Why Employers Should Care About the Cost of Delayed Retirements
Employees Expected to Increasingly Delay Retirement
Having employees able to retire “on time” is a win/win scenario for both employees and employers. In a perfect world, all employees would be able to begin enjoying their retirement years when they wish, and employers would, therefore, be better able to manage workforce resources and costs. However, in today’s society, many employees are expected to delay their retirements beyond their desired retirement ages due to financial concerns, such as having inadequate savings to sustain them throughout their retirement. Other employees may delay their retirements in response to the increase to age 67 for the Social Security Full Retirement Age, and the decline in employer-sponsored retiree healthcare insurance availability, which may lead employees to wait until they are covered by Medicare.
Quantifying Employer Costs of Delayed Retirements
Prudential sponsored the University of Connecticut’s Goldenson Center for Actuarial Research to build a model that quantifies the impact of delayed retirements on employers’ costs.
Using this model, a “National Case” has been developed based on national averages for a hypothetical private sector workforce of 3,000 employees with workforce costs of $194 million. The cost of delayed retirement for this National Case has been measured using two methods, yielding significant findings.
• For an individual employee, the cost of a one-year delay in retirement is over $50,000. This result compares the average workforce costs (i.e., salary and benefits) of a retiring employee vs. a newly hired employee. It is assumed that when an employee retires, an advancement opportunity is created such that all employees progress through the workforce (i.e., “move up a notch”), and an entry-level employee is hired.
• For an entire workforce, a one-year increase in the average retirement age results in an average annual incremental run rate of about 1.0%–1.5% of workforce costs. In the hypothetical case study of an employer with 3,000 employees and workforce costs of about $200 million, a one-year increase in the average retirement age may result in an incremental $2-3 million of workforce costs annually.
Why Employers Should Care About the Cost of Delayed Retirements
While many employers are aware that delayed retirements will likely increase their workforce costs, some simply consider this trend to be unavoidable, and others may not know whether the incremental costs are significant. In order to put the magnitude of the cost of delayed retirements in perspective, we compared this cost to other workforce costs and to rising healthcare costs.
Comparison to Other Workforce Costs
On a national basis, a delay in retirement of:
• One year may cost as much as paid sick and personal leave, or more than twice
as much as life and disability insurance.
• Two years may cost as much as either DC retirement plans, DB retirement plans,
or paid holiday leave.
• Three years may cost almost as much as paid vacation leave, or over one-third as
much as health insurance.
Comparison to Rising Healthcare Costs
Another way to put the cost of delayed retirement in perspective is to compare it to rising healthcare costs, which are a front-and-center concern for benefits and finance executives. From 2004 to 2015, national health expenditures increased at a rapid 5.0% average annual growth rate. During this period, employers’ healthcare costs per employee increased at a slightly lower average rate of 3.9% annually.
However, during this same 2004 to 2015 period, the average annual growth rate of employers’ healthcare costs per employee still exceeded the average annual growth rate of total workforce costs per employee, at 2.6% annually. The net effect was that in 2015, healthcare costs represented 7.6% of workforce costs—or an incremental 1.0% of workforce costs. This 1.0% increase realized is similar to the expected incremental cost of a one-year delay in retirement for the National Case discussed earlier in this paper (1.0%–1.5%). Even more remarkable is that the cost of a two-year delay (2.7%) or three-year delay (3.4%) is more than two and three times, respectively, the healthcare increase.
Best Practices for Employers
Employers are in a position to help their employees be financially secure so they may retire on time. The following are best practices that can benefit employers and employees alike.
1. Consider adopting retirement programs with features that help employees retire on time.
2. Provide education to help employees proactively make informed financial decisions.
3. Adopt a holistic approach to improving employees’ financial wellness.
4. Consider using data analytics to customize the cost of delayed retirement analysis for your
organization.
For additional information about the costs of delayed retirement, view the PDF below.
