Retirement Plans

More Than Just a Number

An aging workforce is on the minds of finance chiefs in the Duke/CFO Business Outlook Survey.
David W. OwensApril 4, 2014

If you’re responsible for the financial performance of a company, can you afford to avoid thinking about retirement — that is, your employees’ retirement?

In 2013’s end-of-year Duke University/CFO Magazine Global Outlook Survey, we asked about the potential consequences of proposals to extend the full retirement age of Social Security (which is currently pegged at between 65 and 67 years of age, depending on when you were born). In the survey, 6 out of 10 U.S. finance executives (62%) said that they thought the government should, indeed, raise the retirement age to help reduce the federal budget deficit. Clearly, the budget shortfall is on their minds.

14Mar_DeepDive_p46But the actual impact of the Social Security program on the federal budget deficit is the subject of heated debate, largely along party lines. Essentially, it’s a question of whether money the government borrows from Social Security trust funds to pay its other bills “counts” toward the deficit. If Social Security funds become unavailable for funding ongoing operations — say, for example, if the money were needed to make ballooning benefits payments as baby boomers ride off into their golden years — then the government will have to replace those amounts from other sources, potentially requiring additional increases in the debt ceiling.

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While the macroeconomic and political consequences of working longer are open to interpretation, the potential impacts on workforce management strategies hit much closer to home for finance executives. Despite the fact that Social Security was originally intended to supplement retirement savings, not replace them, it has grown into a significant factor influencing retirement decisions. According to the Center on Budget and Policy Priorities, a nonpartisan think tank, Social Security provides the majority of the income for nearly two-thirds of the retired population in the United States. For an alarmingly high number of retirees, it provides practically all of their income.

It’s not too surprising, then, that 63% of the respondents in the Business Outlook Survey believe that raising the Social Security retirement age would likely force many of their employees to put their retirement plans on hold. That means that these companies would be dealing with all of the issues associated with managing an older workforce. Those issues are by no means inconsequential.

One aspect, of course, is financial. Two-thirds of the survey respondents who believed that their employees would delay retirement placed higher company costs for medical benefits among the top three consequences of employee decisions to work longer. In addition, a little more than half (52%) were concerned about higher payroll costs for longer-tenured employees. Simply put, the longer employees stay at a company, the higher their compensation tends to be. And approximately one in five respondents expected that their companies’ payments into retirement programs would have to increase.

Competitive Concerns
But the Business Outlook Survey shows that “softer” issues figure into finance executives’ calculations, too. Indeed, attracting and retaining qualified employees was third on the list of top internal concerns, with 38% of respondents selecting it. That places it right behind the rising cost of health care (43%), which was second only to the ability to maintain margins (64%) as a concern.

For some companies, the mandate to remain competitive is a driving factor in benefits decisions. Mark Verbeck, CFO of Coupa Software in San Mateo, California, notes that “for most high-growth tech companies, it’s very competitive for employees.” He acknowledges “the need to continue attracting employees” as a key to success. Similarly, Jeff Taylor, CFO at Rahr, which produces and distributes malt and other brewing supplies, says, “If we are trying to hire good talent, we need to offer what everyone else is offering. For us, keeping the status quo has its advantages,” even when considering “the cost-structure point of view,” as he puts it.

14Mar_DeepDive_p47In this regard, decisions to delay retirement can pose challenges for workforce management. For the Business Outlook respondents who expressed concern about delayed retirement, 6 out of 10 (59%) noted that longer retention of more experienced workers potentially could block advancement by younger employees. If the younger generation perceives that fewer opportunities for advancement are available, the more likely they are to seek their fortunes elsewhere.

Yet, a number of the executives surveyed pointed out that the expense and risks of retaining employees can be balanced with the advantages of being able to draw on a more experienced and skilled workforce. One controller from a midsize manufacturing company wrote that “retaining experienced employees longer will be a huge benefit to the company,” while a CFO from the hospitality industry says simply, “On balance, we do well when our older employees stay around.”

Other respondents agreed, citing the benefits of retaining workers’ accumulated knowledge and skills, as well as the loyalty that long-time employees tend to develop. In the end, noted the owner of a small manufacturing company, the most important impact of having longer-tenured employees could well be “improved performance and workers.”

Effective management of human resources is as much a determinant of an organization’s success as is running the numbers. CFOs, in their ever-expanding roles as stewards of their companies’ well-being, will need to bring the same level of rigor and discipline to workforce management that they traditionally have provided for financial management. More and more, this will mean providing the perspective, in addition to the analysis, that can inform the trade-offs companies will be making as employees enter into a new era of retirement planning.