Forced Early Retirement in a World with Longer Life Expectancies

February 6, 2016

For years, I've argued that the biggest single cause of fiscal problems in the world is the failure to adjust retirement ages for changes in life expectancy.  "Social insurance" programs like Social Security and Medicare and state and local government pension plans simply can't remain viable if people retire at 65 (or younger) and live into their 90s.  In fact, you shouldn't expect to retire at 60 and maintain your standard of living through a decades-long retirement, regardless of whether you fund your retirement with Social Security, personal savings, corporate pensions, or the generosity of your children; the math just doesn't work.  To avoid either huge tax increases, big cuts in Social Security and Medicare,  an explosion in government debt, or the impoverishment of many elderly citizens, we really need to raise retirement ages to reflect longer life expectancies.

 

Unfortunately, large publicly traded U.S. corporations are moving in the opposite direction.  When companies seek to cut costs, either for legitimate long-term considerations or simply to hit quarterly earnings targets, they usually start by forcing or "incentivizing" their older employees into early retirement.  Layoffs are so skewed towards older workers that I've often described the role of Human Resources departments as "committing age discrimination without being held liable."  Companies focus their layoffs on older workers for two reasons.  First, older workers are usually paid more than younger workers.  (They might be more productive too, but HR departments seem to see workers as homogeneous and easily substitutable for one another, not as individuals with different skills.)  Second, forcing employees to retire even a few years earlier than they planned can significantly reduce a company's future pension liabilities.

 

If employees forced into early retirement have transferable skills and are willing to relocate, they might find new jobs at similar or higher salaries.  But employees who can't relocate, perhaps because they have a working spouse or an underwater mortgage, are unlikely to find jobs that pay as much as the jobs they lost.  They might try different careers or go into "consulting," but in all likelihood, their working lives will be much shorter and their lifetime earnings much lower than they expected before they were terminated.  Even those who find new jobs at similar or higher salaries will see their (defined-benefit) pensions reduced by their early retirement.  Facing a longer than expected retirement with a smaller lifetime income and smaller pension, they will have to cut their spending to make their resources last. 

 

Forced retirements and, perhaps more important, the fear of forced retirements may help explain weakness in consumer spending and the associated increase in the personal savings rate in the United States over the last few years.  This is an example of the fallacy of composition, where an action that benefits a company if it acts alone is harmful to the economy if other companies do it too.  Companies that force employees into early retirement shouldn't be surprised when demand for their products isn't as strong as they expected. 

 

Eventually, the aging of the population and the ongoing slowdown in labor force growth will force companies to shift gears and start exploring ways to keep employees working longer instead of retiring earlier.  Until that happens, forcing employees into early retirement will threaten both economic growth and the long-term viability of Social Security and Medicare.

 

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