Change needed to accommodate boomers

(May 13, 2005) Baby boomers aren’t getting any younger, and companies need to make significant changes in order to deal with the looming economic threat an aging population could present. Weakening fertility rates, increased life expectancy and the en masse retirement of the baby boom generation are demographic challenges employers must face.

“We’re really going to be challenged in how we look at this issue,” said Sylvester Schieber, vice-president of Watson Wyatt Worldwide research and information centre in Washington, D.C., in his keynote address at the Human Resources Professionals Association of Ontario’s (HRPAO) first annual compensation conference in Toronto.

He urged companies to take action sooner rather than later, and said incentive-based compensation structures, restructured benefits and structured pension plans may be key components to curb a potential labour pandemic.

Although Schieber acknowledged there’s no blanket solution to the economic impact plan sponsors could face from an aging population, he highlighted some possible options, namely, that employers work towards changing employee behaviours and ways of improving productivity. Such solutions could include approving off-site versus on-site employment, introducing different types of benefits, merit-based compensation and phased retirement.

He mentioned the prospect of companies taking capital offshore to ensure labour supply is in line with demand. “There may be a diminishing supply of the types of workers we want. If we cannot bring enough labour to the capital, then we should consider taking capital to the labour,” he noted, citing India and China as prospective hotbeds for future resources.

While Schieber indicated that he doesn’t favour defined benefit over defined contribution pension plans, he said companies with structured pension plans often have fewer turnovers of highly productive workers than those who do not.

Scheiber notes people today spend 50% longer in their retirement years than retirees did in 1960s, when the average age of retirement was approximately 64 years old, compared with today’s average of 61 or 62. He says the influx of workers relative to the corresponding numbers of retirees 40 years ago made it easy for the social security infrastructure to support beneficiaries. Today’s demographic picture, however, is more grave.

Scheiber forecasts a significantly increased dependency ratio over the next 20 years that will culminate in a continued surplus of retired beneficiaries versus working capital. “That is going to put pressure on our social security system; it’s going to put pressure on our economies; it’s going to put pressure on a whole variety of things that will likely mean that we cannot continue to enjoy the benefits of this 50% longer retirement period,” Scheiber says. “We can’t expect that our social institutions are going to make it up, because our social institutions are strained to the limits.”

As for pensions, Scheiber suggests an overwhelming majority of Canadians would prefer not to pay more into the pension system than they are doing at present, and that this has huge implications on future employment trends. “If that system is not going to continue to finance benefits at the level it does for this growing level of dependency with an ever longer life expectancy, we’re going to have to take control of our own destiny. And if we don’t save, then as our social insurance benefits are adjusted, the only option we will have left to us is working longer,” he says.

So what can advisors do to mitigate this looming economic crisis? Scheiber says they need to work out realistic models of saving for their clients, which will allow clients’ retirement years to be commensurate with their pre-retirement standard of living. And this might very mean advisors tell clients to rethink their benchmark age for retirement.

“Everybody needs to begin to focus on the prospect that they may either have to work longer, or make what I’ll characterize as more robust provisions to protect themselves against the possibility of benefit adjustments in the future,” Scheiber says. “They need to save more, they need to develop financial protections. Maybe it is simply deciding when you’re 40 that instead of working till 60, you’re going to work until 62 or 63, or older in some cases.”

Filed by Heidi Staseson, Advisor’s Edge, heidi.staseson@advisor.rogers.com and Chandra Price, Benefits Canada, chandra.price@bencan-cir.rogers.com.

(05/13/05)