Grassroots Commentary

Working Longer

Bill Franklin · Nov. 4, 2013

The first of 78 million baby boomers began reaching age 65 years a couple of years ago. Their impact on society will continue to be felt over the next two or three decades. Boomers are that cohort of people born between 1946 and 1964. Their parents had put their lives on hold to fight World War II, after fighting the Great Depression, and with the war over they returned to a “normal” life, which among other things meant getting married and starting a family. They succeeded at both more than any previous generation.

In the depression decade prior to the war, families produced an average of two children. But in the years following the war, family sizes jumped almost immediately to three and peaked at 3.8 children in the late 1950s. Average family size would not settle back to the pre-war level until the early 1970s. US population increased 44% during the 20-year span of the baby boom.

The baby boom became a veritable “pig in the python” as it has moved through the various life stages of society to the present. When the firstborn boomers reached school age, it started a school building boom. They entered the workforce from the mid-1960s through the late 1980s and created a boom in white collar jobs and led the transition from a manufacturing to a service economy and then an information/knowledge economy.

As the “pig in the python” has begun to reach age 65, what’s next? Retirement? Don’t count on it.

The age of 65 as the milestone age for retirement was conceived by Otto von Bismarck of Germany in the late 1800s when old Otto was conniving to find a way to combat the German Socialist Party. He created a social security system to appeal to his country’s working class but being the ethically-challenged politician that he was, Bismarck knew his program would cost very little. The average German worker of the time never lived to age 65, and the few Germans who did only lived a year or two beyond.

Franklin D. Roosevelt, one of Bismarck’s most ardent admirers, saw the political gimmickry in the German social security system and fobbed off the Social Security Act of 1935 on Americans whose life expectancy was then 61 years. Life expectancy began exceeding 65 with the end of WW II. Recently it’s about 78 and will soon be 80. The Census Bureau projects life expectancy to rise to 86 by 2075 and to 88 by the end of the century. One in every nine baby boomers (nine million of the 78 million people born between 1946 and 1964) will survive into their late 90s, and one in 26 (or three million) will reach 100.

Boomers were a rebellious bunch in their teen years, and they won’t go quietly into retirement. If anything, they will reinvent what retirement means. The notion of a golden age of leisure following a career of work is heavily glossed by mid-20th century values when work was physically demanding and about as intellectually stimulating as reading the Manhattan telephone directory. Boomers are better educated and healthier than their parent’s generation and many will continue working well past age 65 – either in their current career or in a second, which may be unpaid volunteer work.

Twenty years ago just one in ten people older than age 65 were still working but today that figure has reached almost one in five – and it’s continuing to grow. A study of people who retired and then returned to work found that over half were employed in full time paid work five years later and one in five worked more than 41 hours a week. Over one in ten men over 75 years of age in a recent study continued to work, whereas half of all women in that age cohort were still working.

This is good economic news. The over-65 population will grow from 13% of the population recently to over 20% in about 25 years. Remaining in the workforce boosts economic growth, reduces demand for public assistance by those who lack the resources to retire at 65, and increases income tax revenues. While there is only anecdotal evidence of it, those continuing to work have better physical and mental health than those with time on their hands who are inclined to overeat, abuse alcohol, and die prematurely.

Delaying their application for Social Security means working seniors can increase the size of their future check by 8% each year. This continues until age 70 when everyone must draw Social Security. There aren’t investments today that pay 8% yields, so continuing to work has a double benefit – a wage income and a yield on deferred retirement income. It’s clear to see why those who have the health and disposition to do so defer retirement and even then, for many, don’t make a complete exit from work.

With the percentage of over-65s growing while the percentage of prime working age adults (i.e. 25 to 54-year olds) have little growth, the US workforce can only grow by extending the date of retirement. This comes at an opportune time because the number of workers per retiree is positioned to drop from 4.5 to 3.0 by 2030 if people retire at 65. (The ratio was 160 when FDR foisted the Social Security shell game on gullible Americans and it was still 42 at the end of WW II.) Social Security taxes are low at these ratios. The Social Security Ponzi scheme “works” as long as more people pay in than are paid out, although Social Security taxes must rise as the ratio falls. Therefore the fact that a growing number of post-65s continue to work helps the ratio.

Labor force participation among older workers fell in the five decades following the enactment of the Social Security Act. But it began to grow in the late 1990s, helped by a shift in the perception of what “old age” meant. A recent survey reported 60% of the over-55s polled felt younger than their age. This positive attitude correlates with their income and job responsibility.

The idea that seniors who continue to work deprive younger workers of jobs is without merit. Employed older workers with deep experience are more likely to create jobs by facilitating business expansion than they are to produce a zero-sum outcome. Their knowledge makes others more productive, which produces jobs. Many in post-retirement years also create businesses. Harlan Sanders comes to mind.

Still, there are dark clouds for some on the retirement horizon. Nearly half of the workforce at age 50 will be required to extend the age they expected to retire when they were 40. They now know they must work an additional three years, according to a recent study. Financial health is the cause of most of these extensions.

For example, 40% of homeowners over 65 had mortgage debt in 2010, more than double the percentage two decades earlier. The refinancing boom prior to the 2008 Great Recession induced many to capitalize on Fed-driven low mortgage interest. Unfortunately, many chose cash-out refinancing instead of paying down mortgage balances and shortening mortgage duration. Some equity cash-out was needed to finance education loans for children, but some was for vacations and cars when the economic future looked bright. Now nearing retirement age, senior couples are stuck with mortgage balances and home values that are underwater.

Retirement savings were also battered in the Great Recession. Companies have abandoned defined benefit pension plans in favor of 401(k)-type plans which aren’t as generous. The Great Recession reduced defined contribution plan values below the amount needed to support retirement without a radical lifestyle change. The fear that many facing retirement rightfully have is that they will outlive their assets and become a burden on their children or be forced into some form of public assistance. Consequently older workers continue to work in order to rebuild retirement asset values, assuming continued employment is an option. For some it isn’t, and they must seek part-time work, often in multiple jobs.

The “age 65 retirement delusion” causes too many people to ignore the actuarial fact that men are living to 76 years and women are living to 81 years. Longevity will continue for both sexes because a natural limit for life may be well north of 90. The generations of people in the workforce would do themselves a service to forget retirement at 65 unless they are unusually well off.

Yields on stock and bond funds have been squeezed by Fed policies so that traditional “rules of thumb” about saving no longer apply. There was a time not so long ago that financial advisers told clients to save eight times their last year (presumably the highest) of income for retirement. Today, advisers are more likely to say eleven times, and that’s probably too little. Fifteen and or twenty is more likely to become the norm, especially since no one knows the inflation beast Ben Bernanke’s reckless money printing schemes may release.

But do the math. A person earning $100,000 the last year of work would need to have saved $1.1 million according to the “11 times” rule before retiring. In years past, another “rule of thumb” was to expect yields of 4% to 5%. If those yields existed today, which they don’t, a retiree could make withdrawals of these amounts without encroaching on the saved corpus. Withdrawing 4% to 5% per year would pay out $44,000 to $55,000 per year – hardly a kingly amount (the median US income is $51,000.) But in a zero yield environment, the corpus is gone in 25 years at 4% and 20 years at 5%. Yields above zero would pay part of the annual withdrawal, but until yields get to 4% or 5%, some portion of each year’s pay out depreciates the corpus. I don’t know investment instruments today with 4% to 5% yields, nor do I know many who could cut their lifestyle in half in retirement – i.e. from $100,000 to about $50,000.

Blame the Fed for its profligate bond buying stimulus that helped cause this retirement environment, and blame reckless government spending. But also blame the boomers themselves for saving too little toward retirement. The recent savings rate has been about 4.5¢ per after-tax dollar – down from 12.5% in early 1970s when it began its almost 40-year decline.

While some continue to work because they must, others continue working for other motives. At age 82 Warren Buffett is among the many who have worked well past the traditional retirement age. One wonders why with his wealth, but he isn’t alone. One reason that the rich get richer is that many of them don’t stop working. A recent survey revealed that, among those earning incomes in categories from $100,000 to $750,000, the highest earners were likely to keep going. The wealthiest are most likely to attribute their success to hard work. After a life of hard work, why stop? They keep working.

Others, earning considerably less income, keep working for the enjoyment of what they do. The old saw that if you do what you love you’ll never work a day in your life is true for many. Why stop doing something you’ve spent a professional lifetime learning how to do well? The converse is also true: why do something for a career that you can’t wait to get away from in retirement?

One of the most professionally rewarding careers is apparently university teaching. An amazing 81% of professors in a recent study cited job satisfaction for continuing their careers beyond 65, and with the 1994 elimination of mandatory retirement at 70 in higher education, many contented professors have no plans to retire.

A dimension of the retirement issue that is often ignored is the brain drain it represents to companies and organizations which lose valued employees. For example, about half of the nurses in hospitals and elsewhere are over 55. As they retire, their “manpower” can be replaced – we hope – but their expertise and instincts can’t. A young nurse graduate will spend 35 years getting to the point that he or she can intuitively respond to patient needs, especially in specialized care like the neonatal unit where the patients can’t answer questions and intuition may save lives.

Efforts to combat “brain drain” losses exist but rarely as a well-conceived response to a strategic threat. Some companies redesign their work environments to induce valued employees to stay beyond retirement and disincent early retirement. The impending nurse shortage, for example, has led administrators to put nurse stations closer to patients. Trucking companies, already dealing with a shortage of drivers, especially long haul drivers, are working with cab manufacturers to create more comfortable sleep spaces; they are organizing driving teams and modifying work schedules. Flexible scheduling, part-time work, and telecommuting are becoming more commonplace to accommodate workers with skills a company wants to retain among its employees.

As a practical matter the most important assets in business and other organizations walk out the front door every day. Leaders should be asking themselves what is being done to capture the institutional knowledge and industry know-how that resides in those mobile heads – particularly the older workers who employ intuitive intelligence more than job skills in work.

The true knowledge people gain with age can’t be found in textbooks or corporate documents any more than Grandma can write down a recipe for a dish she has been honing and preparing instinctively for decades. Long after a key employee has departed for the golf links on earth or in heaven, there may be questions where an ancient document is filed or how a complex procedure should be performed or reasoned out. Yet, preserving institutional intelligence in a knowledge base is among the most neglected acts of corporate self-preservation. Even small organizations of 500 or less employees have a hard time knowing who among them knows what.

Social networking platforms, internal wikis and blogs, email archives, employee knowledge/expertise profiles, collaboration and sharing procedures, internal chat rooms and forums are all attempts to snag floating corporate knowledge but they are in their infancy and usually not a mission-critical priority in most organizations.

The key leaders of one of our companies recently spent several days off-site. Among other things they worked in small groups to give narrative to the company’s business strategy and, most importantly, to diagram the business model that would execute that strategy. Their work product was impressive and will, of course, be preserved.

What won’t be preserved is a description of the process, much of which was extemporaneously developed on the fly, that led to their outcomes. A preserved detailed record of their process – their false assumptions, the blind alleys, the breakthroughs and failures, and the thought processes – would be a treasure map. It would enable future generations of leaders, as well as today’s leaders in our other companies, to be virtual eye witnesses now and in the future to their struggle. A record of the process is more important than a record of the product. Given a understandable description of the process, the product could be reproduced even if future business circumstances compel a very different product. But this engine can’t run in reverse. Knowledge of the product won’t produce the process, which will be soon lost in the haze of time if not written down. Even the original participants in this meeting will have difficulty repeating their efforts in a year or two.

Most of the boomers are still working. They converted the American economy from the manufacturing age to the service age to the information and knowledge age. They have worked more differently and longer than any previous generation. They are changing what retirement means. But ultimately they must retire. The greatest transfer of wealth in the history of the country will be passed from the boomers. But they cannot pass on their intellectual assets as they will their physical assets.

Before they shake off their mortal coil, we must find a way to preserve what they spent almost 80 million adulthoods learning.

Facts over Fear
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