What’s so special about 65?

As baby boomers think about calling it a career, phased retirement may become more appealing for employers facing staff shortages.

It may be impossible to stop valuable employees from retiring, but it might be possible to stall them.

An already tight labour market is only going to get tighter as the large cohort of baby boomers moves inexorably toward retirement. Prescient HR departments will begin developing, as soon as possible, ways to keep them at work for as long as possible, says Daniel McCaw, retirement consultant and CEO of William M. Mercer Limited.

This is likely to lead to a much greater interest in phased retirement programs; flexible work arrangements designed to make staying at work worthwhile for employees who no longer need to be there.

“There’s nothing magic about 65,” McCaw says. This is particularly true in the knowledge economy where people can still make valuable contributions past the age of mandatory retirement. In the United States, there is already a move afoot to raise the age for social security eligibility from 65 to 67 and the trend toward early retirement seems to have reversed itself.

Similarly, government and employers in Canada should take steps to keep people in the workforce longer. Not only will it help staff-starved businesses, but it will also relieve some of the stress on the public pension system. Right now the Canadian pension fund is supported by five contributing working people for every one retired person receiving benefits. As the baby boomers move into retirement, that will be halved, McCaw says.

Phased retirement programs almost invariably involve some form of reduced hours, but the retirement system in most provinces discourages employees from working a shorter week because it would hurt their pension when they retire outright.

In Quebec, legislation is already in place for employees between 55 and 70 to work part-time and supplement their wages with partial pensions while still accruing benefits. Similar legislation is bound to come to the rest of the country, McCaw predicts.

In the meantime, employers can begin to introduce programs on their own to make it financially worthwhile for employees to use a phased retirement program. Some employers are willing to pay more than the employee’s going rate just to keep someone around, he says.

While it wasn’t so obvious 10 or 15 years ago, the inevitable laws of demographics made it plain enough for everyone to see that it would be a problem eventually. Similarly, there is no denying that retiring baby boomers are going to cause a huge problem for employers and they should begin to prepare now, says McCaw.

However, McCaw and other retirement experts agree the challenge is figuring out how to keep employees in the workforce longer.

“A lot of experts love it (phased retirement), but it’s just not widely practised,” says Malcolm Hamilton, a principal with William M. Mercer. Even in Quebec where the government has already begun to take steps to encourage people to retire a little later.

“I’m sceptical that it’s a panacea,” he says. “There is still little evidence that people want to work longer. Most people want to retire early.”

So while there may be appeal to the idea, achieving a successful phased retirement program will be difficult. For one thing, many pension plans encourage early retirement.

“The major thing employers have done is in most defined benefit pension plans there are very generous provisions for early retirement. I think a lot of employers are looking at that now saying, ‘Boy would I like to rethink that one,’” says McCaw.

“The last thing people should be doing is enhancing early retirement provisions even though employees have a pretty high demand for them.” It’s reached the point where early retirement is viewed essentially as an entitlement and therefore difficult to reverse. “Employers have to do some creative thinking about what kinds of tradeoffs or partial retirement provisions they could offer employees,” McCaw says. “Employers may want to consider some trade-off,” perhaps in the form of some other type of benefit such as better spousal benefits.

The Royal Bank of Canada has been enjoying success with its phased retirement program. Employees can work shortened work weeks of three or four days without taking the associated hit to their pension contributions, the difference picked up by the company. For every year of service, employees can use the program for a month, up to a maximum of 30 months. Salary is prorated accordingly, but often for employees approaching retirement they are more concerned about the impact to their pension should they move to a shortened week. “A lot of people don’t mind reducing their salary but don’t want to hurt their pension,” says Blair Pollard, manager of HR planning.

There is a cost to supporting the pension, says Pollard. “But the big benefit is keeping some of this talent on longer than they would otherwise.” That extra time can then be used to prepare for that person’s full retirement, finding a replacement and training to take over that role, training which of course can be offered by the imminent retiree. “It really gives you the kind of time you wouldn’t have under other circumstances.”

While the real retirement crunch is still a few years off and the Royal Bank is still going through downsizing of their own, Pollard still believes businesses may soon be forced to reconsider the value of older workers. “It’s a mistake to assume that people near retirement are yesterday’s news,” he says. Businesses will unquestionably be interested in the possibility of keeping people at work longer. There will probably be more companies moving toward defined contribution plans, he says. With a defined benefit plan, once a contributor reaches the maximum benefit, the employee is in effect only being paid the difference between his salary and pension since there is no benefit in continuing to contribute to the plan.

According to Sheryl Smolkin of Watson Wyatt, phased retirement is not a passing fad. Recent research by the consulting firm in the U.S. revealed a growing number of companies considering the option as a way to address impending labour shortages.

While the number of phased retirement models may only be limited by the creativity of HR departments, their success will also be predicated on a shift in thinking about the value of older employees and dispelling myths, Smolkin says.

Flexible work arrangements for older workers may require job re-design. An older worker may be more willing to give up managerial responsibilities to spend time on the more substantive aspects of the job, for example.

Training should be made available to older workers who want to take on new roles late in their careers. Some employers are reluctant to invest in training older employees because they believe older staff will not be with the company as long as younger workers. But research shows that tenure with an employer is seldom shorter than that of today’s highly mobile young worker.

Phased retirement

Still, companies appear reluctant to embrace phased retirement and part of the problem may lie in an uncertainty of the benefits of the program, since in the past phased retirement was considered a good way to get people out of the workforce, says Hamilton.

“It’s not even clear what phased retirement is supposed to solve,” says Hamilton. Some say it is designed to give opportunities to younger people, while others say it would allow people to work longer. “Simultaneously, people were confident it would allow people to retire both older and younger,” he says.

That said, it does seem likely that more companies will become interested in phased retirement, he says, though a number of fundamental changes will be necessary to make it possible. Aside from the government removing financial disincentives, employers will have to provide good and interesting jobs for employees, and most importantly older workers are going to have to want to work.

“Employers will need to attract and rearrange things to make it interesting to stay on.” The greatest challenge will be motivating 60-year-old workers, finding something they want to do rather than retire. “My gut feeling is that most people when they get to 60 want to retire.”

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