(Written in August 2006 as part of my course work)
The term "baby boomer" is given to the generation of Americans born in the years immediately following World War II when there was a marked increase in the birth rate of the United States population. This cross-section of the country is a huge demographic comprising of almost 83 million people, which is around 25% of the entire population. The first of the baby boomer generation will start retiring in a few years. It is estimated that around 35 million boomers will retire between 2000 and 2020. [GAN]
This situation has huge implications for the economy as well as large and small corporations throughout the United States. The United States is, by far, the largest economy in the world and the economies of other countries are significantly tied to the strength of the US economy. It is the leader in global investment and capital markets. Hence, the phenomenon of baby boomers could have a huge global impact.
This essay discusses the effect on corporations, primarily US-based. There is a direct effect on most companies in the form of a significant portion of the workforce retiring, causing loss of skill and experience. There is an indirect effect in terms of the changing state of the economy and the consumer habits of retired baby boomers. In my research, I have attempted to find what companies can do to shield themselves from the negative effects of this shift and how they may be able to benefit from some of the consumer shifts that can happen.
Most companies that employ baby boomers face significant attrition issues. This is especially true for larger companies and those that have been around for a longer time. When any employee leaves a company, there is a significant loss to the company in terms of loss of skills and experience and the amount of time and effort required to replace the employee in hiring and re-training. When a senior employee retires or resigns, these problems are compounded several times. Unfortunately, this phenomenon has been ignored and submerged by other short-term issues in the planning strategies of many companies.
Baby boomers, who have been with the company for a longer time, usually will be occupying key organizational posts, not only at the top management level, but also in the middle management ranks and, to a lesser extent, but not insignificantly, in the rank and file. They carry both explicit and implicit (sometimes called "tacit") knowledge of the organization, its culture, values, missions, successful ways of working and understanding of now to channel its resources. Each person retiring leaves a huge void to be filled.
To provide an example, it has been estimated by the Labor Department that 50% of employees in federal government jobs, and more significantly, 70% of senior managers will be eligible to retire within the next five years. In addition, they estimate that 55% of them will actually retire or leave their jobs by 2007. That is not so far away! [WAL] This piece may be good news for those advocating lesser government, but unfortunately the rest of the economy is also in the same shape.
If employee loss was only a company-wide phenomenon, this could be mitigated to some extent by recruiting employees from other companies by various incentives. However, this is a happening within the society that the company is operating in. There will be a huge labor shortage in the country. Hence, there will be few opportunities for the company to hire similarly skilled or experienced persons within the United States. Smaller companies will have a much tougher task as their resources for hiring are limited.
Some experts say that America's baby boomers are accentuating the problem by already taking up several key positions in the workplace because of their sheer numbers and unwittingly obstructing the advancement of younger workers. [LAA] This gives the younger workers less opportunity to face challenges and grow into good executives. When they do get a chance for the top jobs, will they be able to make good decisions? How will that affect the company and the general economic growth in the nation as a whole?
Economists and financial analysts widely differ on the impact of retirement of baby boomers on the economy. There are two major schools of thought - one forecasting catastrophic doom and the other is very optimistic on the outlook for the country's financial system. They are:
As with most situations, the truth is probably somewhere in between and it is much more complex and less predictable than any expert would lead you to believe. Baby boomers have always bucked the trend and there is no saying how they will behave once they retire. Nevertheless, my research has brought up some interesting facts.
Most baby boomers (almost 80%) expect to work in retirement and many of them want to do so not for enjoyment, but for needed income. [ROP] These numbers are even larger for minorities. Many expected retirees are increasingly uncertain of their future and see themselves as working full-time or part-time income to supplement their savings to get them through the last phase of their lives.
The most important inference from this finding is that the number of people (in the economy) who are generating income will not decline as dramatically as one would expect from the demographic trend. This may dampen any overall positive or negative economic effect and hence may only result in "local effects" in various parts of the country.
This gives some breathing room for companies in two ways. One is that they may not have to worry about a direct hit to the economy. It can also allow them to focus on their particular economic spheres of influence and interest. It also gives them the opportunity to understand the motivations of the potential retirees that would affect them the most - their own employees.
The size of the baby boomer generation dictates that old consumers will dominate the future markets with their immense money power. [LAL] The target of marketers will also change from the youth demographic to the older group with their larger purchasing power. Advertising styles may have to undergo a revolution.
But more than that, it will mean that companies have to look closely at their portfolio of services and products and make a determination which of those will be the stars in the new market place. How are the needs of older consumers different? What appeals to them? What may cause them to avoid the purchase?
Some new types of markets may open up. Other markets, like financial planners and retirement counselors [MER] may become huge. Yet others may never see the same growth or revenues again. Companies have an opportunity to analyze the behavior of the early retirees of the Baby Boomers and capitalize on any opportunities. Stock markets may either be hit hard or be flush with money from the spare cash of retirees [CHU]
Some obvious opportunities are in the areas of health care and accessibility. There will be huge shortages of doctors, other health professionals and medical facilities soon if there is no significant growth in medical training and infrastructure. Companies and individuals should invest in those markets as the demand will keep increasing.
Biotechnology and advanced medical equipment are the new stars of the economy. Dangerous diseases will be cured or controlled by non-surgical simple procedures - This is happening right as we speak. Difficult operations are handled in a few hours and the patient walks out of the hospital on the same day.
Companies should invest in market research that will help them identify trends. These trends can be dynamically changing based on external factors like the economy and the effects of globalization. Companies that do that can identify new areas of investment and will be better placed to benefit from the trends.
One of the most visible discussions in the media in recent times has been the debate on Social Security viability. This discussion has assumed very emotional and partisan tones because of its different effects on various segments of society - from the young workers to those nearing retirement to those already collecting benefits.
The part that everyone agrees on is that in the coming years, there will be significant pressure on Social Security and Medicare. When Social Security was created by Franklin Roosevelt in 1935 [WK1], the ratio of working people to retirees was much higher. But this situation has changed and will eventually result in less than 3 working persons to one retiree, therefore placing a huge strain on the Social Security Administration. [KUC]
There are various estimates of when the Social Security Trust Fund will become bankrupt. The recent attempts to resolve the political arguments have not been successful. The key problem is that since every constituency has a different agenda and no one is willing to make any compromises or sacrifices, so the problem lingers. And it looks like it is going to get a lot worse before everyone agrees on a solution or are forced to do something.
How will companies be affected? There are two fundamental options for politicians: Cut benefits and/or increase taxes. A tax-increase solution could have significant impact on the bottom line of corporations. This could result in slower economic growth and employment opportunities. It could also lead to companies looking to hire resources outside the United States, since those resources don't have to pay Social Security taxes. A general tax increase may result in corporations closing their facilities in the United States.
Cutting benefits will affect those retirees with low savings and indirectly affect companies. This may mean lower consumer spending. Another result could be decline in living standards and health and perhaps outright poverty. Retirees could return to low-wage work leading to depressed wages. One quarter of Baby Boomers have failed to accumulate significant savings and may be in danger of falling into and living in poverty after retirement. [SHA] This group will be the most affected by the Social Security financial situation.
On the plus side, the baby boomer generation has an average higher income than the generation of their parents and they may be able to retire in better circumstances. [SHA] The population aged 50 and over earns nearly $2 trillion income annually, has control over $7 trillion in wealth, has ownership of 77% of the financial assets in the United States and is responsible for 50% of the spending in the U.S.A. [LAL]
There are various economic models that may be able to calculate what threshold of the population has to be above the poverty line or have a certain amount of income or work in order for good economic growth. Generally speaking, however, I would advocate benefit cuts as a long-term measure that does not mask real problems in the existing Social Security model.
Baby boomers will start to collect benefits in the next few years, increasing the amount of revenues that have to be diverted. The unfortunate fact is that there is no real Social Security fund. It has always been spent as part of the regular budget. Increased Social Security payouts will decrease the amount that the Federal government can spend on other programs and hence there is a real danger of other tax increases, like income tax or corporate tax changes. This is the true hit. When taxes increase, it is anyone's guess what the outcome is.
Planning: The first step in resolving any problem is acceptance of the fact that there is indeed a problem and then deciding to fix it. Many companies live in denial or ignorance of the fact that there could be an issue. Sooner or later, however, companies have to face the reality that there could be severe disruptions in its business continuity because of retirement of its senior executives and employees.
The inexperience of newer executives could become a limiting factor for growth and managing opportunities. Corporations from other countries do not face similar problems and could exploit this situation to significantly increase their market share in the United States at the expense of the American companies.
Part of this problem may also due to the fact that companies are being run by executives who will retire along with the rest of the senior people and have little incentive in planning for the future of the organization. So perhaps the initiative should be driven by the directors and shareholders of companies, asking the tough questions. Senior executives must be forced to prepare a plan for addressing this issue.
The plan must address the long-term goals and mission of the company. It must recognize the strategic organizational posts in the top and middle management that could be affected by retirement. It should put a succession plan for those posts. It should also take a good look at employee compensation to see if the company can recruit and retain the best people in the industry. It should identify the strengths, talents, skills and experience that would carry the company forward. [WAL] The article by L'Allier and Kolosh [LAL] presents a questionnaire that companies can use to ask themselves if they are prepared for the upcoming retirement of baby boomers.
Companies must not only plan for retirement, but also changes in the economy and the market. They must have sufficient decentralization to mobilize and change to meet the changing needs of the aging population. They must be ready to deal with government tax and economic policies that may change significantly to deal with any social security crisis. Ultimately, the difference in those companies that succeed will be agility in face of changes, however drastic they may be.
Slowing Down Loss of Employees: Companies can try to retain senior employees beyond their time for retirement eligibility in a full-time or half-time capacity. Many baby boomers are interested in working past their retirement (for a variety of reasons including financial security). As mentioned previously, studies cite that a majority of Boomers expect to work in retirement. [ROP]
The strategy for retaining these employees should extend beyond just monetary compensation. There are many different considerations that the company has to take into account beyond the usual salary and benefits calculations. Older workers may stay in the workforce because of better health and defined benefit health plans.
For example, more attention has to be paid to the convenience of the employee. Does the person like to come earlier in the day or start in the afternoon? How much vacation or free time does he or she need? Are there any "micro-managing" rules that create a lack of freedom for the individual or prevent ease of execution of tasks?
A major, perhaps the most important, issue is health including disability and disease. Boomers are now increasingly acknowledging issues with health. [ROP] Good health insurance benefits may be accorded high value by the employee. Flexibility in work arrangements and timings would help accommodate the employee. Newer technology exists now that will easily enable employees to contribute effectively from their home. However, it should be remembered that senior employees do place a lot of value on personal interactions and technology must be an option for flexibility, not a delimiting factor for work.
Other factors that may contribute to early retirement are the action of peers. [MER] When many employees in the same age group retire (even in another company in the same geographic area), there is a social pressure on the employee to also retire. To enable the person to overcome this, companies should try to provide more incentives which will give the person a higher social standing and reduce the association with his or her peers.
Lack of attractiveness of the work is an important factor. [MER] Blue collars are more inclined to retire because of the mechanical nature of their work. Contrary to Theory X thinking, most people do not find continued idleness a very exciting prospect. Quite often, people yearn for challenges at work and if they cannot find it at work, they look elsewhere in hobbies ranging from gardening to sailing the globe. Companies must provide all employees increasing challenges that will keep them excited and energized.
The goal for companies in these activities should be to buy more time by delaying retirement of key people so that the company doesn't lose too much experience too quickly. The company should not get the idea that it can do nothing while the day of reckoning has been extended. That brings us to succession planning.
Succession Planning: While some employees may decide to stay back in some capacity, many others may leave. Hence companies must initiate succession planning and knowledge transfer to ensure a smooth transition for the organization. [WAL] At the same time, companies must provide increasing and more challenging opportunities to promising new junior executives within the company. There should be a balance between youth and experience in the management ranks of the company.
Succession planning is very important in business management and is practiced in many top corporations. Typically greater attention is paid to the top management roles such as CEO. But other roles within the company may also be very important in many respects. For example, an executive in charge of operations in BRIC countries may not be bringing in a lot of revenue today, but that role may become the most profitable and most critical part of the company in the years to come.
The strategy for the future should involve what values should be retained for business continuity and what focus must change for strategic mobility. It is as important for companies to understand the roles that will cease to be important in future as the ones that will become important. There are limited resources for succession planning - they should be used wisely.
The outgoing personnel must be provided good treatment so that they will have the company's interests in mind when they make the transition. Some companies provide retirement counseling and help. Others provide financial support in the form of analysts to maximize retirement income. Companies should survey employees and understand what would make most sense for them during the transition period.
A key part of knowledge transfer from outgoing executives to the junior employees is transferring the undocumented lessons learnt - the accumulated stories, anecdotes, impressions and attitudes that encompass the wisdom of a lifetime of employment. [PAT]
It is therefore necessary to build a culture of listening and learning within the organization. It is common and, in some places fashionable, to disparage the "old" ways of thinking and doing business. Such companies lose out in the process because change for change's sake does not typically make good results. A good example is Hewlett Packard hiring Carly Fiorina.
Aggressive Recruiting and Retention: Companies must hire good talent - now. Contemporary business literature (Marcus Buckingham, Jim Collins, etc.) says that companies should focus on building on strengths and reduce the management obsession on weaknesses of employees. More than ever, it is time for companies to look at the strengths that would help achieve the company's goals and recruit aggressively and work towards retaining the best.
Some companies have recognized this problem and are teaching managers to handle their employees carefully and take good care of them. Jack Welch mentions in his book "Straight from the Gut" that one goal during his time at GE was to never lose an "A" player and managers were personally responsible if an "A" player left the organization. GE was able to reduce the attrition rate of "A" players to less than 1% - which is mind-boggling considering the drive and ambition of such persons.
There is a drive towards reducing "micro-inequities" between employees. [RAW] This has less to do with compensation and everything to do with the manner in which a manager behaves with his subordinates even in a subtle manner. For example, ignoring a suggestion with providing reasons from one employee and directly praising another employee's idea without close examination. Every action in a pattern of similar behavior is a blow to the employee's self-esteem and just adds one more straw to the proverbial camel's back.
Any recruiting should also take into account the company's international strategy. Companies can and should include promising managers from locations around the world - Europe, Asia, Latin America, etc. Smaller companies which are currently dealing with the American market should look at different states within America, especially the Southern states which have an increasing population with a lower average age.
Managing conflicts between younger and older employees should also be on the checklist. Leave policies are likely a point of contention. Senior employees may tend to take leave more frequently, leaving the younger ones holding the bag. Unlike in the past, younger employees are also dealing frequently with work-life issues. Two-career families are frequently under a lot of time pressure. Management must formulate good policies like flexi-time and make wise use of technology.
Enlightened Immigration and Outsourcing Policies: Much of the immigration debate has been an unbalanced focus on illegal immigration. This has been very unfortunate for the legitimate job seekers who live in uncertainty and in a difficult position to do job transfers and rise in the management ranks.
The H1 visa program currently admits around 65 thousand workers a year on a 3-year visa (extendable to 6 years). The visa is bound to an employer and it is very difficult for workers to change jobs. Additionally, spouses cannot work under a dependent visa. Workers can apply for a permanent visa, but it takes years - usually 5 to 9 years after starting their work in the United States, during which time they must stick to the job classification they had applied. Citizenship takes another 5 years. Many return to their native country without completing the process.
This paper's intention is not to illustrate the problems that legal immigrants face, but to point out how companies are losing the skills and talents of so many smart and hard-working individuals who have little flexibility to change jobs or contribute to management thinking. Remember the H1 program's filtering ensures that only the cream of foreign workers gets into the country. An easier, faster track to citizenship will ensure faster assimilation and greater contribution from these workers.
In perspective, the United States has a much more liberal immigration policy than other countries and hence is better placed to handle the problems of an aging workforce. Western Europe and Japan are grappling with this problem since they had virtually no immigration (other than illegal blue-collar workers). Japan had a 10-year recession and is only now crawling out of the mess.
Increase in outsourcing has got increasing coverage in the press and had politicians using it to score points with their voters. But the relative low unemployment rate has proved that this phenomenon has had little impact on the economy and in fact has resulted in significant savings for consumers and movement of capital to more profitable industries.
Companies can use outsourcing [LAL] to reduce some of the effects of employee attrition. Leaving only the critical operations in the United States can help companies have more flexibility in retaining a subset of talented employees instead of worrying about a mass exodus. However outsourcing may mean layoffs which hurt many employees in the short run. The pain should be eased by generous severance payments that should ease the pain of unemployment until the next job. Training in newer technologies should be done for employees who may never be able to find similar jobs which have been outsourced.
Use of Technology: Companies can leverage technology in many ways. This will be not only helpful for baby boomers who can contribute from their homes, but also act as a carrot in recruitment and retention by helping employees maintain a good work-life balance by being able to work remotely. High-speed Internet and good software programs are instrumental in this. Many managers, usually the micro-managing ones, have difficulty in accepting this concept. Hence training should be provided on how to deal with work done out of sight.
I read an article on CNN that many employees themselves are not inclined to totally work at home, instead preferring a balance between time at work and time at home. Most companies do not have a good game plan for handling work done outside the office. There are many issues relating to communication, productivity, reporting, work integration, confidentiality, etc. that must have be addressed. A flexible workforce can be a strength, i.e., if the company actually spends a few minutes thinking about it and putting together a good methodology.
Technology can also help companies by helping them put together a strong knowledge base. Senior employees can be given opportunities to communicate their knowledge through speeches, seminars, white papers, articles, etc. and this information can be digitized into web pages or audio/video files and placed in the company intranet. Employees could also be encouraged to start blogs that will serve as a record for their thinking styles and strategies.
Many Business Intelligence tools are available now for the business manager to help make key decisions. Before the impending retirement of baby boomers, companies can create software to record what type of information they look for and how they made decisions. Some decisions and actions can be automated, though not all - talent, skills and experience will still count. The cost of hardware and software for doing this is going down tremendously.
Consultants: Companies can use external consulting firms [GAN] to replace some of the managerial talent that will be lost. In fact, many retiring baby boomers may start consulting firms of their own or act as consultants themselves. The company should also try to retain some retiring employees as consultants to aid them in the transition process.
In many companies, a significant portion of a person's time is consumed in activities that add very little value to the organization. This includes time spent on preparing formal reports, attending unnecessary meetings, communicating, etc. It is useful as an exercise to identify the tasks that an employee does which only he or she can do and which contributes to the organization. Retaining the employee as a consultant for those activities will save a lot of money. Lower level work should be handled by junior employees.
Good consulting firms have strong methodologies and a large knowledge repository of case studies. They can relate their knowledge to the specific problems that the company is facing. Typically, consultants can bring in a fresh perspective to issues and are usually not influenced by personal agendas unlike the company's managers.
Consultants should be carefully selected to match the direction of the company. They should be evaluated on their past performance and their values. Sometimes, companies hire consultants to bring in short-term profit or even be the scapegoats for tough action like adding layoffs or firing employees - in conflict with professed values. Conflicts of interest (such as Arthur Anderson's accounting and consulting businesses in the Enron episode) should be identified early on.
The Baby Boomers have influenced American society in every imaginable way possible. They had a hand in every economic, societal and cultural change in the last few decades. Bill Clinton and George Bush are both Baby Boomers and illustrate the "wide spectrum of values and attitudes" [WK2] of their generation. And the phenomenon continues with the impending retirement of millions of Americans born in the period after the Second World War.
Companies should make no mistake: This will be a significant event that will forever change business and markets as they know them. Companies have to be prepared for all eventualities and keep a close touch on the pulse of the American consumer, worker and economy. Many attitudes and behaviors will have to change. The United States with its vibrant economy, liberal democracy and strong institutions has the potential to weather this phenomenon.
[CHU] George J. Church, "How much bull is left in the market?", Time, 3/11/96, Vol. 147 Issue 11, p62 [GAN] Stephen Gandel, "Work the brain drain", Money, Apr2005, Vol. 34, Issue 4 [KUC] William P. Kucewicz, "Asteroid 2011", National Review Online, February 24, 2003 [LAA] Jennifer J. Laabs, "What if they don't retire?", Workforce, Dec97, Vol. 76 Issue 12, p54 [LAL] James J. L'Allier, Ph.D. & Kenneth Kolosh, "Preparing for Baby Boomer Retirement", Chief Learning Officer, June 2005. Also refer associated presentation , July 13, 2005 [MER] Paula Mergenhagen, "Rethinking retirement", American Demographics, Jun94, Vol. 16 [PAT] Susannah Patton, "Beating the Boomer Brain Drain Blues", CIO.com, January 15, 2006 [RAW] Julie Rawe, "Why your boss may start sweating the small stuff", Time, 3/20/2006, Vol. 167 Issue 12, p80 [ROP] RoperASW, "Baby Boomers Envision Retirement II - Key Findings", AARP, March 2004 [SHA] Robert Shackleton, "The Retirement Prospects of the Baby Boomers", Congressional Budget Office, March 18, 2004 [WAL] Trudy Walsh, "Succession Planning", Government Leader, May/June 2006 [WK1] Webmaster, "Social Security (United States)", Wikipedia, 2006 [WK2] Webmaster, "Baby Boomers", Wikipedia, 2006
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