Older workers deferring retirement

Because of the financial crisis, many baby boomers close to retirement may not have time to recoup their losses

By Terence Yuen and Dan Morrison

*This is an expanded version of a summary originally published in the November 2009 issue of CAmagazine.

Faced with fallout from the financial crisis, workers who were counting the days to retirement are having second thoughts.

Despite the sharp rebound in recent months, the S&P/TSX Composite Index was around 11,000 points at the time of writing — still 25% below its peak in 2008. This translates into hundreds of millions of dollars in losses for investors.

The extent to which declines in equity values affect individual retirement savings depends on the exposure to investment risks. Declining values are less of an issue for workers with defined benefit (DB) pension plans: their future retirement income is generally guaranteed regardless of the ups and downs in the financial markets. Many companies, however, that used to offer DB plans have now shifted to defined contribution (DC) plans. DB coverage among Canadian workers has been declining over the past two decades. In particular, the percentage of private sector employees covered by DB pension plans has dropped substantially from close to 30% in the early 1990s to less than 20% in recent years.

The majority of Canadian workers who have no DB coverage are responsible for maintaining their own financial well-being after they retire; however, low retirement savings have always been a concern. Only around 30% of those who are eligible to contribute to a Registered Retirement Savings Plan actually make contributions. Even those who save prudently are being exposed to the volatility of the financial markets. Estimates based on detailed wealth data suggest most Canadian families without a DB pension have more than 60% of their financial assets invested in equities; therefore, a 25% stock market slump implies a sharp decline of more than 15% in retirement savings.

A critical factor influencing when workers retire is financial readiness. With deep investment losses resulting from the financial crisis, increasing concerns have been raised regarding retirement income adequacy. Many baby boomers close to retirement may not have time to recoup their losses. Unless they can significantly increase their savings, retirement may become unaffordable and their only choice may be to stay in the workforce longer than originally planned.

To examine the effect of the recent economic crisis on people’s attitudes toward retirement, Watson Wyatt surveyed 2,232 active employees and 904 retirees of nongovernment US organizations in February 2009. A notable finding from the survey is that people are adjusting their planned retirement age in light of large losses in their retirement savings.

Close to 70% of workers aged 50 and over believe they will need to save significantly more for retirement as a result of the economic crisis, while one-third of the respondents indicated they have increased their planned retirement age in the past year. Of those planning to delay retirement, the majority say they will work at least three years longer than previously expected. Half of them are now planning to work past age 65. Moreover, workers who participate in a DC-only plan are more likely to delay retirement than those with a DB plan. A decline in the value of their 401(k) accounts is cited as the most important reason they are postponing retirement.

Previous studies examining the stock crash in the early 2000s find a similar impact on retirement patterns among UK workers. Watson Wyatt conducted a survey in 2003 of more than 4,000 individuals aged 50 to 64 in the United Kingdom. One in four of the respondents decided to postpone retirement past the date they had previously anticipated. Furthermore, statistical analysis shows a strong correlation between the likelihood of postponing retirement and the degree of loss. Those most affected by the stock market decline are more likely to be planning to retire later.

As more workers are deferring retirement, some could “retire” on the job as they struggle to remain productive and engaged. These older employees, unable to exit as planned, could pose a significant challenge for companies trying to streamline and restructure their operations in the current economic environment. In anticipation of an eventual economic recovery, we would expect to see a wave of older workers retiring, creating significant workforce transition issues for employers in the medium term. To effectively manage workers’ exits from the workforce in an orderly fashion, companies will need to take a comprehensive approach to their retirement programs to meet both employee and employer needs.

Terence Yuen is a senior research economist and Dan Morrison is a senior consulting actuary at Watson Wyatt Worldwide