M

uch 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 10 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, todays
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
The Aging Workforce:
Challenge or Opportunity?
Roselyn R. Feinsod
Towers Perrin
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WorldatWork Journal third quarter 2006
Thomas O. Davenport
Towers Perrin
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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 todays
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 Perrins research into the factors that shape
employee behavior and, specifically, employee
engagement. As Figure 1 shows, the broad 2003 U.S.
workforce survey data suggest that motivation tends to
increase with age.
This phenomenon emerges across a variety of
industries (See Figure 2 on page 16).
Towers Perrins 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, as the data in Figure 3
(on page 16) indicate, 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 industrys 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.
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FIGURE 1 Employee Motivation in All Industries, by Age
Average Motivation Score*
0 20 40 60 80 100
Age 18-29
71.2
Age 30-44
74.8
Age 45-54
75.8
Age 55 and older
78.4
All ages
74.8
*Tower Perrins motivation score is based on a 100-point scale.
Source: 2003 Towers Perrin Talent Report, based on a random survey of more than 35,000
employees working for large U.S. companies (i.e. Fortune 1000 companies and equivalents)
2005 Towers Perrin; reprinted with permission.
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. Figure 4 on page 17 indicates how
engagement affects employee views of their contributions
to the business.
Of course, engagement is only one factor influencing
worker productivity. A rich academic archive on the
direct relationship between productivity and aging exists.
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WorldatWork Journal third quarter 2006
FIGURE 2 Employee Motivation, by Industry and Age
Average Motivation Score*
0% 20 40 60 80 100%
Energy
71.9
74.0
75.3
*Tower Perrins motivation score is based on a 100-point scale.
Source: 2003 Towers Perrin Talent Report, based on a random survey of more than 35,000 employees working for large U.S. companies (i.e. Fortune 1000 companies and equivalents)
2005 Towers Perrin; reprinted with permission.
77.4
74.7
Financial services
72.5
74.9
77.6
77.8
75.3
Health care
70.2
77.4
78.2
80.8
77.1
Retail
69.5
75.9
76.7
73.3
74.4
Age 18-29 Age 30-44 Age 45-54 Age 55 and older All ages
FIGURE 3 Engagement Across Age Groups
0% 20 40 60 80 100%
Ages 18-29
18
21
Source: Riding the Wave of Growth and Restructuring: Optimizing the Deal for Todays Workforce, 2005 Towers Perrin Global Workforce Study U.S. Report, based on a random survey of
approximately 60,000 employees working for large U.S. companies (i.e., Fortune 1000 companies and equivalents) 2005 Towers Perrin; reprinted with permission.
Ages 30-44
16
22
Disengaged Moderately engaged Highly engaged
Ages 45-55
14
21
Ages 55 and older
14
22
61
62
65
64
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 (Charness 2000).
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 wage and benefit expense). The analysis for
AARP (Towers Perrin 2005) 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 Perrins data.
0 Cash compensation, including bonuses, were 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.
0 Employer-paid health-benefits costs (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), as Figure 5 indicates.
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FIGURE 4 How Engagement Affects Employee Views of Their Contributions to the Business
Positively impact quality
42
86
Source: Riding the Wave of Growth and Restructuring: Optimizing the Deal for Todays Workforce, 2005 Towers Perrin Global Workforce Study U.S. Report, based on a random survey of
approximately 60,000 employees working for large U.S. companies (i.e., Fortune 1000 companies and equivalents) 2005 Towers Perrin; reprinted with permission.
Positively impact cost
24
68
Disengaged Moderately engaged Highly engaged
Positively impact customer service
36
76
Positively impact profitability
18
61
Percentage of employees agreeing with statement
0 20 40 60 80 100
Positively impact revenue growth
16
55
68
42
55
33
29
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 (Edington 2001).
0 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.
0 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 studys
business case analysis also looked at key one-time,
turnover-related costs that are typically incurred
when employees leave or join an organization:
0 The cost of departure, including exit cost (time
associated with exit interviewing and expense
of processing terminations); departing employee
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WorldatWork Journal third quarter 2006
FIGURE 5 Annual Aggregate Medical Claim Costs for Employees and Dependents, by Age of Employee
$0 2,000 4,000 6,000 8,000
Age 25-29
$2,148
Age 30-34
$3,206
Age 35-39
$3,759
Age 40-44
$4,130
Age 45-49
$4,789
Source: 2003 Towers Perrin Talent Report, based on a random survey of more than 35,000 employees working for large U.S. companies (i.e. Fortune 1000 companies and equivalents)
2005 Towers Perrin; reprinted with permission.
Age 50-54
$5,685
Age 55-59
$6,617
Age 60-64
$7,622
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).
0 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:
0 Less than 3 percent for increasing retention of
workers aged 50 and older in selected positions
in the four industries studied
0 Only about 1 percent for increasing attraction of
workers aged 50 and older in these positions.
Whats 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:
0 Energy
0 Financial services
0 Health care
0 Retail.
Balancing Value and Cost
Summary findings for positions in the four target
industries appear in Figure 6 (on page 20).
Bottom line: Retaining or hiring additional older
workers may not cost much more than retaining or
hiring 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 todays workforce.
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WorldatWork Journal third quarter 2006
The cost impact
of hiring and
retaining more
older workers can
be quite modest.
For example, some companies may be able to escape
the anticipated talent crunch entirely if todays 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 (See Figure 7 on page 21).
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.
AARPs 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 (See Figure 8 on
page 21). Among those interested in working in
retirement, the most important aspects include:
0An environment in which their opinions are valued
and in which they can gain new skills and experiences
0The ability to choose their hours, take time off to care
for relatives and work from home
0 An organization that allows people aged 50 and older
to remain employed for as long as they want to
continue working
0The opportunity to have new experiences and learn
new skills
0 Access to good health benefits.
Organizations that offer the right mix of rewards and
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Key value differentiators
0 Higher motivation
0 Skilled talent shortages
0 Experience and
knowledge premium
0 Knowledge transfer
0 Higher motivation
0 Lower turnover
0 Experience and
knowledge premium
0 Alignment with
customer base
0 Higher motivation
0 Skilled talent shortages
0 Experience and
knowledge premium
0 Alignment with
customer base
0 Lower turnover
0 Alignment with
customer base
0 Scheduling flexibility
One-time turnover cost as
percent of total annual
compensation cost
38% 33% 29% 39%
Estimated difference in
average per-employee total
compensation costs
associated with doubling the
retention of workers age 55
with 20 years of service from
20% to 40%
3% 1% 2% 2%
Estimated difference in
average per-employee total
compensation costs
associated with doubling the
percentage of new hires age
55 from 20% to 40%
1% <1% 1% 1%
FIGURE 6 Value and Cost Comparisons - Summary of Analysis of Focused Retention and Attraction
Source: 2003 Towers Perrin data for large U.S. employers (i.e., Fortune 1000 companies and equivalents) and analysis of data from the Saratoga Institute and other resources. For more data,
methodology and assumptions, see Section III of the full report 2005 Towers Perrin; reprinted with permission.
Position (Industry)
Engineer (Energy)
Sales Manager
(Financial Services)
Nurse (Health Care) Store Manager (Retail)
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? Figure 9 on page 22 shows the most
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WorldatWork Journal third quarter 2006
FIGURE 7 Top Five Factors Employees 50+ in Large Companies Consider in Deciding to Stay With a Company
0% 20 40 60 80 100%
Competitive health-care benefits package
61
Competitive retirement benefits package
54
Work-life balance
35
The caliber of people with whom I work
28
Recognition for work
27
Source: 2005 Towers Perrin online survey of approximately 1,500 randomly selected employees age 50-plus working for large U.S. companies (i.e. Fortune 1000 companies and equivalents)
2005 Towers Perrin; reprinted with permission.
FIGURE 8 Importance of Selected Benefits and Employer Characteristics in Retirement Work
0% 20 40 60 80 100%
Working in an environment where employee opinions are valued
66
Being able to take time off to care for grandchildren, parents or other relatives
57
Being able to set your own hours
56
Working for a company that lets its older employees remain employed for as long as they wish to work
58
Having new experiences
41
Source: Staying Ahead of the Curve 2003: The AARP Working in Retirement Study, an AARP telephone survey of 2,001 workers ages 50-70; table is based on the 1,020 workers who expected to
work in retirement and had not yet retired. 2005 AARP; reprinted with permission.
Being able to learn new skills
41
Working for a company that offers employment opportunities to retirees
52
Working for a company that offers good health benefits
56
Working for a company that offers health benefits to retirees
55
Being able to work a reduced schedule for a period of time before retiring completely
39
Working for a company that offers a good pension plan
44
Being able to work from home
31
Working for yourself or starting your own business
30
21
29
30
25
41
39
24
18
18
33
19
27
20
13
14
14
17
18
20
24
26
27
28
37
42
50
Very Important Somewhat Important Not Important
common approaches in use among U.S. employers,
according to a Society for Human Resource Management
(SHRM) survey of more than 400 HR executives. Although
the majority are taking some action, almost one-third of
these employers are not yet addressing the issue.
Because of the 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:
0 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.
0 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.
0 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:
0 Dow Chemical has had a formal mentoring program
in place for a decade. Mentors in the program meet
regularly with a small group of protgs to share
insights and experiences and check progress.
0 Northrop Grumman has established several
communities of practice to facilitate knowledge
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WorldatWork Journal third quarter 2006
FIGURE 9 How Organizations are Preparing for the Possibility of a Shortage of Workers Due to the Retiring Baby Boomer Generation
0% 10 20 30 40 50%
Increased training
36
Succession plans/replacement charts
29
Flexible scheduling
21
Created bridge employment
20
Capture institutional memory/organizational knowledge
18
Source: Older Workers Survey of more than 400 human resources executives in U.S. companies, Society for Human Resource Management, 2003. 2005 AARP; reprinted with permission.
Increased recruiting
16
On radar screen
15
Phased/gradual retirement
10
Do nothing
32
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 organizational 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:
0 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.
0 Understand future talent requirements versus current
supply. Examine the companys workforce makeup
and staffing trends (e.g., turnover, retirement patterns,
etc.) and define its future talent needs, based on a
careful analysis of the companys business plans.
0 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.
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WorldatWork Journal third quarter 2006
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W1: Introduction to Work-Life Effectiveness
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Understand the Impact of Work-Life Effectiveness.
Authors
Roselyn R. Feinsod, F.S.A., a principal in the Stamford office of Towers Perrin, and
Thomas O. Davenport, a principal in the firms San Francisco office, led the
research team that conducted the recent Towers Perrin study for AARP discussed in
this paper. Towers Perrin is a global professional services firm that helps
organizations around the world optimize performance through effective people, risk
and financial management.
References
Charness, Neil. (2000). Can Acquired Knowledge Compensate for Age-Related
Declines in Cognitive Efficiency? Psychology and the Aging Revolution: How We
Adapt to Longer Life (Editors: Qualls, Sarah Honn and Norman Abeles). Washington,
D.C.: American Psychological Association.
Edington, Dee W. (2001). University of Michigan Health Management Research Center
(2001). American Journal of Health Promotion
Towers Perrin. (2005). The Business Case for Workers Age 50+: Planning for
Tomorrows Talent Needs in Todays Competitive Environment. A report for AARP.
www.aarp.org/employerresourcecenter.
Reprinted from WorldatWork Journal, third quarter
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