CHAPTER EIGHT
After Fixed-Age Retirement Is Gone
NO FORECAST I EVER MADE was greeted with greater derision than the prediction in the spring of 1976* that in another ten years, that is, by the mid-eighties, mandatory retirement age in America would be pushed beyond age sixty-five and that mandatory retirement at any fixed age might altogether be abolished.
Then it was believed almost universally that retirement would soon become mandatory at an earlier age than sixty-five, for the labor unions then were pushing hard for forced early retirement—at age sixty or, at the latest, age sixty-two.
Yet, within fifteen months after my book appeared, mandatory retirement was banned in our largest state, California. At the same time, the Congress of the United States was moving to raise the age to seventy. By now it is practically certain that mandatory retirement at any one fixed age is on its way out and will disappear throughout the United States. This remarkable change, a shift by 180 degrees in national policies, was accomplished despite strong opposition from all “interests”: labor, business, the government, and academia.
Although the policy reversal came suddenly, its causes—demographic, economic, and political—had been building up for many years. The new policy direction could have been predicted twenty years ago from trends that were reported in widely known statistics. Because the policy implications of these trends were not analyzed by government, business, unions, media, or academia, the United States is now ill-prepared to make major adjustments that the new policies will require. The nation has continued to view issues of retirement policy—and the more conspicuous issues of unemployment—with a mind-set shaped by the Depression. So rigid is the mental and emotional attitude that the leaders of American public opinion could ignore the vast changes that had occurred since the forties. Never was there a better example of the need for examining trends with a view toward foreseeing and tackling tomorrow’s problems.
The present shift in retirement policy is only one—and not necessarily the most important—of a whole cluster of changes that will have to be made over the next decade in the way society looks at and deals with the central question of jobs. We are going to have to learn that “unemployment,” the word that has dominated policy discussion for forty years, is no longer the central issue. The economy needs and can absorb more workers than it now has—provided the public and private framework of policy is altered to meet the actual conditions of the U.S. labor market. A brief review of what has happened to the fixed mandatory retirement age will give us a glimpse of the broader change—and the problems—that lie ahead.
Politically, the demand for a less rigid retirement age had become irresistible because of the growing power of older Americans. People over sixty-five are the nation’s fastest-growing “minority”—and indeed the only fast growing “minority.” They are now more than one tenth of the population and will be one seventh in another ten years. They are a much larger proportion, however, of the working-age population. Increasingly, older people will become a major and highly powerful pressure group, that, unlike any other, cuts across all traditional political lines—whether economic, social, regional, sexual, or racial.
The change from fixed-age retirement to flexible-age retirement is inevitable. It is also desirable on human grounds. Mandatory retirement at age sixty-five condemns to idleness and uselessness a great many healthy people who want to work, if only part time. Sixty-five was established as America’s mandatory retirement age more than sixty years ago, when both life expectancies and health expectancies were much lower. What was then, in 1920, age sixty-five now corresponds to age seventy-five or seventy-eight for men and age eighty for women. Conversely, the sixty-five-year-old today enjoys the health and life expectancy of the fifty-two-or fifty-three-year-old way back in the 1920s.
To be sure, a good many people in their sixties want to retire, but a large proportion of the people who retire—whether they take early retirement or keep on working until they are sixty-five—soon find that all they wanted was a long vacation. However, under the traditional policy of American Social Security and American pension plans, they cannot return to work without substantial penalties, if at all. To give people the option to postpone retirement, either by delaying mandatory retirement or by abolishing it altogether, was thus a belated adjustment to the great success of this century in extending life and health spans.
Economically also, later retirement and flexible retirement are highly desirable. Of the people in the United States now reaching retirement age, the great majority—three out of four or more—finished their education with junior high school or, at most, after a year or two of senior high school. They are people who worked mostly as blue collar workers in manufacturing, mining, or the services. Of the young people who now enter the labor force, about half have gone to school beyond high school and have at least some college. Very few of the new entrants into the labor force are, therefore, available for the jobs the retirees vacate. Altogether, we face a severe shortage of new entrants into the labor force, a few years down the road when the babies of the “baby boom” will all be in the work force—most of them are there already—and when the new entrants into the work force will be drawn from the babies of the years of the “baby bust,” that began in 1960 and that cut the number of babies born by 30 percent. To some extent, this is being offset by the larger participation of young women in the work force—now as high as that of young men. But this shift has already been accomplished. From now on, for the next twenty years, the number of new entrants into the labor force will decline steadily, and the number of new entrants available for the jobs the retirees vacate will decline drastically.
The most obvious practical consequence of this change is that we cannot maintain mandatory retirement at age sixty-five and finance retirement pensions—whether through Social Security or through private pensions. In 1935, when Social Security was first enacted, there were nine Americans at work for every American over sixty-five. By 1977, the ratio had shifted to four-to-one. By 1985, it will be three-to-one. In addition, there are the “survivors,” mostly widows who were far too old when their spouses died to reenter the labor force themselves. The dependency ratio—that is, the ratio between people in the labor force and people who have to be supported in retirement—is already as low as three-to-one; there are 92 million Americans at work and 32 million on retirement pensions or supported as “survivors.” By 1985, that ratio will be down to two-and-a-quarter-to-one or so, unless retirement is delayed. This dependency ratio does not take into account the fact that a very large and growing proportion of the new entrants into the labor force, especially older married women, do not work full time. On full-time equivalency, the dependency ratio is already well below three-to-one, which means that every American employed has to transfer about one third of his income, through Social Security taxes, through pension fund contributions, and increasingly through general taxes to support older people who are retired and on pension.
This is politically and economically unbearable. It means that the pension burden, whether carried by government or by the employer, is becoming increasingly the first charge on the economy, ahead of capital formation, ahead of maintaining and building plants and equipment, and ahead of creating new jobs. It also means that inflation becomes both absolutely inevitable and absolutely unbearable.
The New Problems
Although abolishing fixed-age retirement is both inevitable and desirable, it creates serious problems. It confronts employers, labor unions, and governmental policy makers with entirely new challenges, for which none of them is in the least prepared.
1. The first of these challenges, and in many ways the thorniest, is that of establishing criteria for retiring people who have become physically or mentally incapable of continuing their work. If, as the California law clearly spells out, retiring people for age is no longer permitted, then there have to be objective criteria other than age—that is, physical or mental impairment. Who sets these criteria? Who administers them? The California law talks of “competence” to do the work. What is that? How is it defined? Who defines it?
We know from industries that have criteria for retirement other than age., e.g., for airline pilots or locomotive engineers, that the criteria have to be set in advance. We know that they are best set by mutual agreement between employer and employee representatives. Indeed, we know that nothing so quickly creates a militant union as an attempt by the employer to set these criteria unilaterally and arbitrarily. And we know the criteria have to be administered impartially—that is, by outside professionals with or without representation by employer and employee. Above all, we know that the same criteria must apply regardless of age. If older people are being retired while younger people are allowed to continue to work at the same level and with the same abilities or disabilities, there is a prima facie case of discrimination. And if there are no criteria for “competence” at all for younger people and no regular review of their performance against the standards, no claim of “incompetence” against an older person, short of total paralysis or coma, is likely to be upheld. Indeed some unions, e.g., some Teamster’s locals, are already saying that even a paraplegic, if only sufficiently old, will have to be kept on the payroll—“there is always something he can do.”
For jobs which require physical capacity capable of being defined—response time for airline pilots, for instance, or visual acuity—these standards are not much of a problem, though it will be years before they have been worked out. But what about jobs in which the requirements are judgment, ability to cooperate with people, ability and willingness to listen to new ideas, performance in the classroom, and so on? In other words, what about the jobs of knowledge workers, who increasingly are becoming the center of the American economy and the American labor force? No one has tackled standards for them as yet.
In universities, where a few distinguished faculty members are being kept on annual contract beyond the traditional retirement age, “subject to their physical and mental capacity to do the work,” the decision is usually left to the administrative officer, with or without the advice of a faculty group. There is almost never a decision to terminate; instead it is “suggested” to the colleague who has become senile that perhaps he better stop working. This will no longer be good enough. We urgently need due process that enables organizations to remove people who are no longer equal to the job, regardless even of contracts or academic tenure.
The problem now facing us is in respect to federal judges. When the Founding Fathers declared that judges could not be removed except by impeachment, they did not expect judges to live long enough to become senile—and now they do. We know that the federal judiciary will need to develop some self-controls. There will have to be some body—presumably a committee of the Judiciary Conference of the United States under the chairmanship of the Chief Justice of the Supreme Court—which can remove a judge who has ceased to be competent. How does one do this, however, with very large numbers of people—engineers, accountants, researchers, sales managers, professors, and so on? Without such a provision, only lawyers will benefit from the extension of working life.
We probably should maintain mandatory retirement for people in top jobs, though not mandatory retirement from work and job altogether. It is, I maintain, most undesirable for top people—whether in business, in academia, or in government—to continue indefinitely. A vice president of marketing who is fifty years old can be removed, even though it may mean buying up his contract. It makes no sense to have him become irremovable on his sixty-fifth birthday.
One reason why top people should not be allowed to stay on is that the one disease of which the patient himself is completely unaware is senility. If we leave it to older persons to decide for themselves when to quit top jobs, we risk senility in high places. There are already too many examples around of chief executive officers resisting retirement and staying on far too long. Sewell Avery at Montgomery Ward, thirty years ago, is the usual example, of course. At the same time, there is no reason why the older and functioning person need stop working. There is no reason why the V.P. Marketing, if in full possession of his mental faculties, should not continue to work as a senior individual contributor—in charge of market research or customer relations or product development, for instance. What is needed is to get such a person out of the line of command or authority. Otherwise, the same rules should apply that hold for associates who do not hold top-level positions. We need to develop similar approaches regarding people who work for government or for universities and schools. We need to be able to move people out of top positions because their staying on is too risky and because there is need to make opportunities available to younger people. And we need to be able to keep such men and women in useful and productive work if they are mentally and physically able to continue working and want to do so.
2. Equally important, perhaps more urgent, is the question of the rights and benefits of the people who stay on beyond the age at which they could retire at a decent retirement pension. Neither American business nor American government has seen the problem involved in cases of this sort. Under present laws and union contracts, such people retain full seniority rights, including seniority rights to promotion and wage and salary increases. They retain full seniority in layoffs, even though they have an ample pension available to them. If we maintain this, we will see the ludicrous and inequitable result of keeping in full employment senior citizens whose children are grown up, who have no dependent parents, and who have available to them a retirement pension equal to their salaries (if only because of the lower tax burden and because of Medicare available to them), while laying off young adults, fathers of families with dependent children and dependent parents. This is, however, what the labor unions will have to insist on, unless the employers today—in the private and the public sector—work out a more equitable system.
Under present laws and union contracts, such older people who stay on in work after they have reached the age at which their full pension benefits are available to them still will have to be provided with the full range of benefits and will carry the full load of benefits. The man or woman who stays on the job after age sixty-five pays, for instance, the full Social Security tax, as does the employer. A full contribution to the pension fund is being made, even though the employee’s pension by that time is fully paid up. Under most health care plans, the employee who continues past age sixty-five still has to pay full Blue Cross and Blue Shield dues—or the corresponding insurance premiums—even though Medicare provides for reimbursement of most of his medical expenses, and indeed for more generous reimbursement than many health insurance plans do. This is clearly inequitable. It is unnecessarily expensive and high cost without benefit. It is also silly. Yet it will become a routine burden on both employer and employee unless employers and unions go to work now on adjusting their plans to the new reality, that is, to flexible retirement age.
The Japanese inadvertently solved the problem a long time ago. The Japanese official retirement age is fifty-five. It was set at that age level seventy years ago, when Japanese life expectancies were around forty-three years. Today, Japan has the same life expectancy as the West, so that the fifty-five-year retirement age has become an anachronism. Indeed, what the Japanese really have is not a retirement policy, but a “non-retirement” policy. The great majority of Japanese employees continue to work beyond age fifty-five, and a great many of them in the same job with the same employer as before. However, they are no longer “permanent” employees, but “temporary” employees—which means that they can be laid off if business slackens. They have no more job security. They have no more seniority. They no longer can expect a promotion or have a right to it. And their incomes go down by 30 to 40 percent. At the same time, these employees in many companies have a preferential right to be rehired should they want to come back from retirement and if physically and mentally fit, but only as “temporary” employees. The logic of this, according to the Japanese, is that people over age fifty-five, as a rule, no longer have dependent children or dependent aged parents. Their expenses are lower. The government, as it does in most countries, pays their health care bill. Yet they represent a valuable resource and one that few employers can afford to give up lightly.
3. Altogether, the abolition of fixed-age retirement—or the postponement of fixed-age retirement—will increasingly force employers to create permanent full-time jobs permanently staffed with part-time people, A good many older people will not want full-time jobs, and the older they get, the more likely are they to want part-time work. This is also true in respect to the other major source of new employees in the American work force—the older married woman. Increasingly, employers will have to learn to hire and put to work part-time people.
In many ways, these part-time people are the most desirable employees. They do not, as a rule, move around much. Once they have it, they stay on the job. Their absenteeism and sickness record is remarkably good. They much prefer, as a rule, to go to work where their friends are to being alone at home with no one to talk to but the appliances. However, their attitudes are different. They do not, for instance, respond to traditional “supervision.” They have, after all, been working long enough, whether at the old job or in running a household, to know what work is and to have self-discipline.
The part-time employee needs different benefits. The older employee, for instance, needs supplementary health insurance that covers what Medicare does not cover. He needs no unemployment insurance; he has Social Security or a company pension. The older married woman who works part time does not need any health insurance of her own if she is covered under her husband’s policy. In other words, benefits have to be far more flexible to make sense. Under the present system, part-time people either enjoy no benefits (although benefits for them are predictably going to be a major union demand), or they enjoy benefits that do not, in fact, provide any benefit to them. How to give the part-time employee, whether an older person past traditional retirement age or an older married woman, the most for the dollars spent on benefits, is a major challenge, and one that employers and unions have not yet tackled.
Close to two fifths of the American labor force of tomorrow are likely to be part-time workers: older people past traditional retirement age, married women, and young people still in school and college. We are totally unprepared—indeed, totally unaware of this. To almost everybody, “labor force” still means male adults working full time. They actually comprise not much more than one third of the “labor force” (with another quarter or so being adult women working full time).
It is not only employers and unions who are still imprisoned in the reality of fifty years ago. Our employment and unemployment figures are equally obsolete in that they fail to reflect the great shift to a labor force in which a very large group—perhaps the largest single group—will be part-time people, many of whom have available to them economic support other than the income from their own work, whether Social Security and retirement pension, a spouse’s wage and salary, or parental support. We do not even know the size of the labor force—we have a “body count” but no way to translate the numbers into full-time jobs able to be filled. Similarly, we have a total figure for people potentially available for some work—our so-called “unemployment figure”; but there is no clue in the figure to how many jobs the “unemployed” could fill since we do not know how many of them could take full-time work and how many only the most minimal of part-time work. We cannot even guess today at the amount of additional production we are losing because of unemployment; all the widely publicized figures of the “loss” suffered for lack of full employment are based on the untenable assumption that everybody reported as “available for work” and therefore as “unemployed” is available for forty hours of work a week. And we cannot even guess today at the economic hardship unemployment causes; we simply have no information regarding the other sources of income available to people who might take part-time jobs if available, whether retirement pay, a spouse’s salary, parental support, or welfare and unemployment benefits.
This refusal to accept that the part-time worker, and especially the older part-time worker, has become a major element in the American labor force already grossly distorts economic perception and policy. It explains, for instance, why labor unions and liberal economists speak of “record unemployment,” even though the real “record” of the last few years is the number and proportion of American adults at work, full time and part time. It also explains, however, why despite huge liberal majorities in the Congress, major “reflationary” policies have not been enacted—with a very large (though unknown) percentage of the “unemployed” available for part-time work only, there is little political pressure for “anti-depression” policies.
Our refusal to face up to the steady increase in part-time employees thus already impairs policy making. It will become a source of major mistakes as older people keep on working in large numbers, as they are bound to do now that fixed-age retirement is rapidly disappearing. Employers and unions, in particular, cannot afford to persist in believing that “employee” necessarily means “full-time worker”—yet both, by and large, are convinced that it does and must mean just that.
4. Today, workers are encouraged to stay on the job or retire. Tomorrow, we will increasingly have to make it possible for people to move in and out of the labor force. Women, for instance, usually take a full-time job until the first child arrives. Then they usually drop out of the work (except in case of divorce) until the youngest child is eight or nine years of age. Then they work again, though often only part-time. However, people past traditional retirement age particularly will be disposed to being in-and-out workers. They do have a pension available to them. At the same time, many of them—perhaps a near-majority—will want to work. Today, the employee who retires, e.g., by taking early retirement, finds it very difficult to come back into the work force. Employers, as a rule, do not want him; he costs too much in pension contributions. For under our present system employers may not, under their pension plans, differentiate between employees who are dependent on the company’s pension plan and employees who already have a pension and need, at best, a supplementary pension right. Social Security discourages people from working at any age once they have become entitled to even reduced Social Security benefits. Again, here is an area that needs new thinking lest the economy be saddled by high benefit costs that do not benefit anyone.
Specifically, we will have to think through Social Security. Our present Social Security system was enacted during the Great Depression of 1935, with the express purpose of moving as many people as possible out of the labor force. Increasingly, in the next ten years, we need the opposite policy—one that encourages people to stay at work. At present, anyone earning less than the median American income—that is, less than $14,000 per family—has powerful incentives to stop working when he reaches the age at which he is eligible for the full Social Security payment, that is age sixty-five. Social Security income is tax-free. Medicare is virtually free—also, of course, not taxed—and the individual increasingly has available to him some employer-paid pension, a good part of which is also not subject to taxation. If the older low-income employee gets a gross amount of 50 to 60 percent of his current wage in the form of Social Security and pension—and Social Security usually gives him 50 percent to begin with—he is today being penalized if he works and actually loses income.
What we need is a policy that encourages people to stay on the job and to remain economically productive—which also means producing taxes for the government. Such a policy must not penalize retirement, if only because this is not acceptable politically. We are indeed already on the road to such a policy—and pretty far down the road at that. People entitled to Social Security benefits now get larger checks the longer they postpone drawing their Social Security pension. However, we still place a heavy penalty on working between the ages of sixty-five and seventy-two. Anyone in these years who earns income beyond a small amount loses all or almost all of his Social Security benefits, even though he has fully paid for them. And then, of course, he or she pays income, tax on the earnings received. Indeed, unless such a person makes a very high income—more than $20,000 a year—his earnings from his work is actually taxed at a 100 percent rate. Predictably, this is not going to last. Indeed, I would expect it to be changed before the end of the eighties.
5. The most difficult, but also the most important, problems now that fixed-age retirement is gone, confront us in the public sector. Private sector pension plans have problems, because people live so much longer than we expected even twenty years ago, and because of inflation. However, public sector pension plans, especially those of state and local governments, are a mess and are, in fact, generally bankrupt. It is reasonably certain that public sector employees face sharp cuts in what the public increasingly feels are exorbitant pensions. I would, for instance, expect laws restricting government employees after retirement to the income (adjusted for taxes) they received before retirement. At present, a substantial portion of retired public sector employees enjoy larger post-tax incomes than the salaries they received while at work. This will be considered increasingly inequitable, but also increasingly incompatible with the survival of our states and cities and their financial viability.
At the same time, we impose severe and unjust penalties on the public service employee. Private sector employees have their pensions vested after a maximum of ten years of service—which means that after that period they have an account in their name, with pension rights defined and assured upon their reaching pensionable age. Public sector employees, and especially employees of state and local governments, have no such vesting. As a rule, they have no pension rights whatever, unless they have served a particular employer—a city or a state—for twenty years. Then they are entitled to a very large pension upon early retirement. The very large early retirement pensions are, in great measure, a form of reverse income distribution. They take money from the poor and give it to the rich. Typically, the police captain in a big city—such as Los Angeles or Detroit—goes into early retirement after twenty years of service and takes a job as chief of police in one of the affluent suburbs at a fraction of the salary the suburb would have to pay, did he not have his substantial early retirement pension from his first employer. As the big cities and the large state governments become increasingly insolvent under the pressure of unfunded or inadequately funded pension promises, the early retirement pension will come under increasing attack—and it cannot be defended.
At the same time, we will have to learn to vest public service pensions the same way we now vest private sector pensions. And in the public sector we will face the same problems of thinking through criteria for retirement, of the rights and benefits of people who work beyond traditional retirement age, of the part-time job, the in-and-out older worker, and so on, that we face in the private sector.
The Need for Second Careers
The most important and the most novel of the challenges posed by the abolition of fixed-age retirement is the need for second careers for the middle-aged knowledge worker. It is a need which employers will very largely have to satisfy.
Increasingly, the abolition of fixed-age retirement will force employers to develop standards of performance, competence, and promotability for all knowledge employees, regardless of age. Also increasingly, the pressure will be on employers to remove in early middle age, that is, by age forty-five, the employee-accountant, training director, sales manager, engineer, or associate professor—who is no more than merely competent. Otherwise the employer will find that he cannot get rid of this employee at all. If he tries to do so, he will be guilty of “discrimination by age”—and the employer will no longer be able to say, as he does today, “Oh, well, he’ll retire in a few years anyhow.” The only thing he will be able to do is to place this employee in early middle age in another job and in another career.
The employee will also have a powerful incentive to want a second career once it is no longer taken for granted that one retires automatically at age sixty-five or sixty. Then the prospect of staying in the same place and on the same job for another two or three decades becomes a nightmare to the many middle-aged people who find themselves in a dead-end or deadening job.
Until the Pension Reform Act of 1974, these people rarely moved unless they were fired. They lost too much in pension rights. Now that pensions are vested after ten years of service, there is far more mobility in this group. With fixed-age retirement gone, this group is bound to need and to demand even more mobility—above all, organized placement efforts to give them second careers. The accountant who, after twenty years, is very tired of the steel company, is ready for a job as business manager of the community hospital. The assistant counsel in a company or in city government who won’t make general counsel is ready for a partnership in a medium-sized law firm. The associate professor who has been teaching Introductory Japanese for twenty years and will never produce a scholarly book is ready to handle the liaison between a Japanese company and its Western joint-venture partners; and so on.
Systematic placement in second careers is commonplace in consulting and professional firms—management consultants, consulting engineers, law firms, and CPA firms. One of the country’s leading executive recruiters, who specializes in finding technical and scientific personnel, has long insisted on being entrusted with the systematic “out placement” into second careers for the technical and scientific personnel of the companies for which he recruits. We know through these experiences that it takes only a few years for potential employers to realize that persons looking for a second career are not “misfits” or “failures.” We also know that it takes organized efforts on the part of the employer to place the middle-aged employee in a second career. Indeed, we know that the smart thing to do is to find a number of potential employment opportunities for such people before telling them that they are going to be let go.
Far more important is that the abolition of fixed-age retirement will make a second career routine and commonplace. A goodly number of people will have multiple “career paths” from which to choose. For an increasing number of people will change careers, in their mid-forties and again when they reach their late sixties or early seventies and shift to part-time work.
In conclusion: flexible retirement is going to be the central social issue in the United States during the next decade. It is going to play the role that minority employment played in the sixties and women’s rights played in the seventies. Yet employers, labor unions, and government policy makers pay no more attention to flexible retirement than they paid to minority rights in the forties and to women’s rights in the fifties. This is going to be an expensive and dangerous neglect. The demands that the abandonment of fixed-age retirement will make—also the opportunities it will create—belong high on the priority list. They are demands arising out of great success.
For the extension of life span is the greatest achievement of this century. The demands that this success poses are comparatively easy to satisfy. The time to tackle them, however, is now—ten years from now they will have become “problems.”
First published in The Future of Business, edited for Georgetown University by Max Ways (New York: Pergamon Press, 1978).