Byron G SpencerMcMaster University

Presentation at the Annual ConferenceNational Initiative for the Care of the Elderly

University of Toronto24 May 2012

Joint work with Frank DentonSuddenly thrust into policy debate!But a different take

OutlineFuture population and labour forceExtent of aging that is in prospectOverview of the retirement income system

Relative importance of the public componentGains in life expectancy

Changes in age of pension eligibility?Cost implications for public plans

Population – size

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1951 1961 1971 1981 1991 2001 2011 2021 2031 2041 2051

Population

('000)

Population – size and rate of growth

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1951 1961 1971 1981 1991 2001 2011 2021 2031 2041 20510.0

0.5

1.0

1.5

2.0

2.5

3.0

Population Rate of growth

('000) %

Labour force – size

5,0007,0009,000

11,00013,00015,00017,00019,00021,00023,000

1951 1961 1971 1981 1991 2001 2011 2021 2031 2041 2051

Labour Force

('000)

Labour force – size and rate of growth

5,0007,0009,000

11,00013,00015,00017,00019,00021,00023,000

1951 1961 1971 1981 1991 2001 2011 2021 2031 2041 20510.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Labour Force Rate of growth

('000) %

Proportion 65 and olderProjected %Pop65+ by Province

0

5

10

15

20

25

30

35

40

NF PE NS NB QU ON MA SA AL BC

2010 2050

Projected %Pop65+: Selected Provinces

0

5

10

15

20

25

30

35

40

1995 2005 2015 2025 2035 2045

NF ON MA

Population aging is inevitable!

Even doubling immigration would still result in substantial population aging

-- as would much higher fertility

-- as would re-defining ‘old’

Canada’s retirement income system

Old Age Security/ Guaranteed Income Supplement (OAS/GIS)

Canada/Quebec Pension Plans (CPP/QPP)Private

Registered Retirement Savings Plans (RRSPs)

Employer Pension Plans (EPPs)Own savings

Public plansAnnual benefits ($) Cost

Program Max Avg   ($b) Source of funds Eligibility

_____________________________________________________________________________________________________

Old Age Security (OAS) 6,481 6,100 28.5

General revenues 65+

Guaranteed Income Supplement (GIS)

8,788 5,897 8.0

General revenues 65+ and low income

Spousal Allowance 12,309 5,003 0.5

General revenues

60-64, spouse 65+, low income

CPP/QPP Retirement pension 11,840 6,152 31.8 Contributory 65 is NRA; +/- 30% at 70/60

CPP/QPP Total 42.2

____________________________________________________________________________________________________

Notes: GIS values are for a single person, Allowance for all recipients; values as of late 2011.

The "cost" column show forecast expenditures for 2010-11.

OAS, GIS, and CPP/QPP benefits as percent of pre-retirement incomeSource: Baldwin (2009)

Gains in life expectancy – and age of eligibilityThe CPP/QPP was introduced in 1966Since then life expectancy has increased

And the typical age of retirement has decreased

Baby boom generation is transitioning into retirement

A bad combination?possibly large increases in the burden of

support, and inequities across generations

Living longer, retiring younger“It is indeed remarkable that, despite

increases in longevity, the effective age at which workers retire has tended to follow a downward trend in virtually all OECD countries, at least until recently.” (OECD, 2009)

Population outlook – and gains in life expectancy

<65 65+ All ages

1966 18,475 1,540 20,015

Population size ('000)

2010 29,313 4,799 34,112

2035 -- No gains in life expectancy 31,439 9,199 40,638

-- Continued gains 31,607 9,978 41,584

-- Difference 168 779 946 -- % of difference 18 82 100

Age Distribution of the Population in 2010 and Projected to 2035, With and Without Gains in Life Expectancy

Note: The population is shown in five-year age intervals; see note to Table 1.

Implication: Take gains into accountThe CPP/QPP introduced in 1966; 70% of

males could expect to live to 65By 2010 that proportion increased to 87%

And those who reached 65 could expect more years in retirement

By 2010 26% more males survived to age 65 and they had 32% more years of (expected) retirement

Continued use of 65 as the marker of old age is inappropriate

Retirement age policiesUS – from 65 to 66 by 2008, to 67 by 2025Germany – from 65 to 67 by 2029France – from 60 to 62 by 2018UK – to 65 for women by 2020; to 66 for all

by 2020; to 67 by 2036; to 68 by 2046Canada –from 65 to 67 for OAS/GIS, 2023 to

2029; no change in CPP/QPP

Looking aheadGains in life expectancy will continue to be

importantA continuation of recent gains will add 800,000

people aged 65+ in 25 years, as compared to maintaining constant mortality rates

That means an extra 8.5 percent age-eligible to receive full pension benefits

Should that not be part of pension reform discussions?

Policy option: change age of eligibilityAE0 – remains at 65AE1 – increases by one month each year, 2011 to

2035AE2 – increases by one month each year, 2016 to

2035AE3 – increases by three months each year, 2011

to 2030AE4 – increases by three months each year, 2016

to 2035AE5 – increases adjust to gains in life expectancy

at birth

Age-eligible portion increases, but --

10

12

14

16

18

20

22

24

26

2010 2015 2020 2025 2030 2035

AE0

Age-eligible portion increases, but --

10

12

14

16

18

20

22

24

26

2010 2015 2020 2025 2030 2035

AE0

AE1

Age-eligible portion increases, but --

10

12

14

16

18

20

22

24

26

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

Age-eligible portion increases, but --

10

12

14

16

18

20

22

24

26

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

AE3

Age-eligible portion increases, but --

10

12

14

16

18

20

22

24

26

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

AE3

AE4

Age-eligible portion increases, but --

10

12

14

16

18

20

22

24

26

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

AE3

AE4

AE5

What of LF / A-E Pop’n?

2.0

2.5

3.0

3.5

4.0

2010 2015 2020 2025 2030 2035

AE0

What of LF / A-E Pop’n?

2.0

2.5

3.0

3.5

4.0

2010 2015 2020 2025 2030 2035

AE0

AE1

What of LF / A-E Pop’n?

2.0

2.5

3.0

3.5

4.0

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

What of LF / A-E Pop’n?

2.0

2.5

3.0

3.5

4.0

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

AE3

What of LF / A-E Pop’n?

2.0

2.5

3.0

3.5

4.0

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

AE3

AE4

What of LF / A-E Pop’n?

2.0

2.5

3.0

3.5

4.0

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

AE3

AE4

AE5

Implications for contribution ratesAs a (reasonably realistic) approximation -

Ct = btRt/wtLt

= (b/w)t (R/L)t

Assume (b/w)t constantThen the contribution rate would vary with

(R/L)t

-- the contribution rateParticipation Rates Adjust

6

7

8

9

10

11

12

13

2010 2015 2020 2025 2030 2035

AE0

-- the contribution rateParticipation Rates Adjust

6

7

8

9

10

11

12

13

2010 2015 2020 2025 2030 2035

AE0

AE1

-- the contribution rateParticipation Rates Adjust

6

7

8

9

10

11

12

13

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

-- the contribution rateParticipation Rates Adjust

6

7

8

9

10

11

12

13

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

AE3

-- the contribution rateParticipation Rates Adjust

6

7

8

9

10

11

12

13

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

AE3

AE4

-- the contribution rateParticipation Rates Adjust

6

7

8

9

10

11

12

13

2010 2015 2020 2025 2030 2035

AE0

AE1

AE2

AE3

AE4

AE5

Concluding commentsPopulation aging is inevitable

Policy should be based on that assumptionBut old needs to be redefined

The aging of the baby boom will drive up costsEven so, Canada’s public RIS is sustainableBut costs are very sensitive to age of eligibilityA gradual increase would

Moderate the decline in the LF/Pop ratio Reduce the tax rate needed to support the system