Companies Need to Manage the Aging Workforce

According to the report released by The Boston Consulting Group (BCG), “Global Aging: How Companies Can Adapt to the New Reality,” companies that manage their aging workforce will stay competitive in the coming decades.

The report states the forces behind the demographic shift are simple: people are living longer and having fewer children. In the developed countries, the average life expectancy increased from about 66 years in 1950 to roughly 78 years in 2010. Over the same time period, fertility rates fell from 2.8 to 1.7 (measured as children per female). Rapidly developing economies (RDEs) are seeing their life expectancies and fertility rates approach those in developed countries.

Globally, the dependency ratio, which measures the number of people age 65 and older for every 100 people of workforce age, rose from about eight in 1950 to 12 in 2010, and will further rise to an estimated 25 by 2050.

“We are witnessing an unprecedented, fundamental shift,” said Jan Willem Kuenen, a BCG partner and a coauthor of the report. “The trends in motion represent the development of a new demographic equilibrium that will have social, political, and economic ramifications. The effects on companies in all major industries will be substantial.”

The report says global aging will affect companies along four core dimensions: labor, growth, capital and consumer needs.

Older workforces and scarcer labor will lead to two principal challenges for companies: maintaining high productivity and ensuring sufficient labor availability. To sustain productivity, companies must find ways to make the workplace "age friendly" (especially for physically demanding jobs), promote fitness and health consciousness and maintain motivation as people advance in their careers, the report says. As for labor capacity, the expected outflow of human capital will require careful planning and transfers of expertise on an unprecedented scale. Globally, in 2010, there were roughly 0.3 people retiring for each person entering the workforce; by 2050, that number will more than double to 0.7.

Lower growth in the 15-to-64-year-old workforce-age segment will have a negative impact on GDP growth globally, with significant consequences for companies in all industries, the report contends. Especially in the RDEs, productivity gains—through technological advancements, process optimization, efficiency improvements and the like—can help offset negative demographic effects. As a result, the trend of economic polarization into a two-speed world will become more pronounced, with growth rates in many developed countries declining further while those in many RDEs remain high. Companies must therefore explore initiatives such as enhancing their presence in high-growth countries, searching for pockets of growth in mature economies and moving toward leaner business models—continually seeking new ways to reinforce margins, maintain competitiveness, cut costs and optimize processes.

The impact of aging on capital, another scarce resource for companies, could turn out to be significant. Lower GDP growth could reduce the demand for capital, whereas a greater number of people beginning to save more for retirement could increase supply. The result would be lower real interest rates. At the same time, aging will continue to strain government finances due to the increasing costs of pensions and healthcare. Moreover, in some markets, high government debt could lead to an increase in the money supply, with higher inflation as a result. Overall, given that many factors will have an impact on interest rates, companies should prepare themselves for various scenarios. One possibility is a prolonged period of low real interest rates coupled with periods of high inflation.

Over the next 20 years, the 55-and-over portion of the population, sometimes referred to as the silver segment, will account for significant consumer-spending growth—at least 50% of the total in some developed markets and more than 80%in others. Companies therefore need to build a deep understanding of this heterogeneous age group, the report suggests. Companies should also adapt their product portfolios and sales approaches, given that consumers tend to develop different preferences as they grow older. For example, many seniors tend to care less for status and material possessions and more for finding products that are easy to use and expanding their horizons through such means as travel and continuing education.

"Despite the risks and pitfalls that global aging will present, there are many opportunities to be seized as well," said Kuenen. "With the right perspective and a willingness to take action, the potential negative impact can actually be turned into a positive impact. Companies that recognize the magnitude of the issue and that take the necessary steps—not just to cope but to benefit—will best adapt to the new reality and profit from it."

A copy of the report can be downloaded at www.bcgperspectives.com.