# employment and retirement

simple math about retirees in the US

Let’s suppose the average American goes to work full-time at age 20 and retires at age 65.  If employees are distributed equally by age, then 2.2% of the workforce reaches retirement each year.  We know the real percentage is higher than that at present because the Baby Boom makes up an unusually large portion of the population.

The workforce is about 155 million people.  Of that, 95%, or about 147 million, are employed.  If 2.2% of this total number retire each year, that’s 3.2 million jobs being opened, or about 270,000 per month.

That’s a far greater figure than the net new hiring being done in the US, as reported by the Labor Department.

This simple calculation already suggests that not every position vacated by a retiree is being filled and/or that people who in other times would be retiring are continuing to work.  Let’s put that aspect of the employment issue aside for today, though.

The point for today is that, however gradual, the retirement of the Baby Boom must be having a powerful effect on labor costs.

But what is that effect?

retirements and pay

A highly oversimplified example:

Let’s say a company has five employees.

#1, the oldest and longest tenured, makes \$100,000 a year.

#2 makes \$80,000

#3 makes \$60,000

#4 makes \$40,000

#5 makes \$20,000.

The total payroll is \$300,000 a year.

Suppose #1 retires and that each of the other employees is promoted one slot and awarded a \$15,000 raise.

Assume, too, that a new #5 is hired right out of school for \$20,000.  So #5 gets a job and everyone else gets a substantial raise.  A big boost for everyone’s economic health, except for the old #1.

The new company payroll looks like this:

#1 makes \$95,000

#2 makes \$75,000

#3 makes \$55,000

#4 makes \$35,000

new #5 makes \$20,000.

The total is \$280,000.  That’s 7% less than the company was paying out before. Average wages have dropped a lot, despite the fact that every employee is significantly better off.

If 2% of the company is retiring in a given year instead of 20%, and everything else is the same, then the overall drop in wages is 0.7%.  That’s probably much closer to the actual effect on national wages from retiring Boomers.

my thoughts

–During recessions, when people are afraid–and especially in a 401k retirement world–older workers tend to hang onto their jobs rather than retire.  When recovery begins, there tends to be a catch-up period when both “normal” retirees and those who have postponed retirement leave work.  This phenomenon depresses average wages more than usual and disguises the upward economic momentum that’s taking place.

For a plain vanilla recession, this downward wage pressure should begin to abate in year two of recovery.

We’re now deep into year seven after the worst of the last recession.  But the Fed seems to think that the cyclical depression of wages by retirements is still in full swing in the US now.  I’m not sure what to think.

–Our hypothetical retiring Boomer probably goes from earnings \$100,000 a year to collecting Social Security of \$20,000 + using income from accumulated savings/401k/IRA/pension of, say, \$30,000.  No matter what the exact numbers are, this is a sharp downshift in purchasing power and in standard of living.

If the idea that Boomer retirements are currently accelerating is correct, this seems to me to tip the investment scales increasingly sharply away from Boomer spending and toward Millennials’.