the age at which workers are first entitled to receive Social Security benefits (the early retirement age) and the age at which they are eligible to receive Medicare as well.

Source: The Federal Reserve Bank Finance and Economics Discussion Series 2007-1: "A Primer on the Macroeconomic Implications of Population Aging" (January 16, 2007)

Federal Reserve Board Chairman Addresses the Aging Demographics

Federal Reserve Board Chairman Ben S. Bernanke
spoke before The Washington Economic Club on "The Coming Demographic Transition: Will We Treat Future Generations Fairly?" He said that viewing the demographic change from a broader economic perspective "shows clearly that adequate preparation for the coming demographic transition may well involve significant adjustments in our patterns of consumption, work effort, and saving."

Ultimately, the extent of these adjustments depends on how we choose--either explicitly or implicitly--to distribute the economic burdens of the aging of our population across generations. Inherent in that choice are questions of intergenerational equity and economic efficiency, questions that are difficult to answer definitively but are nevertheless among the most critical that we face as a nation.

His remarks went on to demonstrate that the question is how the burden of an aging population is to be shared between our generation and the generations that will follow us and to point out that a failure to prepare for the changes will have substantial adverse effects on the economic welfare of the United States and its citizens.

Source: Federal Reserve Board Remarks by Chairman Ben S. Bernanke (October 4, )2006

Federal Reserve Study to Show Impact of Baby boom Retirement

A new Federal Reserve study, to be published in July, finds that the retirement of the Baby Boom generation will force far-reaching adjustments in the way the economy works. Preliminary results of "The Recent Decline in Labor Force Participation and its Implications for Potential Labor Supply" from The Brooking Institution suggest that forecasts for everything from growth and employment to corporate profits and interest rates will have to be recast.

According to a report on the preliminary results from Bloomberg, the study has shaken economists' forecasts by suggesting the U.S. economy will have to decelerate much more over the next decade than most now expect. "The study projects what the authors call a 'conservative' 3 percentage-point decline over the next 10 years in the labor force participation rate--the percentage of people who are either working or looking for work." However, other economic forecasts predict much smaller drops in the participation rate.

Source: "`Revolutionary' Fed Study Has Economists Rethinking Forecasts" Bloomberg.com (April 13, 2006)