Older Workers: Demographic Trends Pose Challenges for Employers and Workers
Released: 2001-11-16T00:00:00

Letter

Background

The maturation of the baby boom generation (persons born between 1946 and 1964) has progressed to the point where boomers will soon begin moving from the traditional working ages to the ages when many people start to retire. The first wave of the baby boom generation will start to turn age 65 in 2011 and the last of the boomers will be 65 in 2029. This development will lead to significant changes in the ratio of the working age population (defined as age 20 to 64) to the population age 65 or older. This ratio, called the “aged dependency ratio” because it provides an estimate of how many workers will be available to support each retiree, was 21 percent in 2000, or 5 working-age individuals for every person over age 65. As the baby boom generation ages, the aged dependency ratio will rise. By 2030, it will reach 35 percent, meaning that there will be fewer than three persons of traditional working age for every person age 65 or over.

The increase in the aged dependency ratio is not only occurring because of the growing numbers of older persons. It is also due to the slowing growth of the labor force of younger workers over the last decade, a trend that is expected to continue. From 1950 to 1990, the labor force under 55 grew at an average annual rate of 1.9 percent. From 1990 to 2000, the average annual growth rate for this group was 1.0 percent, and BLS projects that from 2000 to 2025 labor force growth will slow to an annual rate of 0.3 percent.

Several recent changes in Social Security retirement policy could strengthen incentives to work longer. Social Security provides monthly benefits to qualified retired and disabled workers and their dependents, and to survivors of insured workers. These benefits are the primary source of income (more than 50 percent) for nearly 57 percent of the population age 65 and older. In April 2000, the practice of reducing Social Security benefits when a beneficiary has earnings and has reached the normal retirement age (currently 65 years and 4 months) was eliminated, at least in part to remove the disincentive to work. Also, the delayed retirement credit for persons who first claim benefits after the normal retirement age is steadily being increased until it reaches 8 percent per year in 2008. Prior to these increases, those who chose to work beyond normal retirement age might receive less Social Security over their lifetime because the start of their benefit receipt was delayed. Some members of Congress have also put forward proposals that would raise normal retirement age for benefits beyond the current schedule of increases, as well as proposals that increase the early retirement age of 62.

Other federal laws also attempt to make work and the workplace more hospitable for older individuals. The Age Discrimination in Employment Act of 1967 (ADEA) promotes the employment of older persons based upon their ability rather than age and prohibits age discrimination in employment. The Equal Employment Opportunity Commission (EEOC) enforces ADEA as well other federal statutes prohibiting employment discrimination. ADEA applies only to firms with 20 or more employees, thus excluding a not insignificant segment of the labor force. While some states have their own laws protecting older workers in small businesses, these laws still may exclude some small businesses.

As pension benefits are a key source of retirement income for many workers, they can also influence the work decisions of older individuals. To encourage employers to establish and maintain pension plans for their employees, the federal government provides preferential tax treatment under the Internal Revenue Code (IRC) for plans that meet certain requirements. In exchange for preferential tax treatment, an employer is required to design the pension plan within legal limits that are intended to improve the equitable distribution and security of pension benefits. The Internal Revenue Service (IRS) administers policies on pension distributions that are set by the Congress in the IRC to ensure that the benefits of all tax-qualified plans are apportioned in a nondiscriminatory manner.

Many pension plans have features that encourage employees to retire at or before age 65. Pension laws relating to defined benefit plans allow benefits earned after the normal retirement age (generally, age 65) to accrue at a lower rate. Furthermore, many defined benefit plans subsidize early retirement benefits which tends to discourage employment after becoming eligible for these benefits.

ERISA establishes certain minimum standards for private employee pension plans. This law also created the ERISA Advisory Council to advise the Secretary of Labor with respect to carrying out responsibilities under ERISA. The Advisory Council has made recommendations to the Secretary of Labor to consult and work with appropriate government agencies on pension and welfare plan reforms that could help employers establish phased retirement programs.

A Growing Number of Older Workers Are in the Labor Force

The number of older workers will grow substantially over the next two decades and they will become an increasingly significant proportion of all workers. This expected increase is a result of the aging of the baby boom generation and a general trend in greater labor force participation among older persons. Older workers are employed in a diverse group of occupations but are a growing proportion of the workers in white-collar occupations. In addition, our projections show that older workers may make relatively greater gains in earnings than their younger counterparts between 2000 and 2008.

Older Workers Will Be a Growing Proportion of the Labor Force Over the Next Two Decades

The number of older workers will grow rapidly over the next two decades. According to the BLS, in 2000, 18.4 million persons over age 55, or about one-third of the over-55 population, were in the labor force. (See Fig. 2.) BLS estimates that there will be 31.8 million older labor force participants in 2015, an average annual increase of 4.0 percent from 2000. However, this rapid growth is expected to level off by the mid-2020s. BLS estimates that 33.3 million older persons will be in the labor force in 2025, an average annual increase of only 0.5 percent from 2015.

This expected increase is a result of the aging of the baby boom generation and a general trend in greater labor force participation among older persons. The oldest baby boomers are currently 55 years old, and the youngest will turn 55 in 2019. The percentage of older persons who participate in the labor force has been growing, especially among females age 55-64, a trend that is expected to continue. (See Fig. 3.) Currently, 30 percent of all persons 55 and older participate in the labor force, a number that is expected to grow to 37 percent by 2015, according to projections by BLS.

This increase in labor force participation among older workers is primarily driven by the growth in the number of older women and their labor force participation rates. Labor force participation rates of women between the ages of 55 and 64 have been steadily increasing from 42 percent in the mid- 1980s to 52 percent in 2000. A further increase in the participation rate to 61 percent is expected to occur by 2015, according to BLS. The labor force participation rate of women age 65 and older is currently 9 percent. This is up from the low point of slightly more than 7 percent in the mid-1980s but is lower than the 10 percent levels of the 1950s. BLS projects the growth in the participation rate in this age group to grow to 10 percent by 2015.

The labor force participation rates of males over age 55 have been stable for several years and are projected to increase in the future. Older male labor force participation hit a low point in the mid-1990s that was part of a downward trend that had been occurring for several decades. Since then, the labor force participation rates of males between the ages of 55 and 64 have held steady at approximately 67 percent; BLS projects an increase to 69 percent in 2015. Labor force participation rates of males 65 and older also held steady at about 17 percent during the 1990s and are projected to rise to nearly 20 percent by 2015.

As the number of older workers grows, older workers will also become a larger percentage of all workers. In 1950 and 1960, older workers comprised 17 percent and 18 percent of the labor force, respectively. (See Fig. 1.) As the relatively large baby boom generation entered the workforce between 1960 and 1990, the proportion of older workers fell to 12 percent of the total as the number of workers under age 55 swelled. Older workers now represent 13 percent of the total workforce, and BLS estimates that by 2015 they will be about 20 percent of the total workforce.

Older Workers Are Employed in a Broad Range of Occupations and Are a Significant Percentage of Many

Older workers hold jobs in a wide range of occupations that are somewhat reflective of the occupations occupied by younger workers. (see table 1.) Nearly the same percentage of workers in the age categories of 40 to 54, 55 to 64, and 65 to 74 are employed in white collar occupations (approximately 62 percent). The slight difference in the employment distribution among these age groups is found in blue-collar and service occupations. Nearly 15 percent of workers age 65 to 74 are employed in service occupations compared with 11 percent of workers age 40 to 54. Blue-collar work accounts for 26 percent of employment among workers age 40 to 54 and 23 percent for workers age 65 to 74. The general shift in the economy away from physically demanding jobs is present among workers of all ages, but is far more pronounced among older workers as they age.

Workers age 55 to 64 constitute a significant proportion of many occupations as they are nearly 13.9 million members (11 percent) of the total workforce. (See table 2.) The highest absolute numbers of older workers age 55 to 64 are in executive/manager occupations (2.4 million or 12 percent of the total occupation) and professional occupations (2.3 million or 11 percent of the total occupation). Workers age 65 to 74 comprise much smaller percentages of occupations since most persons in this age group have exited the labor force. Workers age 65 to 74 constitute less than 4 percent of the all major occupational categories with the exception of farming, fishing, and forestry.

Between 2000 and 2008, the number and percentage of workers over age 55 will increase in all major occupational categories, according to our projections. (See Figs. 4 and 5.) The largest change should occur in white- collar occupations. Among executives/managers, the percentage of workers in this occupation who are over 55 is projected to grow from 15 percent to 23 percent. The percentage of the workforce that is over age 55 in professional occupations should also grow substantially from 14 percent to 19 percent. The smallest change should occur in employment in service occupations as the percentage of the workforce older than age 55 employed in the service sector grows from 13 percent to 14 percent. In line with these major occupational changes, certain specific occupations will increasingly rely on older workers. For example, from 2000 to 2008, the percent of teachers older than age 55 will increase from 13 percent to 19 percent, and the percent of nurses and related occupations older than age 55 will increase from 12 percent to 18 percent. (See app. I.)

Older Workers Occupational Composition Moves Toward White- Collar Jobs as They Age

As workers age, their occupational composition moves towards white- collar and service occupations and away from physically demanding occupations. According to our projections, the composition of the older workforce will shift further from blue-collar to white-collar occupations in the near future. Between 2000 and 2008, the proportion of workers age 55 to 74 in managerial/administrative and professional/technical occupations will increase by 2.9 percent and 1.6 percent, respectively, while the proportion in blue collar and service occupations will decrease. (see app. I.)

The change in the occupational composition of older workers into less physically demanding occupations is supported by an analysis of changes in occupations of related age groups, as shown in table 3. Group I consists of individuals age 45 to 54 in 1990 and individuals age 55 to 64 in 2000. Group II consists of individuals of age 55 to 64 in 1990 and 65 to 74 in 2000. In 2000, both groups I and II had fewer individuals in the more physically demanding occupations of production, craft and repair, machine operation, and assembly; they also had a greater number of older workers in the white-collar and service occupations in 2000. Part of this shift likely occurred because as workers age they can experience health problems that make their jobs more difficult to perform and, therefore, they choose to move into less physically demanding jobs. Also, the composition of the labor force changes because of differential retirement rates and those who continue to work to older ages are more likely to be white-collar workers.

The shift toward white-collar occupations is also partially explained by differences in educational attainment among the baby boom generation and the cohort proceeding them. (See Fig. 6.) Fifty-seven percent of persons who are age 40 to 54 have at least some college education (29 percent have a college degree) compared with 42 percent of individuals age 55 to 74 (21 percent have a college degree). Moreover, only 11 percent of individuals age 40 to 54 lack a high school diploma compared with 22 percent of persons age 55 to 74. The greater level of educational attainment among the baby boomers may lead to more employment opportunities as they age. They may have a broader diversification of jobs available to them compared to the current generation of older workers.

Older Workers’ Earnings Have Risen Faster Than Younger Workers’ Earnings

Between 1989 and 1999, older workers experienced larger percentage gains in median earnings than younger workers. (See Fig. 7.) Adjusted for inflation, workers between the ages of 55 and 64 and workers between 65 and 74 had median earnings increases of 9 percent and 19 percent, respectively, for the 10-year period—compared with increases of 2 percent and 4 percent for workers age 40 to 54 and 30 to 39, respectively. These earnings increases were primarily driven by a greater number of older workers working full-time instead of part-time (57 percent in 1989 versus 63 percent in 1999) and a movement in the occupational composition toward higher paying white-collar jobs (See tables 3 and app. I). Improvements in the economy during the last 15 years likely offered older workers the opportunity to move into full-time employment as labor shortages increased the demand for their services. During the economic expansion of the mid- to late-1980s, the unemployment rate declined from 7 percent in 1985 to 5 percent in 1989; by comparison, in the mid- to late- 1990s the unemployment rate declined from 6 percent to 4 percent.

According to our projections, workers between the ages of 55 and 74 will continue to make gains in their earnings that exceed those of their counterparts who fall between the ages of 40 and 54. Currently, workers age 55 to 64 and workers age 65 to 74 earn 93 percent and 46 percent, respectively, of what workers age 40 to 54 earn. We project these numbers to rise to 111 percent and 67 percent, respectively, by 2008. These relative gains are tied to the change in the composition of the older workforce to higher paid white-collar occupations, while younger workers’ occupational composition is projected to change to more blue-collar and service occupations.

Older Workers Are Less Likely to Lose Jobs Than Younger Workers, But More Likely to Exit the Labor Force if Job Loss Occurs

While older workers are less likely than younger workers to lose a job, older workers who do lose a job are somewhat less likely than younger workers to return to work. Older workers and younger workers tend to lose their jobs for similar reasons. However, many older workers who lose their jobs choose to retire following the job loss. Some older workers who have not yet fully retired do seek transitional or “bridge” employment. But once fully retired, relatively few are interested in returning to work. The desire to return to work among fully retired older persons who have lost a job varies according to education and race. Although small in percentage terms (1.3 percent), it is fairly large numerically. In 2000, there were more than three-quarters of a million persons age 55 to 74 who were either unemployed and looking for work or fully retired and wanting a job.

Older Workers Lose Their Jobs Less Frequently But Are Less Likely to be Re- Employed Than Younger Workers

According to data from the Displaced Workers Supplement (DWS) to the CPS, older workers were somewhat less likely than younger workers to lose their jobs between 1997 and 1999. (See table 4.) However, older workers who did lose their jobs were significantly less likely than younger workers to be re-employed. Thirty-nine percent of persons age 55 to 74 who lost their jobs were not re-employed as of February 2000, compared with 19 percent of persons between age 40 and 54. Those who did seek re- employment and found jobs reported job search times that were somewhat comparable to their younger counterparts. The median job search times for workers age 40 to 54 and 55 to 74 was four weeks. However, the average 12 weeks time workers age 55 to 74 needed to search for new employment was 3.6 weeks longer than for workers age 19 to 39 and 1.3 weeks longer than for workers age 40 to 54. This indicates that there is a segment of the older workforce that incurs more prolonged job searches relative to younger persons.

Older workers and younger workers tend to lose their jobs for similar reasons. According to data from the DWS, older workers are somewhat more likely than younger workers to lose their jobs due to plant closures or plant relocation (31 percent compared with 24 percent, respectively) and somewhat less likely to lose their jobs due to insufficient work (17 percent compared with 22 percent). (See Fig. 8.) The DWS asks respondents whether they lost their jobs due to their position or shift being abolished, completion of a seasonal job, failure of a self-operating business, or another reason. The responses of older and younger workers were not significantly different.

Though older workers are not more likely to lose a job, a job loss potentially has more severe consequences for older workers. Older workers tend to have greater tenures in their jobs and may experience a larger loss in earnings upon re-employment, compared with younger workers. Moreover, the potential loss of health care benefits following a job loss could be more problematic for older workers because of the positive correlation between greater health problems and aging.

For older workers, the likelihood of being hired by a new employer varies according to several factors—the compensation level, mix of wages and benefits, skill requirements, working conditions, and hours of work— associated with the new employer and job. For example, a firm whose wages are highly correlated with firm-specific experience will hire fewer older workers. Firms with these types of compensation structures usually require that skills be developed internally on the job. Moreover, these types of firms tend to encourage earlier exits of older workers through their payments of pension benefits. Occupations that require extensive computer use also tend to hire fewer older workers possibly due to perceptions that older persons have difficulty adapting to new technologies. Finally, jobs that require night and evening shifts hire fewer older workers.

More Than Three-Quarters of Million Persons Age 55 to 74 Who Do Not Have Jobs Want to Work

According to the March 2000 CPS, 768,000 persons age 55 to 74 were either unemployed and seeking a job (520,000 persons), or fully retired and said they wanted a job (248,000 persons). Unemployment rates for most groups of older workers are low and vary somewhat by educational level and by race. In 2000, the unemployment rate for all workers over age 55 was 2.8 percent. However, non-high school graduates had an unemployment rate of 5 percent, which was more than three times as high as college graduates. (See table 5.) The unemployment rate for blacks was 4.1 percent and for Hispanics and other ethnic groups 5.3 percent, compared with an unemployment rate of 2.5 percent among whites. Furthermore, once older Americans fully retire, most do not want to return to work. About 45 percent (or 18.4 million persons) of all persons between age 55 to 74 were fully retired. These individuals are not doing any work for pay and have categorized themselves as “retired.” When questioned about whether they wanted a full-time or part-time job, only 1.3 percent responded “yes.”

Some Employers Provide Flexible Employment Arrangements for Older Workers But Programs Are Not Widespread

Public and private employers are using an array of arrangements— including rehiring retirees, reduced work schedules, and allowing job- sharing—to retain and extend the careers of older workers. However, survey data and interviews with employers suggest that few of these arrangements are widespread among private employers or involve large numbers of workers at individual firms even though the majority of older workers are interested in them. Employers cite several reasons for not implementing programs, but the most prevalent is that they simply have not considered doing so. While acknowledging the importance of the issue, union officials we spoke with said that they have not addressed these issues broadly in collective bargaining agreements due to a lack of interest on the part of employers generally and difficulties in establishing flexible schedules in many manufacturing settings. Public employers appear to be experimenting more with these programs than private employers. For example, large efforts to retain older workers are being made in some states in response to teacher shortages. These efforts primarily involve pension incentives that make work financially attractive for older employees.

Private Employers Are Using Some Arrangements to Retain Older Workers and Rehire Retirees, But Use Is Not Widespread

Some employers and employees are experimenting with flexible employment arrangements that would allow older workers to continue to work. We found that flexible employment arrangements come in many different forms, including part-time work, seasonal or part-year work, consulting or contracting for limited periods of time, or a reduction of job responsibilities. (See table 6.) For example, a large retail drug store chain accommodates older workers by offering them part-time or part- year schedules and allows them to work in multiple locations throughout the country. Under this approach, an older worker can work in New York during the spring and summer and in Florida during the fall and winter. A large chemical manufacturer has established an in-house Retiree Resource Corps that serves as a clearinghouse for matching retirees’ skills and the company’s employment needs for retirees who wish to work on a temporary basis. Retirees must separate from the company for 6 months prior to entry into the program and are limited to less than 1,000 hours of work per year. Employees who work more than the maximum have their pension benefits ceased and must terminate from the program to have their benefits reinstated. A large fruit canning employer hires older workers on a part-year basis to work in their canning factory that operates from July to mid-September. The employer says that older workers are more likely to be available for the part-year work than younger workers who are more interested in full-time jobs. A needle manufacturer has been successful in recruiting older workers by allowing them to choose the days they want to work.

Though they exist, flexible employment arrangements are not yet widespread in the private sector. According to our interviews with experts, consultants, and employers, in many instances these arrangements or programs are provided on only an ad hoc basis and to limited groups of employees. The employees involved in these arrangements tend to be skilled workers with an expertise for which an employer has a special need. While these programs can be expensive, some firms have shown they are willing to pay to retain the more highly skilled employees who are hardest to replace.

Survey data on the extent and nature of flexible employment arrangements -- at least in large private sector firms -- also supports our finding that such programs are often limited in scope and not widespread. According to a study by Watson Wyatt, a large human capital consulting services firm, 16 percent of employers participating in their survey offer some type of flexible employment arrangement. However, they defined such an arrangement as any type of accommodation that was being made to an older worker either on a programmatic or individual basis. The American Association of Retired Persons (AARP) and the Society for Human Resource Management (SHRM) also conducted a study of flexible employment programs and estimated that about 2 percent of employers offer such arrangements to older workers. Neither of these studies is nationally representative.

While acknowledging the importance of the issue, unions we spoke with have not yet addressed flexible employment programs broadly in collective bargaining agreements due to a lack of interest on the part of employers generally and difficulties in establishing flexible schedules in many manufacturing settings. We spoke with officials from unions representing workers in the telecommunications industry and manufacturing industries like automobiles and aerospace, who said that flexible employment programs for older workers are not yet a major issue for many unions. A union official in the manufacturing industry said flexible employment programs may be difficult to establish because for many production processes, the work environment tends to require team production from employees on full-time schedules. A union official in the telecommunications industry said that unions have proposed some flexible employment arrangements in bargaining, but they say employers have not shown an interest because they do not yet see worker retention as an important issue.

Evidence suggests that at least some middle- and large-sized employers currently do not see a need for flexible employment programs, although this could change in the future. According to the Watson Wyatt survey, 70 percent of companies do not offer phased retirement programs to older workers because they simply have not considered it. Other reasons given for not offering programs were the programs’ incompatibility with corporate culture (16 percent), restrictions on in-service distributions (14 percent), employment costs (13 percent), and productivity concerns (9 percent). However, 28 percent of the employers who do not offer phased retirement indicated that they have a moderate to high interest in doing so over the next 2 to 3 years. Moreover, 70 percent of the employers surveyed said that phased retirement programs may be a solution to labor shortages brought on by demographic and economic change.

The hesitancy on the part of employers to offer flexible employment programs appears to be at odds with the desire of older employees to have the option of participating in such programs, and thus possibly extending their work lives. According to 1996 data from the Health and Retirement Survey, 56 percent of persons age 55 to 65 would prefer to gradually reduce their hours of work as they age, but only 16 percent of full-time workers in this age group said their employers would be willing to allow them to reduce their hours. Another survey of workers age 54 to 74 who were employed in their career occupations found that 48 percent of workers wanted to work significantly fewer hours—citing workload and job demands (41 percent) and financial factors (28 percent) as their reasons for working more hours than they would prefer. A reduction in work hours seems to be a fairly common desire: 71 percent of retirees who have returned to work said the reason they initially retired was due to a lack of a more flexible work schedule. Furthermore, this option seems to be less available to rank and file workers, with managers and professionals more likely to believe a reduction in hours was possible (64 percent) than were workers in service and production occupations (31 percent).

Some Public Sector Employers Have Undertaken Large Efforts to Retain Older Employees

Some public sector employers have been very active in initiating broad programs that provide incentives for older workers to stay on the job. Driven in large part by teacher shortages in many public school districts, state and local government employers have implemented programs that provide incentives for older employees to remain on the job. In many instances, these incentives were created by redesigning their state-defined benefit pension plans to include Deferred Retirement Option Plan (DROP) features that allow a pension participant at an eligible retirement age to have pension benefits start even though he or she continues to work.These programs also include other pension plan revisions as well. At the state level, Arkansas, California, Louisiana, and Ohio have all adopted incentives for older teachers to stay on the job rather than retire.

A growing number of state and local public employers have implemented, or are considering implementing, DROP pension features as incentives to encourage older employees to remain on the job. Although employers have used these for other public employees like firefighters or law enforcement personnel, many have focused on the retention of elementary and secondary public school teachers. For example, Arkansas has a DROP program in which all teachers who meet length-of-service requirements can have 70 percent of their monthly pension payments deposited into an account that is payable as a lump sum along with other options for payment. Teachers can stay in the DROP program for up to 10 years. The state also allows teachers who are eligible for retirement to draw their full pension and a full salary if they work in one of four subject areas deemed to have a critical shortage of teachers (math, science, foreign language, and special education) and if they separate from employment for 30 days.

Louisiana has a variety of programs to encourage older teachers to stay on the job, and 4,300 teachers participated in them last year. The DROP program has been popular among the teachers because they can earn a lump sum in the range of $70,000 to $80,000 in 3 years. Two-thirds of eligible teachers participate in the DROP program and may participate for up to 3 years, after which they can continue working and will resume earning pension credits in their defined benefit system. The myriad of other Louisiana programs established to retain or attract retired teachers are being phased out and replaced with one program that allows retired teachers to earn their full pension while continuing to teach after a 12- month break in service.

Some public employers are using other pension incentives to retain teachers. For example, facing a projected shortfall of 300,000 teachers over the next decade, the California legislature enacted several measures modifying the state teacher pension plan to encourage older teachers to continue to work. Starting in 2001, teachers who retire and then separate from employment for 1 year can return to teaching and earn a full salary while continuing to receive full pension payments. In addition, pension benefits have been enhanced in 3 ways: a longevity bonus of up to $400 per month has been added for 30 to 32 years of service; a 0.2 percent addition to the pension benefit has been granted for each year beyond 30 years of service; and 2 percent of salary is paid into a supplemental retirement account which is then payable as a lump sum.

Nearly 10 percent (17,000 teachers) of Ohio’s teaching workforce consists of rehired retirees. Ohio teachers can draw a full salary and full pension benefits after a 2-month break in service. This provision also applies to other Ohio public employees in the event of a future shortage of employees.

Federal Regulations May Inhibit Private Employer Use of DROP Plans

Internal Revenue Code requirements regarding pensions may discourage private employers from adopting DROP plans and other programs that could encourage workers to extend their employment after retirement eligibility. In 2000, the ERISA Advisory Council identified current ERISA and IRC regulations that could constrain private employers in implementing flexible employment arrangements, including regulations prohibiting in-service distributions of defined benefit pension benefits and rules governing nondiscrimination.

Pension regulations prohibiting in-service pension benefit distributions can discourage the employer’s formation of DROP programs. Defined benefit pension plans sponsored by private employers are not allowed to pay pension benefits to older workers who become eligible for retirement income before the plan’s normal retirement age. Therefore, it would be difficult, if not impossible, for a private sector employer to provide a defined benefit DROP plan to workers who are younger than the pension plan’s normal retirement age. To address this issue, the Council recommended relaxing the IRS rules on in-service distributions to facilitate the formation of phased retirement plans, although concern was expressed by some witnesses that workers might outlive their retirement savings by beginning benefits at an earlier but lower rate.

The ERISA Advisory Council also found that federal regulations governing nondiscrimination in pension benefits or contributions can restrict employers from offering phased retirement programs. For example, some employers reported to the Council that they did not establish flexible employment programs because of concerns with violating federal pension regulations governing nondiscrimination in benefits or contributions. The concerns are based on the likelihood that a higher percentage of highly compensated employees would be participating in the programs because their skills are more desirable. To the extent that older workers are more likely to be owners or highly compensated employees than younger workers, a DROP plan could disproportionately include the employer’s highest paid employees. In such a case, the employer’s pension plan could be deemed as discriminatory and potentially lose its tax-qualified status. To alleviate these concerns, the Council recommended that the IRS relax its rules on nondiscrimination if the intent of the plan amendment was clearly not to be discriminatory. Recognizing the complexity of this issue, the ERISA Advisory Council also suggested that the Secretary of Labor organize a task force to focus on the obstacles within ERISA and other relevant federal laws that inhibit private employers from instituting DROPs.

Many Other Factors Inhibit the Employment of Older Workers

A variety of factors contribute to discouraging the continued labor force participation of workers after a certain age. These factors include the following: Some employers may have negative perceptions of older workers and discriminate. Past surveys have found that some managers possess negative perceptions about the productivity of older workers. For example, managers have expressed a perception that age reduces workers’ physical stamina and ability to learn new skills. Under the ADEA, it is illegal to discriminate in employment on the basis of age, but evidence suggests that such discrimination does still occur. In 2000, the EEOC received 16,000 complaints of age discrimination, with nearly 3,000 merit resolutions and cumulative monetary damages of $45 million. Because some employers might seek to avoid hiring older workers because of potential litigation, the ERISA Advisory Council proposed that an interagency task force be convened to determine if any of the laws dealing with older workers’ pension benefits, including the ADEA, the IRC, and ERISA, need to be amended in order to encourage the continued development of flexible retirement alternatives for older workers.

Employers perceive higher costs associated with hiring older workers. Employers may feel that it is more difficult to recoup the costs of hiring and training older workers. The shorter potential length of time an older worker may remain with an employer, compared with a younger worker, implies that these up-front fixed costs are greater for older workers because of the shorter time period for employers to recoup their investment. Moreover, all other things being equal, older workers can raise an employer’s cost of providing health coverage. To address these issues, the ERISA Advisory Council recommended that legislation be developed that would extend Medicare to workers between the ages of 55 and 64.

Older workers have more health problems that inhibit work. According to CPS data on self-reported health status, 17 percent of persons age 55-64 have a work-limiting health problem compared with 9 percent of persons age 40-54 and 5 percent of persons age 30-39.

Conclusions

Older workers play a key role in the labor market and their importance will only grow in the years to come. By 2008, 1 out of every 6 workers in the American labor force will be over age 55, and this ratio is estimated to reach over 1 out of 5 by 2025. Older workers will comprise a progressively larger number of our nation’s managers, supervisors, and executives. Employers will have to rely more heavily on this segment of the labor force, as their experience and “institutional knowledge” become an increasingly valuable resource. Thus, older workers will become a critical labor force component in maintaining future productivity and economic growth, particularly if, as projected, labor force growth continues to slow.

Yet, employers have taken little action so far to prepare for this demographic transition. We identified few employers with well established, formalized programs to encourage older employees to work longer. Some private employers have indicated an awareness of the need to retain older workers and are experimenting with different options to extend the work lives of their older employees. However, these programs remain small and are often administered on an ad hoc basis. Flexible employment programs also remain to be addressed by employers and workers in the collective bargaining context. Public employer efforts to retain or rehire older workers have been broader and somewhat more common, largely in response to localized labor shortages in skilled occupations like teaching.

Part of this inaction may be because these demographic changes, while inevitable, remain largely on the horizon. Most employers are not yet facing labor shortages or other economic pressures requiring them to consider phased retirement or related programs. For this reason, time is available to develop sound policies, programs, and practices to respond to this demographic challenge. Some public discussion on this matter is already taking place. For example, Labor’s ERISA Advisory Council has received testimony from employers and other interested parties as to how federal policy and laws should be changed to address phased retirement, and the older worker issue generally. From this testimony, the Advisory Council has made recommendations to the Secretary of Labor, particularly with regard to current pension law and policy.

The ERISA Advisory Council has already urged that the Secretary of Labor convene a task force that would focus on issues concerning the extension of DROP plans to private employers. However, many of the recommendations suggested by the Advisory Council are beyond the purview of the Labor Department and would require action by other agencies or the Congress for implementation, as well as raising cost implications. Additional expert assessment and input from those agencies charged with administering the affected laws and regulations would help ensure that these recommendations are both carefully crafted and represent sound policy, particularly those calling for far reaching legislative changes. Expertise and input from outside agencies could also help to identify any unintended consequences of the actions that could be taken. For example, amending the ADEA to facilitate the expansion of phased retirement programs might result in some older workers losing legal protection against age discrimination in ways not previously recognized or understood. It also raises the risk that workers might outlive their retirement savings by beginning benefits too early.

Finally, greater input from other agencies could help to identify other aspects of the issues already explored and additional recommendations not addressed by the Advisory Council. This is particularly important given that the diversity among firms and industries suggests a need for a range of solutions. For example, what may work for public employers—creating incentives to extend employment through alterations in the design of their defined benefit pension plans—may not be helpful for private employers who do not have such plans or could not afford such redesign.

The challenge of how to extend the work lives of older employees in a manner that balances the competitive imperative of business with the life realities of older workers presents many opportunities. By focusing on the development of the policies, programs, and employment arrangements necessary to extend the work life of the growing numbers of older employees, the nation can ensure future supplies of skilled workers, bolster economic growth, and help secure retirement income adequacy for many working Americans.

Recommendations

To address the potentially serious implications of the aging of the U.S. labor force and avoid possibly acute occupational labor shortages in the future, the relevant government agencies should work together to identify sound policies to extend the worklife of older Americans, including those legal changes that would foster creative solutions to extending workers’ careers. Specifically, we recommend that the Secretary of Labor convene an interagency task force to develop legislative and regulatory proposals addressing the issues raised by the aging of the labor force. This task force would include representatives from Labor, and other agencies that have either regulatory jurisdiction or a clear policy interest, bringing together the expertise necessary to consider fully the implications of each proposal. It would solicit input from employers, unions, and other interested parties and carefully balance the concerns of older workers, employers, and the general public. The task force would also serve as a clearinghouse of information about employer or collectively bargained programs to extend the work life of older workers.

Agency Comments and Our Evaluation

We provided the EEOC, Labor, Treasury, and the Social Security Administration the opportunity to comment on the draft report. EEOC provided us with written comments, which appear in their entirety in appendix II. EEOC agreed with our findings, strongly supporting the goal of encouraging older workers to remain in the labor force and endorsing our recommendation for the convention of an interagency task force. The agency also provided us with several technical comments, which we incorporated as appropriate. Labor, Treasury and the Social Security Administration provided us with technical comments, which we incorporated as appropriate.

We are providing copies of this report to the Secretary of Labor, the Secretary of the Treasury, the Commissioner of Social Security, and the Commissioners of the Equal Employment Opportunity Commission. Copies will be made available to others upon request. Please contact me at (202) 512-7215, Charlie Jeszeck at (202) 512-7036, or Jeff Petersen at (415) 904- 2175, if you have any questions about this report. Other major contributors to this report are listed in appendix IV.

Appendix I: Data on Employment of Older Workers

Age 65-74 54 53 41 30 41 54 52 30 43 45 43 44 2008 (Projected percent)

Appendix II: Comments From the Equal Employment Opportunity Commission

Appendix III: Scope and Methodology

Survey Data

Most of the survey data used in this report are from the March Current Population Surveys (CPS). The annual March CPS is a source of income estimates for the United States and also includes employment and demographic data. We used the CPS because of its large sample size, its inclusion of detailed information on the economic and demographic characteristics of labor force participants, the timeliness of its data, and its collection frequency and consistency, which allows the opportunity to show trends over time and construct projections. We used CPS Basic Monthly Survey data from 1983 through 2000, March supplement data from 1989 through 2000, and February supplement data on displaced workers and job tenure and occupational mobility from 1996, 1998, and 2000. The Health and Retirement Survey (HRS) is composed of persons born between 1931 and 1941, and the respondents are questioned every 2 years. The first wave of questions was conducted in 1992. We used HRS data from Wave III that was conducted in 1996.

The sampling errors for the estimated percentages used in this report from CPS data are less than plus or minus 1 percentage point at the 95 percent confidence level. This sampling error does not apply to our projections of occupational distributions or wages. Although widely used and a rich source of detailed data, CPS and other surveys that are based on self- reported data are subject to several sources of nonsampling error, including the following: inability to get information about all sample cases; difficulties of definition; differences in the interpretation of questions; respondents’ inability or unwillingness to provide correct information; and errors made in collecting, recording, coding, and processing data. These nonsampling errors can influence the accuracy of information presented in the report, although the magnitude of their effect is not known.

Data were grouped into the age categories of 30-39, 40-54, 55-64, and 65-74 when the sample size was large enough to make calculations based upon these age groups. When the sample size was too small to support these age categories, we chose to group the data by over 55 and under 55.

Projection Methods

We based our occupational projections to the year 2008 on methods developed by the U.S. Department of Labor, Bureau of Labor Statistics. In order to do occupational projections by age group, we used 5-year age cohorts from 1988-93 and 1994-98 CPS Basic Monthly Survey data, calculating net replacement needs for 5-year intervals to 2003 and 2008. We made adjustments for the irregular size of bottom and top age groups. To compensate for missing historical data to project the younger age cohorts to 2008, we used BLS projections of the civilian labor force in 2008 for the 16-24 and 25-34 age groups and then we subtracted the percent unemployed as of 2000 for these age groups. We then distributed the projected employed by the percentage of those age groups in each occupational group in 2000. The accuracy of our model was checked by running projections from earlier data to the year 2000 and comparing the 2000 projections with actual 2000 data. We also adjusted our projected labor force numbers for 2008 by BLS’ labor force projections for 2008. To project earnings to 2008 for age groups over 40, we calculated mean earnings by occupation, age group, and year from 1989 to 1999. We then inserted a variable to control for the business cycle, projected the earnings by occupation and age group to 2008, and merged the projected earnings with our age group specific 2008 occupational projections. A potential shortcoming of our projections is that the cohort effects (e.g., the baby boomers are different from older generations) cannot be separated from age effects (e.g., the baby boomers labor force behavior will change as they pass from middle to old age) using cross-sectional data.

Private and Public Employer Information

We identified companies with flexible employment programs for older workers through interviews with experts and reviewing literature on the subject. We then interviewed officials from 13 companies who were knowledgeable about the programs. Public employers were identified and interviewed on the same basis.

Appendix IV: GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgments

Other contributors to this report include Don Porteous, Roger Thomas, and Howard Wial.