A report published in mid-September by the Paris-based Organization for Economic Co-operation and Development, warns that if Canadians continue to retire at relatively early ages, the economy will suffer.
Not only will retirees be burdened with funding relatively long retirements, but the economy will be condemned to very slow labour-force growth and, as a result, weaker economic growth.
The OECD report says Canada will see a notable uptick in workers retiring after 2011, when the leading edge of the baby-boom generation will turn 65. Put together with a fertility rate that is at a record low and increased life expectancy, Canada will probably soon see a significant increase in the proportion of retirees in its population relative to the number of workers. It is projected that the percentage of retirees will rise to more than 45% of Canada’s population by 2050 from about 20% in 2004.
Increasing immigration will help soften the effects of this demographic shift, but it is unrealistic to expect that it will have a large impact. It is clear that the changing demographics will have a significant impact on public finances and economic growth.
The OECD report says the Canada Pension Plan is on sound economic footing and is well positioned to weather the increase in retirees. The bigger concern is health-care spending, which is expected to grow rapidly along with an aging population, and labour-force growth. The report estimates that over the next 50 years, if current labour-force participation rates remain constant, the Canadian workforce will grow by less than 5%.
By comparison, from 1950 to 2000, the labour force in Canada grew by almost 200%.
“Such a pronounced slowdown in labour-force growth will make it difficult to sustain past growth rates and improvements in living standards,” the report warns. “In addition, because of the fact that aging and its impact on labour-force growth is expected to be more severe in Canada than [for] its main competitor, the U.S., there may be serious implications for Canada’s competitiveness.”
Although there are many factors that can and surely will change over the next few decades, the OECD recommends one basic policy shift to help deal with the aging population: removing barriers to employment for older people. Average retirement ages have been declining in Canada over the past several decades. In the early 1960s, the average retirement age for both men and women was 66; in 2004, that was down to 63 for men and 62 for women. The report notes that Canadian labour-force participation rates start to fall off at age 48, and they plunge between ages 55 and 60 — dropping 27 percentage points for men and 35 points for women at this age. By age 65, fewer than 30% of Canadians are still working.
There is clearly plenty of scope for keeping older workers in the labour force — which would make a big difference to the size of Canada’s labour force. The OECD projects that, at current participation rates, Canada’s labour force will be about 17 million by 2050. However, if the labour-force participation rate among those more than 50 years of age is raised to the top rate (for that age group among OECD countries) by 2030, by 2050, Canada’s labour force would be 20 million. And if participation in every age group is maxed out, the labour force would hit 21 million by 2050.
The biggest opportunity to improve workforce participation is among older workers. Toward that end, the OECD makes a host of recommendations to encourage workers to stay on the job longer.
It suggests allowing more flexibility for older workers to generate employment income and to draw pension income. It recommends abolishing the CPP rule that requires workers to stop working a month before drawing the pension; reviewing the rules that prohibit workers from simultaneously accruing and receiving CPP benefits; and allowing people to accrue future pension rights.
The OECD also proposes measures to encourage firms to hire older workers by improving employment services, such as providing more training for older workers, rooting out age discrimination, beefing up employment programs and encouraging older workers’ participation in these programs.
To some extent, Canada is moving in the right direction. The OECD notes that its demographic challenge isn’t nearly as severe as that of some countries. The public pension system appears to be well funded. And, while there is still plenty of room for improvement, the participation rate of older workers has increased in the past few years.
@page_break@As well, future economic growth could be supported by other developments such as improved productivity, although Canada doesn’t have the best record on this count. Or existing workers could be pushed to work more hours. However, neither of these changes will probably have the impact that retaining large numbers of older workers could.
The situation could also be helped by supporting the role advisors have in encouraging workers to save and invest for retirement. A report issued by the CD Howe Institute in late September recommends a variety of tax reforms to both reduce the heavy tax burden that can fall on low-income retirees and increase incentives to save and invest.
It also recommends hiking the age limit for savings plan contributions to 73 years of age from 69; boosting RRSP contribution limits; lowering federal personal income taxes; and shifting provincial taxes to consumption from earnings and investment; harmonizing income-testing regimes and cutting clawback rates; and introducing new savings vehicles, such as tax-prepaid savings plans.
Financially secure retirees will be less of a burden on the public purse. And with more money saved during working years, the shift of a large segment of the population to retirement will not pose as great a threat to domestic stability. IE
Remove barriers to employing seniors
A dramatic uptick in retirements in coming years would slow economic growth
- By: James Langton
- October 18, 2005 October 18, 2005
- 14:21