In coming years, Social Security will also supply a much smaller percentage of the average retiree's annual income. Research by Alicia Munnell, a former member of the President's Council of Economic Advisers and now a professor at Boston College's Carroll School of Management, indicates that changes in the Social Security program already enacted, such as the increase in the program's normal retirement age; the rising cost of Medicare premiums, which are deducted from Social Security benefits; and the anticipated increased taxation of benefits as personal income tax, will cut the average replacement value of Social Security benefits for a middle class earner from the current 41.2% of wages to 26.9% by 2030.

Ultimately, that translates into less disposable income for many older Americans in the decades to come. A retirement security projection model put together by Jack VanDerhei, a Temple University professor and fellow of the Employee Benefits Research Institute, projects that given a continuation of current behaviors and programs, U.S. retirees will face an annual shortfall of $45 billion between their incomes and the amount they need to live on by the year 2030. "There is an obvious downward pressure on the economy," acknowledges David Wyss, chief economist at Standard & Poor's Corp.

Despite the obvious economic implications, Corporate America hasn't seemed particularly involved in the policy debate. "I'm not sure we've faced it front and center," says Patricia Hanahan Engman, executive director of the Business Roundtable, which represents CEOs of the biggest U.S. companies.

Demographic Indifference

That might be something of an understatement. A survey by the New York-based Conference Board, another group that represents corporate interests, revealed that two-thirds of companies had not even looked at the demographics of their own workforces.

What does this graying of America mean for companies? The recent upheaval in both defined benefit and defined contribution plans is at least beginning to catch the attention of executives, but the problems they will encounter are far more complex than just coming up with enough cash to fund their underfunded pension plans.

For starters, constraints on the workforce will take their toll on U.S. growth. The change in demographics "means slower growth of the workforce, and that's going to slow down GDP," says S&P's Wyss. "Higher productivity growth will help, but the only way to get the labor force growing is to allow more immigration or raise the retirement age."

In that regard, Japan's prolonged malaise is an ominous warning for the U.S. Japan's population is already in the midst of the aging that will hit the U.S. in coming years, and economists cite Japan's demographic changes as one of the key factors behind the country's inability to revive its economy for more than a decade.

If a big portion of U.S. retirees do end up living on inadequate incomes at some point in coming years, that "could have disastrous consequences," says Bill Arnone, a partner in Ernst & Young's human capital practice in New York. Even beyond the potential economic impact, Arnone says he would worry more about the possibility of social turmoil. "Remember, this Baby Boomer generation is huge," he suggests. "I can't be optimistic about the consequences if we have large numbers of people not happy in this phase of life."

And many of these cranky old people may still be working for companies–either that or the shortage of workers could force labor costs up dramatically. Chances are the former will be the case since a good chunk of these seniors will feel healthy enough to stay on the job and many may rightly feel their retirement nest egg will be insufficient for what could be a long, relatively speaking, old age. Already, in the late '90s, the retirement age rose for the first time since World War II.

Having employees retire later also makes sense for employers, says Sylvester Schieber, the director of research for consulting firm Watson Wyatt. "Retirement plans that literally bribe workers to walk out the door and not come back when they're in their mid 50s are not going to prove to be rational plans a decade from now," he says. "As a normal course of practice, to throw away workers in their mid 50s or early 60s is going to be a luxury that companies can no longer afford."

One of the biggest problems posed by the exit of so many experienced workers is a loss of intellectual capital. "You're going to be losing a lot of skilled people at once," says S&P's Wyss. "The corporation is going to be scrambling in some cases to replace those people." He notes that, so far, companies seem to be looking at the problem on a "micro" basis by working out succession plans for individual managers.

Work 'til You Drop

So far much of the interest in recruiting semi-retired older workers has come from retail operations that use a lot of part-time help, offer no benefits and tend to pay minimum wage. For instance, McDonald's Corp. made an effort a few years ago to hire seniors, and recently Home Depot Inc. announced that it would work with the Association of Retired Persons to recruit older workers. But these small campaigns have often skirted some of the biggest issues.

Moving toward a later retirement age means a big change in mindset for workers, who watched their parents or older siblings retire in their 50s or early 60s–and an even bigger change for company managers who often stereotype older workers as too expensive, ornery and not productive enough. As important, companies will have to rethink how best to structure work, pay and benefits to make a later retirement more attractive.

On this point, there has been some talk among human resource experts about keeping older employees on board by providing them with flexible schedules or allowing them to work fewer hours; the latter approach is often described as "phased retirement." A 2003 survey of 428 human resources executives conducted by the Society for Human Resource Management (SHRM), the National Older Worker Career Center and the Committee for Economic Development found that 24% of the participating companies were offering flexible schedules to retain older workers and 17% would allow older workers to put in fewer hours.

But Jennifer Schramm, manager of workplace trends and forecasting at SHRM, notes that another SHRM survey of workers found that those 55 and older place much less emphasis on work/life balance than workers under 55 do. Instead, workers over 55 overwhelmingly cite benefits as the job feature that matters most. Schramm suggests that this reflects older workers' concern about health insurance, a benefit that often is provided only to full-time workers. "If there is a choice between their benefits and their time, you could make a case that they'll probably choose benefits, and they'll continue to work full time," Schramm says. She adds that "we will only begin to see how much demand there is for things like phased retirement when a big enough group of people make those demands as Baby Boomers retire."

Meanwhile, though, efforts to alter pay or benefits to retain or attract older workers run counter to the whole pension and pay structure built up over the last 50 years, which assumes that workers retire at 65 or earlier. Problems include pension arrangements that in effect penalize workers if they postpone retirement. "Let's say you're entitled immediately to 50% of your pay as a retirement benefit," says C. Eugene Steuerle, a senior fellow at the Urban Institute. "If you work another year, you essentially lose out on getting that annuity payment for a whole year."

Give Retirees A Break

Steuerle argues that retirement systems should be reorganized "so that people who work at older ages don't lose out on accrued benefits they have from their previous work, and they're also able to share at least moderately in the type of employee benefits that go toward retirement benefits." A report that Steuerle co-authored with Rudolph Penner and Pamela Perun, also of the Urban Institute, notes that corporations that make changes in pension benefits also risk running afoul of the maze of laws that govern pension payouts, including ERISA, tax laws and the Age Discrimination in Employment Act. The study notes, for example, that ERISA requires that workers be terminated to be eligible to receive pensions. Because the definition of termination is unclear, some companies prefer to hire other companies' retirees as part-timers, rather than their own retirees, for fear of violating the termination provision.

Other problems include the higher cost of providing health benefits to older employees. The SHRM survey of human resource executives also showed that 53% say older workers don't keep up with technology and 28% view them as less flexible. "Employers are going to have to revise their stereotypes of older workers as stuck in their ways and difficult to train," says Boston College's Munnell, who also served as Assistant Secretary of the Treasury under President Bill Clinton. Still, Munnell stresses the flexibility of the U.S. labor market as a plus that should not be ignored. "We got all those Baby Boomers into the work force. We got all those women in. We do adjust and adapt."

Save More, Have More

The turnaround in the long-term trend toward earlier and earlier retirement is seen as part of the solution to the problem of inadequate retirement incomes. For retirees with insufficient savings, "just working two or three more years makes an enormous difference," says David Wray, president of the Profit Sharing/401(k) Council of America. "It makes a difference in Social Security benefits, in the money you have as savings, and you've paid down more debt."

VanDerhei's model shows that many middle-income and upper-income workers could ensure that they have enough retirement income by saving at a somewhat brisker pace between now and retirement. For many lower-income workers, though, that's not possible, VanDerhei says: They don't earn enough to set aside the amount of money that they would need. (For example, his statistics suggest that low-income single women would have to save more than 25% of their incomes annually.) "We have retirees in this country who are living well, and that's a good thing, and we have people who are about to retire who are going to live well," says Lynn Dudley, senior counsel of the American Benefits Council, which represents plan sponsors. "We have a cohort behind them who are not going to live well." Dudley describes the retirement system as being "on the precipice."

As the retirement system comes under stress, Watson Wyatt's Schieber warns U.S. corporations that they are making a mistake when they abandon–as they have in droves in recent decades–defined benefit plans. Pensions evolved in the 1930s as a way for employers to deal with workers who were no longer productive, but couldn't afford to retire. "This wasn't a purely benevolent thing," explains Schieber. "It was a practical, productivity-driven phenomenon. If employers walk away from these plans now, forgetting why they started in the first place, we're going to end up relearning some lessons about a century after we learned them in the first place."