Next Avenue: Should we allow mandatory retirement?

It is unlikely that I will be as good at my job at 75 as I was at 55, and yet my employer might be stuck with me. An employer generally cannot require an employee to retire, even at a respectable age such as 68; mandating a retirement age as a condition of employment will be regarded as engaging in age discrimination.

Not only am I likely to be less useful to my employer at 75 than at 55, my compensation at the older age will greatly exceed what I earned at 55. Employers correctly fear that if they decrease or even flatten the salaries of aging employees, they will trigger age discrimination suits.

Time to allow mandatory retirement?

I want to build an argument in favor of dismantling the part of our legal system that effectively bars retirement at a set age, even if agreed upon. Within limits, employers and employees should be able to contract as they like, even if this means that some workers will be required to retire at a specified age. Employers might be more willing to hire older job applicants if it is permissible to set their terms of employment.

I love my job and have no plans to retire, so the argument developed here is against my own self-interest, but right for society at large. There is good reason to allow retirement by contract. But it is doubtful that law will do the sensible thing.

Conventional (and insightful) wisdom is that when employees receive training in their early years at a firm, they must be “overpaid” later on in order to keep them from moving to other firms that did not bear the cost of training and that will try to hire them away from the employer that provided training. At some point, the workers might shirk or just stay on the job past their most productive years in order to continue to collect these backloaded, high wages. To combat this problem, employers can structure wages so they increase with seniority, but then start decreasing when the worker is mature and when diminished productivity is likely, or lateral hiring is unlikely.

What employers could tell 30-year-olds

It might be hard to get this just right. In the modern era with laws against age discrimination, it is plain that lawsuits are to be expected by an employer that pays workers less as they age. It is possible that an employer could hire young workers and tell them that wages will initially rise over time, but then decline after 30 years. The 60-year-old might complain, but the employer will argue that this was a bargain offered at age 30, not one that discriminates against older workers.

The same sort of argument might be made in favor of mandatory retirement; the employer is not requiring a 68-year-old to retire, but rather contracting for every 30-year-old to agree to retire in 38 years!

The important thing here is the idea that mandatory retirement is but one way of ensuring that workers do not remain with their employers too long, especially at high wages, even as employers are not discouraged from training them in the first place.

Making room for new employees and new ideas

Contractual retirement also makes room for new employees and new ideas. Nothing stops the retiree from opening a business or looking for work elsewhere because nothing requires all employers to mandate retirement; the idea is that compulsory retirement would be of the permissive, contractual, and agreeable kind.

It is likely that if law were to allow employment contracts to specify a retirement age, employers might find middle-aged and even older employees more attractive. At present, employers must not discriminate against older job applicants, but it is difficult to bring a successful lawsuit on behalf of persons not hired. An employer might readily hire someone at 55 if that person could promise to retire at age 65, but employers are advised by their attorneys that such a contract would be unenforceable and would make the firm vulnerable to age discrimination suits. However, if the entire pool could be counted on to retire by age 70, it would make more sense to hire middle-age applicants.

Anticipating strong objections

Ours is an aging population, however, and the center of political gravity is likely to oppose anything that can be seen as limiting the options of senior citizens. If the ban on mandatory retirement is ever to end, reform will need to come in steps that anticipate the objections of powerful groups.

One way to reduce opposition to legal reforms is to delay change, pushing the burden of change into the future. A proposal made in 2017 to allow retirement ages in employment contracts beginning in 2037 would have a decent chance of passing because most of the apparent losers are unknown and certainly not politically organized. On the other hand, job applicants who would benefit from the change are unidentifiable in 2017, and employers in favor of the change will discount the far-off benefits and not invest much in political effort.

Another strategy would be for employers to announce that compensation will follow an inverse U, providing that pay automatically decreases by 5 percent a year after 30 years of service. It is not clear that courts would allow this scheme, and since it would almost surely be limited to new employees and any savings would come about after decades, such a plan is probably not worth the effort.

No age discrimination suits after 68?

A better strategy, I think, would be for law to promise that no age discrimination suit could be brought by anyone over a specified age, such as 68. Some employers might then offer employment contracts that reduced compensation by 5% every year after 68. Other employers might simply structure contracts so employment ceased at 68, perhaps the same age that maximum Social Security benefits became available, but the employer and employee could choose to negotiate a new contract for work beyond that age, and at any wage they agreed upon.

In a job like mine, retirement would come at 68, but my university could choose to offer me a job beyond that age for any number of years it liked, and at a salary that was (or was not) unrelated to earnings before 68. In some countries, like Israel, retirement is regulated in this sort of way.

It is unlikely that younger workers and voters can undo the ban on compulsory retirement — even where employees voluntarily agree to such terms. If change comes, it will be because of evidence that businesses are migrating to other countries with greater freedom of contract.

Filed in: Top News Tags: 

You might like:

Encore: Yellen says inflation below 2% goal poses one of Fed’s ‘biggest challenges’ Encore: Yellen says inflation below 2% goal poses one of Fed’s ‘biggest challenges’
NewsWatch: If you like the FAANGs, you’ll love these three year-end melt-up candidates NewsWatch: If you like the FAANGs, you’ll love these three year-end melt-up candidates
Why nearly half of office Christmas parties won’t have booze this year Why nearly half of office Christmas parties won’t have booze this year
Personal Finance Daily: What’s at stake in ‘net neutrality’ debate and why nearly half of office Christmas parties won’t have booze this year Personal Finance Daily: What’s at stake in ‘net neutrality’ debate and why nearly half of office Christmas parties won’t have booze this year
The Wall Street Journal: 6 Citgo execs arrested in Venezuela, accused of corruption The Wall Street Journal: 6 Citgo execs arrested in Venezuela, accused of corruption
The New York Post: Uber paid ransom to keep data breach affecting 57 million users and drivers quiet The New York Post: Uber paid ransom to keep data breach affecting 57 million users and drivers quiet
Earnings Results: Salesforce earnings top Street estimates but shares back off record after hours Earnings Results: Salesforce earnings top Street estimates but shares back off record after hours
Market Extra: Goldman: ‘Rational exuberance’ to drive stock market in 2018 Market Extra: Goldman: ‘Rational exuberance’ to drive stock market in 2018

Leave a Reply

Submit Comment
© 2017 Stock Investors News. All rights reserved. XHTML / CSS Valid.