To envision the future of the labor market, one of the best places to start is to know that the share of workers ages 55 and older has more than doubled, rising from 12% in 1995 to nearly 25% in 2020. And older workers will fill the majority of new jobs created by 2026—6.4 million out of 11.4 million. Plus, the older people are, the more they care about retirement security.
Many factors have led to this unusual moment in the American business cycle, but employers care deeply about what it will take to recruit and retain workers. Because 1.4 million of the 11.4 million workers will be home health and personal care aides, and they skew older than average workers—consisting mainly of older women taking care of even older people—society and employers should pay special attention to providing retirement benefits to these workers, as well as increasing their wages.
Our review of the academic literature suggests that retirement benefits are a key factor in employment decisions and can be a key strategy to recruit and retain low-wage workers.
Workers are sensitive and responsive to their “composition of compensation.” In union negotiations, around kitchen tables and in initial interviews, employee benefits are a key topic of discussion. The division of total pay between cash and other benefits has been a mainstay of demands from workers.
Throughout our nation's history low-wage workers have demonstrated a demand not only for higher wages but also for forms of income security including retirement accounts. Low-paid women garment workers, janitors and coal miners are examples of low-paid workers who allocated a portion of that wage to retirement security—nickels into their retirement fund—when they had a say (via collective bargaining) in how their pay was divided. When workers have a chance to voice their preferences, they vote for cash pay up front and to save for retirement.
Employers also care deeply about how they divide compensation between cash wages and employee benefits. Many scholars and professionals, such as University of Chicago’s Edward Lazear (Chair of the Council of Economic Advisers under the George W. Bush Administration), have pointed out that every employer must use compensation options in a strategic manner to meet their employment goals. The reason employers provide retirement benefits is simple—allocating some pay toward financial security pays off in a happier, more stable workforce.
Retirement Benefits Reduce Turnover
First, there is ample evidence that increasing benefits, such as providing more robust retirement plans, reduces employee turnover. A 2018 Society for Human Resources Management report on the private sector showed that companies offering competitive benefits were able to recruit 19% more effectively and were 28% more likely to retain employees. This effect also occurs in the public sector, where research on federal government employees shows that workers who contribute to defined contribution pension plans tend to have lower quit rates. Thus, there is a demonstrated relationship between deferred compensation through retirement benefits and employee retention.
Research shows that quit rates may even be more responsive to benefits than to wages. A key and clever study in this area showing that workers with fringe benefits have lower turnover controls for the fact that stable workers are attracted to firms with fringe benefits. The effect of an additional dollar of benefits on quits is about five times that of wages. In other words, employees are five times less likely to quit in response to an increase in their benefits than due to a comparable increase in their wages.
‘Increasing benefits, such as providing more robust retirement plans, reduces employee turnover.’
Financial education about retirement is another important benefit to the employer and employee alike because it aids in retention. For portions of the population, it is likely the workplace would be a primary opportunity to receive retirement financial education.
The financial education literature finds that people with retirement benefits are generally more educated about and pay relatively more attention to their wealth. People invest in knowledge about markets, and the power of compound interest when they have “skin in the game.” Researchers found that wealth provides a “teaching moment” so that “financial wellness programs” are more effective when people have wealth to manage.
Of course, financial education and wellness education includes debt management and counseling. Ultimately, the first step is to make sure employees know that there is a retirement benefit to begin with.
Retirement Plans Have a Special Effect on Older Workers
Second, the reduced turnover from offering retirement benefits rather than just cash compensation is especially important for older workers. This is particularly relevant to the personal and home healthcare workforce, because they are older than the average worker (see also Butler).
Retirement plans are a relatively more important form of compensation for older workers than wages. One study conducted on the transition of teacher pensions from defined benefit (DB) to defined contribution (DC) plans suggests that the resulting exit rate for federal employees was one-third higher for those in their late 30s to early 50s under a DC plan, compared to their younger colleagues who saw no increase in their quit rates. A decrease in the value of retirement benefits had a stronger impact on the employment decisions of older workers.
Workers highly value retirement benefits. But because retirement and health benefits generally increase with age, older workers place increasing priority on retirement options.
Retirement Benefits Helps Close Racial and Gender Wealth Gaps
Third, offering retirement benefits in the care sector may help to address glaring gender and racial wealth disparities. Research suggests that job-based retirement benefits are a crucial component for building wealth and reducing wealth disparities. Yet, when looking at the distribution of assets across wealth deciles, only those in the top 50% of the population have any retirement assets.
Only those at the 6th wealth decile hold any retirement assets.
Source: Elmi and Lopez, 2021.
Wealth-building programs at work are especially important for women workers. Raw estimates show that women own 32 cents for every $1 held by a man. Even when taking income into account, never-married women still only have 71% of the wealth of never-married men.
Women are also less likely than men to own almost every kind of asset, including being less likely to hold retirement accounts. And when women hold pensions, they are still typically smaller than a man’s. This makes sense considering that women across all age and racial groups are more likely to work in part-time jobs that do not provide these kinds of benefits, including such jobs as those in the care sector. On average, women are twice as likely as men to choose part-time work.
Wealth disparities also impact minority preferences for job benefits. For example, Latino workers are particularly concerned about retirement security, especially Latino women because their longevity rates are quite high. Latinas have the highest life expectancy of any other demographic in the United States (88 years) and older Latinas face poverty rates three times higher than older White women, with one in five Latinas older than age 65 living in poverty. Latinas are also the least likely among women to have access to an employer-sponsored retirement plan (see also Hounsell).
Retirement Benefits Provide What Cash Can’t, Necessarily: Security
Last, wealth is different than income and can add substantially to a household’s financial security. Wealth and income serve different roles in the financial security of households. While income allows households to meet regular everyday expenses, wealth is often relied upon to accommodate unexpected shocks, such as an emergency hospital bill. Most comprehensive definitions of economic security and poverty understand the importance of wealth to households and include a wealth measure in determining overall household well-being (see also Headey; Brandolini).
Research shows that household wealth substantially affects the level and distribution of economic well-being when considered with income. It is also the case that wealth is of greater importance in measures of life satisfaction than income, even across countries. Intuitively, it is often those with the least income security that also have the lowest wealth holdings, despite being in the greatest need of financial cushioning (see also Ghilarducci, Radpour and Webb 2019).
If employers won’t provide low wage workers retirement plans—and they have had 41 years to do so since the 401(k) came on the scene—it makes sense for state and federal governments to step in. Once retirement benefits become a universal portable benefit employers can still offer supplemental benefits to get a leg up on other employers.
Jessica Forden is a research associate of The New School’s Schwartz Center for Economic Policy Analysis in New York.
How Much Retirement Wealth Is Enough?
Is there a specific amount or level of retirement benefit that would make it more attractive for worker recruitment and/or retention?
The answer is expressed in absolute terms and in relative terms. People need enough to live on, which experts have determined to be twice the poverty level, or $25,760 for a single person older than age 65. For higher income workers the target is usually expressed in terms of percentage of preretirement earnings. For middle class workers the target is nearly 80% to 90% of pay, and for high income workers who have a greater percentage of pay devoted to taxes and savings and other work-related expenses the target is about 70%. For the working poor they will need annual incomes that exceed their earnings.
Social Security benefits at the normal retirement age of 66 to 67 is about $1,300 per month, which is under 200 percent of the official poverty level.
