And They’re Off! (But Should You Worry?)

The hysteria over retiring baby boomers is ill-founded, but companies do face a specific kind of labor shortage.
Alix StuartOctober 1, 2008

When Kathleen Casey-Kirschling collected her first Social Security check in Vero Beach, Florida, last February, alarm bells went off across the nation. Casey-Kirschling, born January 1, 1946, is considered the first baby boomer. Therefore, her retirement foreshadows the mass exodus of tens of millions of people from the workforce, a demographic catastrophe that should have companies in a collective panic.

Alarmists would seem to have the facts on their side: the number of people entering the retirement sweet spot (ages 65 to 74) will grow by more than 80 percent between 2006 and 2016, according to the Bureau of Labor Statistics, while the number of people in the prime of their careers (25-to-54-year-olds) — will grow a mere 2.4 percent. Already, retirements are slashing the supply of qualified air-traffic controllers, petroleum engineers, and nurses, and a 2007 study by the Federal Reserve Bank of St. Louis suggests an imminent impact on GDP growth.

But Peter Cappelli, a professor at the University of Pennsylvania’s Wharton School and the director of its Center for Human Resources, doesn’t buy it. “There’s nothing to this story about a national labor shortage,” he says. Despite the impending retirement bubble, the labor force will continue to grow in absolute numbers over the coming decades, albeit at a slightly slower rate than in past years. Meanwhile, productivity gains have erased the need for certain workers, and many others may delay retirement past 65, due to their generally good physical health or poor fiscal health.

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The real issue, Cappelli maintains, is a talent shortage, not a labor shortage. “There’s nothing new about people retiring at age 65,” he says. “What’s new is that companies haven’t taken the time to develop talent.” Cappelli’s recent book, Talent on Demand (Harvard Business School Press, 2008), chronicles the shift U.S. companies have made in the past 30 years from growing all talent internally to looking externally for pretrained talent.

More experts are coming around to Cappelli’s way of thinking, at least in calling for a cap on the hysteria. What’s needed, they argue, is not so much a rapid embrace of programs such as phased retirements, in which companies try to hang on to departing employees as long as possible, but a cool analysis of hiring and training needs. “Macro trends don’t matter that much to any given company,” says Mary Young, senior research associate with The Conference Board. “What they really need to do is analyze their own workforce.” Enter the CFO, who can help with everything from projecting labor supply and demand to handling cost/benefit analyses of retaining specific people. Why should finance get involved? As Young tactfully notes, “The ability to do statistical analysis is not traditionally within the realm of HR.”

File under “I Don’t Do Filing”

Even in industries like health care and energy, where retirements will soon reach a critical point, a little forward thinking can go a long way. PSEG, for one, would appear to be the perfect victim of a baby-boomer brain drain. The New Jersey–based utility has an older than-average workforce and harder than-normal work (some employees, for example, routinely hang out of helicopters to fix live wires). Thirteen percent of its employees will be eligible for retirement (most with pensions) over the next five years even as the company confronts major growth opportunities, given the renewed interest in alternative energy sources including nuclear power and solar panels.

But Thomas O’Flynn, CFO of PSEG, says the situation “is not a crisis.” For one thing, he notes that many people at the company work past retirement age. And the company began to develop its talent pipeline more than five years ago by working with local community colleges to develop curricula for specific skills. Those programs have yielded 66 hires to date, keeping pace with the number of departing workers while giving new employees a chance to receive on-the-job mentoring. O’Flynn is so optimistic about the system that he is doing little to encourage delayed retirements and hires back retired workers on a very selective basis.

Many companies may not even have to go that far, according to Laurie Ruettimann, former human-resources manager at Pfizer and now author of the Punk Rock HR blog. As technology and offshore outsourcers assume ever more commoditized tasks, “what you have left are knowledge workers, who are generally willing to take on more work, as long as it’s not filing,” she says.

Before you can breathe easy, however, it would be wise to engage in a little “strategic workforce” or “human capital” planning. In a recent study, The Conference Board’s Young documented several different approaches. At one end of the spectrum, Dow Chemical, with $54 billion in revenue and 46,000 employees, uses a sophisticated simulation tool that extracts personnel data from its ERP system, projects it forward three to five years, and then forecasts possibilities for demand based on such factors as industry trends and new business strategies. The model can also address targeted productivity increases. All told, the tool yields very specific hiring numbers, business unit by business unit, for a range of scenarios.

Corning Inc., meanwhile, takes a high-level view that looks at likely needs across general categories of jobs, divided into strategic, core, and noncore segments, over the next three to five years. The diversified manufacturing company has about 25,000 employees and $5.8 billion in revenue. The analysis is based largely on input from line executives, rather than external data, and yields general investment goals rather than quantitative hiring figures.

Either approach can work, says Young, but what’s critical is to slice and dice the data in meaningful ways. Rather than look at the average age of a workforce, for example, CFOs should consider average ages within specific roles, facilities, or geographies, along with historical retirement patterns, to pinpoint exactly where problems may lie. Through such cuts, Dow Chemical discovered that older U.S. employees are staying on longer than projected, in part because many delayed starting a family and are just now facing college costs.

While it may be comforting to know that what demographics taketh away it also giveth (the 2008 class of high-school graduates was the largest ever, at 3.3 million, a figure expected to dip slightly and then return to that record level within10 years), companies should focus lesson supply and demand and more on the challenges of developing multiple generations of employees simultaneously. Young and old are both likely to depart sooner rather than later, the latter to retire and the former to exercise their “nimbleness.” As O’Flynn says, “We have to work harder to make [younger employees] comfortable and keep them motivated.” In short, crisis or no, talent will command a premium for many years to come.

Alix Stuart is a senior writer at CFO.

Help Wanted

Some job categories will be heavily affected by employee departures between 2006 and 2016.*

1.9 million: Retail salespersons

1.2 million: Customer-service representatives

523,000: Truck drivers, heavy & tractor trailer

497,000: Executive secretaries & administrative assistants

450,000: Accountants & auditors

*Total job openings due to growth and net replacements

Source: U.S. Bureau of Labor Statistics

More than half of workers age 65 and older who work now do so full time.