later retirement_the win-win solution

7/28/2019 Later Retirement_The Win-Win Solution

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Institut

C.D.HOWEInstitute

commentaryNO. 345

Later Retirement:

the Win-Win Solution

Retirement ages in Canada are on an upward trend, and should

significantly reduce the dire impacts of population aging on

the economy and living standards that many forecast.

How should policymakers respond?

Peter Hicks


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About TheAuthor

Peter Hicks

a ormer Atat DeputyMter everal ederalgovermet departmet,maly the area o ocalad laour market polce.He alo worked or the OECD Par, coordatg worko the polcy mplcatoo populato agg.

$12.00

isbn 978-0-88806-865-1issn 0824-8001 (prt);issn 1703-0765 (ole)

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Finn Poschmann

Vice-President, Research

The Institutes Commitment to Quality

Commentary No. 345

March 2012

Pension Policy


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The Study In Brief

Over the coming two decades people are likely to stay in the workorce much longer by about veyears. Tere will be a strong trend towards later retirement as a result o social and economic pressures,without any policy action. Te results will be largely positive and should thereore be supported by policy

whenever possible.For example, the trend towards later retirement will signicantly reduce, although not entirely oset,

the much-discussed negative macro-economic and labour-market eects o population aging. Tis suggeststhat compensating policy reorms are still needed but can be less draconian than has oten been thought tobe necessary.

Te employment rates o older workers have been on an upward trend since the mid-1990s, whiledemographic aging suggests continuing strong labour-market demand or uture older workers who will bemuch better educated than their predecessors. Babyboomers have dierent preerences and expectations orwork and leisure in retirement. Finally, nancial pressures arising rom existing public and private pension

plan unding arrangements and looming government budgetary troubles here and abroad will likely keep thepressure on or policy changes that encourage later retirements, in line with longer lie expectancy.

Delaying work-retirement transitions by ve years would have large, positive economic and scal eects,reducing pressures on growth, government nances and pension unding. Other gains in social well-beingappear likely, i harder to quantiy.

While there is no immediate crisis to be addressed, a key reorm will be to gradually increase the standardage o pension eligibility in order to bring it more in line with increases in longevity. Fortunately, the neededchanges are not large. Tey can be introduced gradually, with little risk o negative side eects. Such reormsshould involve gradually raising the age band at which one could receive C/QPP. Similar changes to the OldAge Security (OAS) would provide consistency in signals about retirement ages.

A well-designed reorm process could help re-connect pension policy with the emerging social, labourmarket and demographic realities that are shaping our lives and our society.

C.D. Howe Institute Commentary is a periodic analysis o, and commentary on, current public policy issues. James Flemingedited the manuscript; Yang Zhao prepared it or publication. As with all Institute publications, the views expressed here arethose o the author and do not necessarily reect the opinions o the Institutes members or Board o Directors. Quotation

with appropriate credit is permissible.

o order this publication please contact: the C.D. Howe Institute, 67 Yonge St., Suite 300, oronto, Ontario M5E 1J8. Teull text o this publication is also available on the Institutes website at www.cdhowe.org.


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2

Tis paper reviews evidence, based on recent trends,suggesting that over the coming two decades peopleare likely to stay in the workorce much longer byabout ve years. Te employment rates o olderworkers have been on an upward trend since themid-1990s, while demographic aging suggestscontinuing strong labour market demand or utureolder workers, who will be much better educatedthan their predecessors. Babyboomers have dierentpreerences and expectations or work and leisure inretirement. Finally, nancial pressures arising romexisting public and private pension-plan undingarrangements and looming government budgetary

troubles here and abroad will likely keep thepressure on or policy changes that encourage laterretirements, in line with longer lie expectancy.

Delaying work-retirement transitions by veyears would have large, positive economic and scaleects, signicantly reducing the much-discussednegative eects o population aging on growth andpension unding. Other gains in social well-beingappear likely, i harder to quantiy.

Te next section examines the actors that are

likely to aect the growth o employment ratesand average retirement ages between now and2031. Most o these actors point to large gains inemployment rates among older workers over this

period, with average retirement ages increasingespecially rapidly in the next decade and thenleveling o.

Ten, the ollowing section develops a reasonablescenario or average retirement ages in 2031. A ve-year increase in average retirement ages is consistentwith the criteria used.

Consequences or the economy and governmentpolicy are explored in a subsequent section. Terewill be a particularly large impact in osetting manyo the potentially negative eects o populationaging, in maintaining the size o the workorce andin reducing the need or retirement savings. Social

well-being will also increase, both at the individualand societal levels.

While there is no immediate crisis to beaddressed, a key reorm will be to gradually increasethe standard age o pension eligibility in order tobring it more in line with increases in longevity.Fortunately, the needed changes are not large.Tey can be introduced gradually, with little risko negative side eects. In these circumstances, awell-designed reorm process could help re-connect

pension policy with the emerging social, labourmarket and demographic realities that are shapingour lives and our society.

Te author wishes to thank those who commented on drats o this paper and those who assisted in the preparation o anearlier version o the paper (Hicks 2011).

Much existing policy analysis is based on the assumption thatretirement ages will remain unchanged in the coming years. Tis

is a highly unlikely scenario, giving rise to misleading conclusionsabout the future welfare of Canadians. Te paper proposes a morereasonable assumption about future trends in retirement ages thatwould result in better policy choices.


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3 Commentary 345

Wh y The Next Gener ation of

Retirees Will Work Longer

Employment rates among older people have been

growing quite sharply in Canada since the mid-90s,and there are many actors that are likely to sustaintrends towards working longer and retiring laterover the next 20 years.

We will see a very large increase in the size o thepool o potential older workers and in their skills.Financial market pressures are likely to urtherincrease work incentives. Te older babyboomersseem likely to have stronger preerences or laterretirement, possibly very dierent rom those o

the generation that preceded them. Te narrowingo the gender gap in labour-orce participation willalso result in later average retirement ages. Someeconomic actors that now push people towardsdelaying retirement are likely to persist. Finally,potential policy responses to increasing undingand scal pressures are likely to lead people to, onaverage, remain in the workorce or many more years.

Looking Back

An examination o recent trends provides a useulstarting point or projecting uture retirement patterns.

Te average age o retirement is the traditionalmarker or measuring the boundary between workand retirement. rends in average retirement ages inturn reect two components:

theemploymentratesofpeopleindierentagegroups;

thenumberofpeopleineachofthoseagegroupswhich, in this time period, is largely driven by the

aging o the babyboomers.In Canada and many other countries, employment

rates in the older age groups when work-retirementtransitions take place i.e., 55 to 69 years old havebeen increasing quite sharply since the mid-90s(Figure 1). Tere were also increases in the

employment rates o people age 50 to 54 and amongthose who are 70 and over, but these were not as large.

Average retirement ages dropped by about ouryears during the 20-year period rom the mid-70sto the mid-90s, rom age 65 to age 61 (Figure 2).Tis was a period when the supply o labour waslarge and growing or demographic reasons; i.e.,the babyboom generation was o working age andemale participation was growing.

Te mid-1990s marked a reversal o trends

towards declining retirement ages in Canada.Retirement ages plateaued and are now on anupward trend but, at least until now, have not beenrising as quickly as they ell in the period rom themid-70s (Figure 2).

It might be thought that trends in employmentin the older age groups would be similar to trendsin average retirement ages. Box 1 explains whythis is not the case and why statistics on averageretirement ages are not a good guide to uture

trends in retirement-age behaviour.Using analytic techniques that circumvent someo these problems with crude average-retirement-age statistics, Carrire and Galarneau (2011) haveshown that delayed retirements have resulted ina signicant increase in working lie. In 2008, a50-year-old Canadian could expect to work or 16more years, 3.5 more years than in 1994. However,the expected length o retirement has stabilizedsince the mid-90s with increasing years spent

in employment keeping more or less in line withincreasing lie expectancy.1

1 An important area or uture study would be an examination o the interplay among expected years o lie spent in education,in work and in retirement. For example, would (or should) a longer period o schooling imply a relatively shortened periodo lie spent in work, or a relatively shortened period o retirement? I the timing o entry to working lie is becoming moreheterogeneous, should this have an eect, or example, on the determination o the criteria or pension eligibility?


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4

Strong Demand for Labour in the Future

Future labour-market demand will obviously playa key role in determining uture employment ratesor older workers. Long-term labour demandpredictions are difcult because they are inuencedby a wide range o economic, social and scalactors, such as business cycles, changing needsor workers depending on skills or occupations orgeographic areas, and the ways in which employers

organize their activities in order to attract newsources o labour supply or retain existing ones.

We know that the global economy had beenexceptionally strong or much o the periodsince the mid-1990s. Consequently, the growtho employment rates among older workers seenduring that period may not continue uncheckeduntil 2031. However, at any level o demand, thereduction in uture labour supply that will be caused

Figure 1: Employment Rates, Older Age Groups, Both Sexes, 1976-2011

Source: Cansim able 282-0002.

55 to 59 years 60 to 64 years 65 to 69 years

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5 Commentary 345

Figure 2: Average Retirement Age (Statistics Canada Calculations), 1976-2011

Source: Cansim able 282-0051.

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by demographic actors mainly the babyboomersmoving into their retirement ages and the reducedroom or growth in emale employment willalmost certainly put upward pressures on theemployment rates o older workers. Tese actorswill likely encourage many older workers to remainin the labour orce or a ew more years.

Previous studies (e.g., OECD 2006, Banerjee andRobson 2009) have made it clear that later retirementwould be the only large source o new labour supplythat could respond to demographically inducedlabour shortages. Other sources, such as reducedunemployment or increased immigration mightplay a supporting, but smaller role. StatisticsCanada labour-orce projections (Martel et al.2011) show that dierent demographic assumptionsdo make a dierence when projected out to 2031,but these are still small relative to the eects oolder worker employment rates.

The Skills of Older Workers Will IncreaseDramatically in the Future

We already know a lot about tomorrows older

workers: they will be simply todays middle ageworkers, but with more experience. Forecastinglabour supply is, thereore, relatively easy. Aswell, estimating the uture skills and individualproductivity o those older people is equallystraightorward.

Future retirees babyboomers and subsequentgenerations will be much better educated thanthe generations that preceded the boomers. Te2006 Census tells us that among people age 45to 54, 84 percent had some orm o degree orcerticate (including secondary graduation) andonly 16 percent did not. Among those 65 to 74(pre-boomers) there were twice as many peoplewithout any certicate (32 percent) and only 68percent with a certicate. Tis rise in educationalattainment will result in a comparable gain inthe educational attainment levels o older people(compared with todays older workers) as a result othe simple aging o cohorts.

Increased educational attainment and moreexperience should lead to higher productivity andearnings among tomorrows older workers, againcompared with those o today. Skills do deteriorate


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later in lie, but to a lower degree than the gainsassociated with increased experience and highereducational attainment until well past the ages in

question here when people are in their late 50sand their 60s.2

Tat is, in the uture labour orce there willnot be the large education and skills gap betweenyounger and older workers that began when the

highly educated boomers entered the labour orce.Te new generation o younger workers will

Box 1: How Average Retirement Ages Are Calculated

Unless otherwise stated, the international denition o

average retirement age is used in this paper. Followingis the OECD denition: Te average age o retirementis the sum o each year o age weighted by the proportiono all withdrawals rom the labour orce occurring at that

year o age. (OECD, 2011a).Statistics Canada uses the same underlying concept

but calculates it in a dierent way, making use oa question about sel-perceived retirement on theLabour Force Survey. Hicks (2011) provides detaileddenitions.

Tese denitions result in a seeming inconsistency

between trends in employment rates and averageretirement ages, as described in the text. In part, thisreects the act that the average retirement-age dataare driven to a large extend by the simple aging o thebabyboomers as well as by changes in actual behaviour.

As well, average retirement age statistics are moresensitive to early retirements than delayed retirements.Carrire and Galarneau (2011) use the ollowingexample. ake the most extreme case where, in a given

year, only one person retired and all other employedindividuals postponed their retirements. In this case,

the average retirement age would be the age o thatsingle retiree. Te average retirement age wouldeventually reect the later retirements, but not untila number o years ater the changes in retirementbehaviour o the employed individuals had occurred.

At the end o the day, any data about average

retirement ages will be ambiguous since there is nounderlying agreed denition o what retirement means is it the end o a career job, or complete cessation oall work, or receipt o a pension, or some mix?

Average retirement age measures are based on theincreasingly obsolete concept that there is a singlemarker in peoples lives called retirement that separateslie in work rom subsequent lie in outside o work.

Tis is ar rom the real world where people otenhave extended transitions rom work to ull-retirementand where there are many gray zones between

retirement, unemployment and poor health. Microdata that trace individuals over time have shownmuch heterogeneity in the paths that people ollow inmoving rom participation in the labour orce in themiddle portions o their lives to ull withdrawal otenquite late in lie (PRI 2005).

Despite these caveats, the concept is still useul orthe purpose o this paper. We can reasonably assumethat changes over time in the overall employmentrates between successive ages in average retirementrates is a good proxy or changes in the whole array

o complex work-retirement transitions that areactually taking place. Te biggest concern would bei there were a decrease (or increase) in the averagehours worked by older people during the retirementtransition. Tis possibility is addressed in the maintext o the paper.

2 Te literature on the relationship among age, earnings and productivity is not conclusive. Sharpe (2011) reviews theinternational literature on the relation between age and productivity and concludes that the eects are quite small and,even i negative, can be overcome by actors such as training and education. He argues that there is certainly nothing inthe international or Canadian literature that suggests that individual productivity actors should work against a policy oencouraging later retirement.


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7 Commentary 345

3 Calculations by Data Angel. Data Angel is the sole proprietorship consulting rm o Scott Murray. For urther inormationhe can be reached at [email protected]. See Hicks (2011) or a description o the methodology that was used, includingthe way in which data or 2001 and 2031 were generated.

Figure 3: Percent of People with Literacy Skills that Are Acceptable or Higher, Age Groups,2001 and 2031

Source: Data Angel.

have educational proles that are much moresimilar to those o their parents. Given anticipatedincreased demand or labour, the uture should seeopportunities or both younger and older workers.

Adult literacy surveys provide some directmeasures o skills by age. One o these relates toreading comprehension a basic learning to learn

skill that is one o the oundations o an adaptablelabour orce.Figure 3 shows the percentage o people in

dierent age groups who possessed at least an

acceptable level o reading comprehension skills;3i.e., those needed or people to ully unctionin todays knowledge society and economy. Tegure shows the growth in these skill levels by age,revealing:

asmallincreaseinreadingcomprehensionskillsbetween 2001 and 2031 among people aged 16 to

55, the ages that have traditionally made up thebulk o the workorce;

alargejumpinreadingcomprehensionscoresor people in the traditional work-to-retirement

2001 2031

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transition years o 56 to 65. In 2001, the scores opeople in this age group were signicantly belowthose o younger workers. By 2031, the scores willbe almost the same; and

averylargerelativeincreaseinthegenericskillso people over the age o 65.

Financial Market Considerations

Upward pressure on employment rates amongolder workers will be reinorced by nancial markettrends that are likely to see the returns to capitalall relative to wage growth. For example, in recentdecades a portolio containing both stocks and

bonds would have had returns that exceeded averageannual wage growth by 6 percent or more. Lookingahead, or CPP purposes, the Chie Actuary predictsthat assets managed by the Canada Pension PlanInvestment Board (CPPIB) will exceed wagegrowth by a relatively small 2.9 percent.

Tese lower comparative returns to capitalencourage higher labour supply, while lowernancial returns in general will aect the level oretirement wealth accumulation, possibly requiring

longer periods in employment.

Changes in Preferences for Workand Retirement

In 2011, we came to an important demographicturning point, with the rst wave o the babyboomersbecoming eligible or Old Age Security. It is worthconsidering the impact they have let in their wake.

Our conceptions o what constituted normalparticipation in school, work and amily changed

radically with the maturing o the babyboomers.Completion o secondary school and participationin post-secondary education became the norm, notthe exception. Te nature o work evolved extremelyrapidly with the spread o the knowledge economy.wo-earner amilies became the norm; genderequality improved in the education system (greatly)and in the workorce. Health improved with theprospect o urther gains in lie expectancy.

In other words, the aging o the babyboomgeneration was associated with proound changesin our economic and social structures. In lookingahead to the period when the babyboomers enter

their older years, it would seem reasonable toanticipate equally large changes in the natureo retirement. We should anticipate that thebabyboomers and their successors are likely tohave quite dierent preerences and expectationsor work and leisure than the generations thatpreceded them.

Te notion o what constitutes a normal age toretire becomes entrenched in the culture througha variety o means: pension eligibility criteria,

workplace practices and media attention. Tenormal age evolves over time in response to changein these underlying actors.

Looking back, the 1980s saw a movementtowards lowering the normal age o retirement.Freedom 55 advertising or private retirementsavings received wide media attention. In 1987,changes were made so that the CPP was available atage 60 on an actuarially adjusted basis.

Looking ahead, we can see many signs o a

shit towards a later normal retirement age, as wellas a continuation o exibility around that norm.Media attention has shited toward the inevitabilityo working longer. In answering surveys, thebabyboom generation indicates they expect to retirelater. For example, Schellenberg and Ostrovsky(2008) compare data on retirement intentionsor 1991, 2002 and 2007 or three age groups:aged 45 to 49, 50 to 54 and 55 to 59. Among theyoungest o these age groups (which contains many

babyboomers) there was a signicant rise in theage o expected retirement over this period. Forexample, in 1991 only 20 percent o those aged 45to 49 thought they would retire at age 65 or older.By 2007, this had risen to over 27 percent.

Modest pension reorms in the direction o laterretirement have already been introduced in Canada(e.g., an increasing actuarial adjustment in the CPPor working longer and removal o work cessationprovisions) and, as discussed below, the much


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9 Commentary 345

deeper changes that are underway in other countriesare likely to inuence Canadian expectations.

In about ve years, we will be able to startexamining the actual retirement patterns o the

leading edge o the boomers. Until then, therewill be much uncertainty about the age at whichthe boomers will begin to make the transition toretirement, the length o that transition and thehours worked during the transition. For planningpurposes, we can only rely on existing evidenceabout the boomers current expectations, whichsuggest that they will choose to retire later than thecurrent generation o pre-boomer retirees.

The Effects of the Closing Gender Gap

Work-retirement trends have been, and willcontinue to be, inuenced not only by changingdecisions on when to retire, but also by the closingo the gender gap in labour-market participation.

Tere are important gender dierences inemployment rates and hence in average retirementages. Tere have been signicant upward trends inemale employment rates since the mid-90s in each

o the three age groups where retirement transitionsare concentrated (ages 55-59, 60-64 and 65-69): Tegrowthinfemaleemploymentratesduring

this period was much higher than among men orthose age 55 to 59, somewhat higher than amongmen or those age 60 to 65, and about the sameas or men among those 65 to 69;

Forwomen55to59,themorerecentgrowthwas simply an extension o trends that go backor some decades, while employment rates or

women 60 to 65 and 65 to 69 were quite at

prior to the mid-90s.In other words, the longer-term rise in the

overall participation o women in the labour marketcan be seen in the youngest o our three retirementage groups, but not yet in the two older groups.Given the inevitable aging o cohorts, we mightexpect even larger increases in the employmentrates o older women in their 60s in the comingdecades, but a declining rate o growth among

those 55 to 59 as their employment rates are alreadynearing those o men.

Tat is, there is lots o room or utureemployment growth among women entering their

60s, particularly when one takes into account theexceptionally large growth in educational levelsand skills that characterize older women o theseages. Gains in educational attainment have been animportant actor in the increasing employment oolder men in the period since the mid-90s (Schirle2008) and we can anticipate a similar eect orwomen in uture years.

Analysis o data in Canada, the United Statesand the United Kingdom (Schirle 2008) has

also shown an interesting amily dynamic. Teincrease in the employment o women has been animportant actor in the increasing employment rateso married men since the mid-90s. Since womenare typically the younger partner in a marriage,men may choose to delay their retirement in orderthat leisure time is shared by both spouses. Schirleconcludes that uture increases in the employmento women could urther increase the employmentrates o men.

Te calculation o uture retirement-age trendsin the next section nds, however, that takingaccount o these two trends (towards genderequality in employment rates and towards laterretirement) does not greatly aect uture retirementage projections at the aggregate level. A sensitivityanalysis, where womens employment rates in olderage groups were assumed to equal those o men by2031, did not have a large eect on trends in overallretirement ages.

Under-Saving and Incomplete Pension Coverage

Much attention has been placed in the recentliterature on the eect o nancial pressures on laterretirement. Some people need to delay retirementbecause they lack the nancial resources to supportthemselves adequately in retirement (Wolson2011). While this is driven in part by the businesscycle, the structural trend towards later entry into


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the labour market with relatively ewer years tosave or retirement, especially an early retirement,may create ongoing pressures to work longer. Lowsavings rates and declining workplace pension

coverage are other actors, as is the greater use odened-contribution plans.

The Effects of Possible Policy Changes

Between now and 2031, reorms will likely beintroduced that will have the eect o shorteningretirement durations bringing them more intoline with social, economic and demographicrealities. Tere have been many such reorms in

recent years in most OECD countries and moreare on the horizon.About hal o OECD countries have introduced

reorms to tie pension benets directly to lieexpectancy. Tis has been accomplished throughgreater use o dened-contribution schemes inboth public and private pensions, as well as byintroducing direct links between benet levels andlie expectancy. Te basic logic is that i people livelonger, they will receive less benet unless they

work longer. However, the OECD itsel (OECD2011) sees drawbacks with this kind o approach,particularly or low-income workers.

Linking pension eligibility more closely to lieexpectancy is a better route, the OECD argues.Hal o OECD countries are already increasingstatutory pension ages or will do so in the comingdecades. However, in all but ve countries(Hungary, Italy, Korea, urkey and the UnitedKingdom) projected gains in lie expectancy overthe next our decades will outstrip prospectiveincreases in pension ages.

Although work disincentives are currently nothigh in Canadian public pensions, the concludingsection o this paper argues there is also animportant need or similar age-o-entitlementreorms here.

Other reorms aecting the private sector maywork in the same direction. An example would beregulations to encourage employers to retain older

workers instead o replacing them with youngerworkers. Another example might be legislationgoverning tax-assisted private pension plans thataect their standard age or benet entitlement or

the conversion o RRSPs to RRIFs.On the other hand, some uture policy reorms

might result in some modest changes that wouldwork in osetting directions. For example, newprivate pension arrangements, called PooledRegistered Pension Plans, are currently beingproposed that would be more suited to the needso those who are not adequately covered by existingRPPs and RRSPs. Tese reorms have potentialor eventually reducing the numbers o people who

now delay retirement because o inadequate savings.However, the eects would be small in the time-rame considered here; most proposals would takemany years to become mature.

In the private sector more generally, we also seeretrenchment in the coverage and benet levels oprivate pensions, a trend which is unlikely to reverseat least in the near uture and which is likely tocreate pressures or working longer that are evenstronger than those originating in the public sector.

On balance, policy changes in the comingdecades will almost certainly work in the directiono encouraging later retirement.

Future R etirees Are Likely

to Work at Least Five Yea rs

Longer on Aver age

Te purpose o this section is to develop an estimateo average retirement ages in 2031 (and o theemployment rates on which average retirement agesare based) in order to illustrate some o the resultingimplications or public policy.

Recent trends in employment rates, togetherwith middle-ground population projections, providea useul starting point to estimate the extent to whichthe average retirement age is likely to increase in thenext 20 years. Our calculations suggest that averageretirement ages are likely to rise a little over veyears by 2031 when compared with the 2010 gure.


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1 1 Commentary 345

4 Te Statistics Canada projections are based on labour orce and participation rates, not employment and employment ratesas in this paper. In order to provide a lower projection, Statistics Canada also constructs an estimate based on participationrate trends that goes back prior to the mid-90s. Tis makes sense given the design o their study, but ignores the reality othe major turning point in retirement ages that exists in most developed countries since the mid-90s. Crude polynomialtrend lines that can capture changes in the direction o trends show an even more extreme uture growth in employmentrates in most older age groups.

O this rise, almost two years is induced by shitingdemographics while a little over three years is theresult o upward-trending employment rates orthose nearing retirement.

The Calculations

Average retirement ages reect changes in thenumbers o people in the traditional work-to-retirement age groups and their employment rates.Te obvious starting point in making calculationsabout the uture would be to extend recent trendsin employment rates, in conjunction with StatisticsCanadas population projections. Tis is the

approach taken, or example, in Statistics Canadasrecent projections o the size o the labour orce outto 2031 (Martel and others, 2011).

Existing employment rate trends or olderworkers cannot, however, be simply projected outon a linear basis to 2031 without some adjustments.For some age groups, linear projections make littlesense. For example, the very high increase in theemployment rates o those aged 55 to59 since themid-90s, as seen in Figure 1, obviously cannot

continue indenitely at the present rate. Tat wouldresult in employment rates o over 90 percent by2031. Clearly, some maximum will be reachedbetween then and now. On the other hand, linearprojections or other older age groups, such as orpeople aged 65 to 69, seem highly conservativegiven the actors discussed in the previous section,especially or women.

Ater consultations with policy departmentsand experts, the Statistics Canada labour-orceprojections (Martel and others 2011) addressed

the problem by simply capping the growth inemployment rates at their 2018 estimated level.4

For a longer-term scenario that goes to 2031,not 2018, a more realistic alternative would assume

that the employment rates or men and women overage 55 in 2031 would be equal to the current levelor men and women in the preceding age cohort;i.e., ve years younger on average. For example,the employment rate o a man who was age 65 in2031 would be set to equal that o a male age 60 in2011. Tis assumption is ultimately arbitrary andbased on a trial and error process whose goal was toproduce a reasonable scenario or 2031 that met theollowing criteria:

Overallprojectionsbetweennowand2031thatare roughly consistent with trends since 1995 inolder worker employment and that (unlike theStatistics Canada variation discussed above) alsomake sense by single year o age and gender, rightthrough to 2031;

Consistencywiththelikelychangesinindividualpreerences, market actors and policy directionsthat were discussed in the preceding section,

which suggest that the pressures toward laterretirement will likely increase, on balance, in the

coming years. Replicabilityusingeasilyaccessibledata,in

order to allow other analysts to explore dierentimplications o the scenario or make dierentassumptions about its construction.

Box 2 shows how the calculations were made.Tese calculations resulted in an average

retirement age o 68.2 in 2031, up by 5.3 yearsrom the 2011 gure o 62.8 years our reasonableprojection o delayed retirement o about 5 years.


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Figures 4 and 5 show the resulting calculationso employment rates or older workers and averageretirement ages projected to 2031. Te reasonablechange projections are compared with a no changescenario where employment rates among olderworkers at each age between 55 and 75 are assumed,unrealistically, to remain unchanged rom their2011 levels.

Figure 4 shows that, in the no change scenario,

employment rates among older workers taken as awhole will all quite steadily until 2031 even thoughwe hold the rates constant or each separate year oage. Tis is the result o the growth in the numberso older people and the act that employment ratesstill decline by age. However, in the reasonablechange scenario, employment rates among workersage 55 to 75 continue to increase at about the ratewe have seen in the recent past.

Figure 5 shows a strong increase in average

retirement ages in the coming decade and then levelso. Tis illustrates the importance o demographicactors. Large numbers o babyboomers will reachthe traditional retirement ages over the next decadeand then move into their post-working yearsin the 2020s. (Te calculations have arbitrarilyassumed that everyone retires by age 75.) Te resulto the interplay between employment rates anddemographic actors is that retirement ages increase

rapidly to about 2020 and then start to level o.Tis occurs even in the no change scenario. In thereasonable change scenario, the levelling-o occursa little later and the increase in retirement ages ismuch greater.

In other words, average retirement ages wouldrise by 1.8 years between 2010 and 2031 simplyas a result o demographic actors, with no changein employment rates. Te comparable increaseo 5.3 years in the reasonable scenario thereore

Box 2: How the Scenarios Were Calculated

All the data used in the calculations in this paper

are rom Statistics Canadas CANSIM base: Teemploymentandhoursdatafrom1976to

2011 are rom the labour orce survey.

Populationprojectionsfrom2012to2031are Statistics Canadas middle-ground M2projections.

In both scenarios, the employment rate projections orolder workers:

Arecalculatedbysingleyearofage,imputedrom the ve-year Labour Force Survey

averages, but with no clustering o retirementdecisions at specic ages;

Assumeasmoothtrendfrom2012to2031;

Assumethatnooneretiresbeforetheageof55 and that everyone has let the workorce byage 76.

Areseparatelycalculatedbygender.

In both scenarios, the employment rate projections

or those under age 55 assume that 2011 rates holdconstant until 2031.

Inthenochangescenario,theemploymentrates or each age between 55 and 75 wereassumed to remain at their 2011 level.

Inthereasonablechangescenario,the2031employment rate or each age between 55 and75 was set to equal the employment rate orthose ve years younger in 2011.

Average retirement ages were calculated using these

projected employment rates and the M2 populationprojections and ollowing the OECD methodologyoutlined in Box 1.

Average hours (used in the calculations in Section4) are assumed to remain unchanged rom their 2031levels. Te hours data are based on the labour orcesurvey but have been roughly adjusted (using datarom the 1998 and 2010 ime Use surveys) in orderto get consistent data or age groups.


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1 3 Commentary 345

really consists o 3.6 years as a result o changesin employment behaviour and 1.8 years as a resulto inevitable changes in the age structure o thepopulation.

Looking Behind the Averages

Here we examine two potentially importantlimitations on the use o our projections:

Hoursofworkandproductivitymightdeclinewith age;

Terearepeoplewhomaynotbeabletoworklonger, or would preer not to do so.

Hours of Work and Productivity in the Transition

to Retirement

Our simple reliance on employment rates couldbe misleading i there were a decline in the hours

worked by older people in the uture, or examplei more older workers shited to part-time work aspart o their transition to retirement. Tere mightwell be a greater number o older workers, but theymight not be doing the same amount o work.However, labour-orce survey data do not supportsuch a concern.

First, trends over the past decades in averagehours worked have been quite stable or most age

Figure 4: Employment Rates Among Workers Aged 55-75, 1995 to 2011 and wo Scenarios to 2031

Source: See Box 2.

No change in employment rate scenario

Reasonable change in employment rate scenario

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

2028

2031


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1 4

groups. Tere has been a slight decline or bothmen and women age 65 and over. However, thetrend or those 55 to 64 (and or those 25 to 54) has

shown little change. It seems reasonable to assumethat average hours will remain unchanged into theuture.5

Figure 5: Average Retirement Ages, 1995 to 2011 with wo Scenarios to 2031

Source: Authors calculations. See Box 2.

56.0

58.0

60.0

62.0

64.0

66.0

68.0

70.0



1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

2028

2031

5 It has sometimes been argued that babyboomers have an underlying preerence or more choice both in the timing oretirement and in the hours worked during the retirement transition. Such changes in preerences are not yet ully reectedin actual behaviour because institutional arrangements are still relatively inexible, or example as to part-time work.However, the situation could change as employers gradually adapt their workplace to the needs o the older boomers. Tis isa plausible hypothesis that needs to be explored in the coming years once we can examine the actual behaviour o boomersduring their retirement transitions. At present, there is not enough data to anticipate the extent o such trends or whetherthey would, on balance, increase or decrease the volume o work that is undertaken by older people.


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1 5 Commentary 345

Second, in the period since the mid-1990s, theproportion o older workers who work part-timehas remained quite steady. Te percentage o part-time work among women employees in older age

groups has actually declined.A deeper look suggests that our assumption

about unchanged hours is likely conservative.For example, Carrire and Galarneau (2011) useworking-lie tables to show that delayed retirementhas had a large positiveimpact on total annualhours. Tere have been declines in average weeklyhours but this is due to the changing industrial andoccupational composition o the workorce.

A similar concern would exist i older workers

were less productive. However, again the evidencesuggests this is not true, or reasons that arediscussed later.

People Who Cannot, or Do Not Want To,

Postpone Retirement

Another problem, at least at the level o perception,relates to people who cannot work, or do not wantto work, longer in lie. Some older workers simply

do not have the needed skills or health.Distributional issues are important in manykinds o analysis. Social well-being is, at the endo day, measured in a relative manner. In a worldwhere, on average, people work longer, the well-being o those who cannot do so may all relatively,i only temporarily. In some cases, this may resultin higher o-loading pressures on social programs.Many countries nd that their disability orunemployment programs become a substitute, andcostly, orm o transition rom work to retirement.

Such concerns are important, but they are notdirectly relevant to the analysis here. Averageretirement ages will be higher but will continue toreect a heterogeneous range o retirement patterns.An increase o ve years in retirement patterns onaverage does not mean that everyone will work vemore years, or will be expected to do so.

However, potential problems could arise i theadditional years o work took place when healthand skills were declining; i there were concomitant,signicant increases in the skill-requirements o

jobs or in their health requirements or employees;or i there were a sharp cultural shit in work-leisurepreerences in a way that increased the proportiono older people who place a high priority on leisurein retirement.

None o these conditions exist, however. Healthylie expectancy is increasing, with most retirementtransitions being among people in their late 50sand 60s well beore declines in health becomecommon. As well, the skills o people in the aected

age ranges will be higher in the coming decadesthan they are today. On the demand side, physicallydemanding manual work is shrinking as a portiono the workorce and knowledge work is increasing;and, although it is still too early to be sure aboutthis, babyboomers may have a preerence or laterand possibly more exible pathways to retirement.

Te largest problem may be among a relativelysmall number o people those who cannot worklonger and who might be negatively aected by, or

example, the age o pension entitlement graduallybeing shited to keep in line with longevity changes.However, as will be argued in the concludingsection, a gradual reorm process could readilyinclude compensating adjustments i they are needed.

Why Ch anges in Retir ement

Behaviour Are Potentially

Important

Later average retirement ages could have ar-reaching eects on issues o policy interest. Longerwork lives would increase the supply o labour,thus reducing the negative economic eects opopulation aging, and reducing the pressures onpublic pensions and the need or retirement savings.Positive eects on health and individual well-beingare also probable.


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1 6

Effects on Old Age Dependency

Dependency ratios based only on age structuresonce dominated policy narratives about the eects

o population aging. For example, they comparedthe number o people aged 20 to 64 (working ages)with the number o people 65 and over (seniors tobe supported by those o working age). Newer andmore useul measures take account o the combinedeects o population aging and actual employmentbehaviour. A comprehensive measure is an hours-based producer-consumer ratio: the time actuallyspent at work producing the goods, services andincome needed to support all the activities o lie

outside o work. More specically, the ratio iscomputed as the total number o hours workedin an average week by the whole population as apercentage o the total amount o time that is notworked during that week by people o all ages.

Looking backward, one might think that asbabyboomers were entering the labour marketin the late 1970s and the 1980s, the producer-consumer ratio would show pronounced growth.In reality, the ratio moved up and downconsiderably during this period, mainly in line withthe business cycle, showing only a relatively smallupward trend (Figure 6). Positive demographiceects were partially oset by trends among malestowards early retirement (until the mid-1990s)and by increasing longevity. In other words, theeconomic gains that resulted rom the avourabledemography and productivity gains o those yearswere used, in part, to und ever-longer periodsoutside o work, in retirement.

Looking orward, i there are no changesin retirement behaviour we can expect a cleardownward trend in the producer-consumer ratio(Figure 6). On the other hand, our reasonablechange projection, incorporating longer working-lie durations, greatly reduces the downall inthe ratio, thereby considerably easing economicproblems associated with population aging.

Te data used in Figure 6 can recalculated toillustrate the relationship between producers and

consumers in an even more direct way. In 2011,every hour o work provided the goods and servicesneeded to support 9.0 hours o the time spent by allCanadians outside o work. By 2031, our reasonable

projections show that this same hour o workwould need to support 9.3 hours outside o work,a slight increase. (In the no-change scenario, thishour would be need to support 10.2 hours outsideo work, a considerably larger number, althoughperhaps not as dramatic as is oten portrayed in thepopulation aging literature.)

Living standards would thereore still likelyall. However, economic perormance that wassomewhat stronger than expected could go a long

way in compensating or any demographicallyinduced all in living standards. So would anincrease in average retirement ages beyond thoseassumed in the projections. For example, an increasein the employment o older workers that is, say,25 percent higher than our reasonable changeprojection would completely oset the negativeeconomic eects o population aging, at least overthe next two decades.

Labour Market Effects

Figure 7 shows the eect o later retirement on thesize o the total workorce (employees o all ages):

Inthenochangescenario,whichassumesthatemployment rates by age remain at their currentlevels, the rate o growth o total employmentlevels o signicantly when compared to pasthistory, with total number o employees in 2031growing to about 14 percent higher than in 2011;

Longerworkdurationsonaverageour

reasonable change scenario would see theworkorce growing by only a little less than thehistorical trend, reaching 20.6 million employeesin 2031, up by 19 percent rom 2011.

Tese gures are in line with Statistics Canadasrecent labour-orce projections (Martell et al. 2011),once allowance is made or the act that StatisticsCanada projected higher participation rates amongolder workers only until 2018, not 2031 as we havedone in our reasonable growth scenario.


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1 7 Commentary 345

Implications for Retirement Savings

Te obvious payo rom delayed retirement would

be a large reduction in the amount o savingsneeded or a comortable retirement. Hicks (2011)provides numerous examples, including eects onpublic pensions. Dodge, Laurin and Busby (2010)show that a our-year delay in retirement cansubstantially reduce the need or retirement savings:or example, the required private savings rate or amedian worker would be 17 percent o annual pre-tax earnings i he/she were to retire at age 63 but

would drop to 10 percent i retirement is delayedto age 67.

Shorter retirement durations not only reducethe need or retirement savings, they also reduceincome-related risks that may occur during thecourse o old age. Income risks in later lie arebest managed in a system with exible retirementpathways and multiple sources o income duringa persons older years. An important source o thisdesired diversity is the employment income thatwould result rom later retirement. People adjust

Figure 6: Producer-Consumer Ratio, 1976 to 2010 with wo Scenarios to 2031




0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

2020

2024

2028


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1 8

their retirement age to reect their ability to retirecomortably (Schellenberg and Ostrovsky 2008).

Spin-off Effects on Health and Well-being

Later retirement may also result in improvementin other dimensions o individual well-being(Hicks 2011). Some o these gains are associatedwith a related trend towards greater exibility inretirement transitions and an associated increasein exibility in allocating time to work, learning,leisure, care-giving and care-receiving over a

lietime. However, in this paper, we limit ourselvesto describing the possible benecial eects thatwould result directly rom an increase in averageretirement ages.

Unortunately, there is little hard data that allowsus to see causal links between retirement ages andwell-being. Box 3 provides some illustrations opositive links among age, working, and measures owell-being such as job security, nancial security,mental health and satisaction in dierent domainso lie. Unless otherwise noted, they are data drawnrom the Statistics Canadas web site. It is important

Figure 7: otal Employment 1976 to 2011, with wo Scenarios to 2031




0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018

2021

2024

2027

2030


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1 9 Commentary 345

to underline that these examples are highly selectiveand indicate correlations only, not causality. Teysuggest, but certainly do not prove, that a worldwhere people work longer on average will be ahappier world.

Following are some o the actors that are likelyto contribute to increases in well-being i averageretirement ages were to rise:

Forthosewholiketheirjob,thatsatisfactionisspread over a longer period o lie (and amongthose who dislike their jobs, many will simplyleave the workorce early, as they do currently);

Tenumberofpeoplewhocannotworklongeror health reasons is declining;

Alongerworkinglifeislikelytoprovidemoreopportunities or mid-career training and

job-changing (Hicks 2011), which is likely tohave positive eects on both productivity andindividual satisaction;

Forthosewhohavelowretirementsavings,working longer provides greater opportunitiesto manage the risk o inadequate incomein retirement, again with positive eects onindividual well-being.

Box 3: Examples of the Inter-relationships among Age, Work and Well-being

Jobtenureincreasesdramaticallywithage.In

2010, workers age 55+ average 190 months withtheir present or latest employer. Te comparablegure or those 25-54 was 98 months.

Teoncelargegapineducationalattainmentbetween younger and older worker has shrunkenormously. In 1990, some 27% o people 25-54had a PSE degree or certicate. By 2010 thatgure grown to 36%. Te growth or peopleage 55 to 64 has been much aster rom 17%to 33%, now almost as large as that or middleaged people.

Unemploymentratesforpeopleaged55+arelower than or people in their middle years (age25-54) and much lower than or young workers(age 15-24). Te gures or 2010 are 6.4%, 6.9%and 14.8%, respectively.

Familynetworthincreasesdramaticallydependingon the age o the amily head up to the 55 to64 age group.o In 2005, or those aged 35-44, net worth was

$135,000.

o For those 45-54 it was $232,000.

o It reached $407,000 or those aged 55 to 64.

o Even in the age group 65+, net worth was still$303,000 higher than in the 45-54 age group.

Workinglaterwillreducetheneedforretirement

savings in a quite dramatic ashion. Te resultcould be increased material living standards inthe pre-retirement period and greater nancialrisk in the retirement years. Examples are oundin the text and in Hicks (2011).

StatisticsCanadasGeneralSocialSurveyof2005 ound that people got more satisactionrom paid work activities than they did rommost leisure and cultural activities (Wolson2011). Indeed, or people over the age o 65,paid work was at the top o the list o activities

that people said they enjoyed the most. Retiringlatermakesussmarter!International

evidence (Rohwedder and Willis 2010) showsthat cognitive ability is higher among those

who work longer, with obvious individual andsocial payos.

Somejobscausestresswhichisnegativelylinked to health and well-being. However, thebalance o evidence suggests that maintaininga longer attachment to employment, one o themain institutions that provide structure in our

society, is likely to result in a net improvementin individual lie satisaction and in health,including mental health (Kuhn et al. 2011,Behncke 2009).


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2 0

Conclusion: Policy Action

Is Needed But Need Not Be

Threatening

Te policy implications o later retirements are largebut are not accurately reected in policy discussionsin Canada. Tat suggests a ailure in the interacebetween the research and policy communities, aailure that warrants deeper exploration than ispossible in this paper.

For example, the policy community has receivedthe message rom the research community that,under the assumption o little change in retirementages, a signicant number o Canadians are not

saving adequately or their retirement. Tey havealso received the message that population agingwill have large negative macro-economic and scalconsequences in the coming decades. However, theyhave not received the message that, i more realisticassumptions about uture retirement patterns aremade, the negative economic eects o populationaging will be greatly reduced and that, or example,there may be ewer problems o under-saving orretirement than are indicated by much o todayspolicy analysis.

In terms o general policy directions, theconclusions o the paper can be summarizedas ollows.

1: Tis paper argues that there will be a strong trendtowards later retirement as a result o social andeconomic pressures, without any policy action.It also argues that the results will be largelypositive and should thereore be supported bypolicy whenever possible. For example, the trendtowards later retirement will signicantly reduce,

although not entirely oset, the much-discussednegative macro-economic and labour-marketeects o population aging. Tis suggests thatcompensating policy reorms are still neededbut can be less draconian than has oten beenthought to be necessary.

2: Many currently unknowable actors willdetermine what will actually happen in 2031.However, the assumptions used in this paperto develop a reasonable retirement scenario

are much more in line with current trends anddirections than is the unrealistic and equallyarbitrary assumption that underlies most currentpolicy analysis; namely that there will be no change

in retirement patterns over the next 20 years.3: In terms o specic pension reorms, the paper

argues or increasing the age o receipt opublic-pension benets. Tis proposal mightbe questioned at a time when people otenretire beore the standard retirement age, whenretirement ages are increasing in any event, andespecially given that the direct eects o suchpolicy changes are likely to be quite minor.However, the act that there is no immediatecrisis in Canadas public pensions provides

a happy, unusual opportunity to make somerelatively painless changes in the short-run inorder to lay the ground or the more rationallonger-term evolution o the retirement incomesystem as a whole.

o expand on this last point, the paper points tothe desirability o increasing the age o eligibility topublic pensions in the longer run. Reorms alongthese lines would be important, but need not belarge. Te work disincentives in Canadian publicpensions are relatively small smaller than those

in many private pensions (Fougre et al. 2009). Inthe coming decade or so, the needed extension oworking lives will occur mainly as a result o marketand societal orces alone. Reorm to the age opublic-pension eligibility would, no doubt, reinorcethe changes that will take place in any event, butthe main rationale or reorm is not related toshort-run impacts.

Te goal would be to help shit the systemaway rom the notion that there is a normal age o

retirement based on a persons chronological age.It is important to understand that a xed normalage o retirement is not neutral in its eects on theallocation o time to work and retirement. A xedage, in conjunction with growing lie expectancy,means that the proportion o lie spent inretirement grows relative to the proportion o timespent in work, in learning and in leisure at otherstages o lie.


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2 1 Commentary 345

Reorms that increased the age o public-pensioneligibility would convey the message that it is nolonger appropriate or public policy to includeprovisions that could distort peoples lie-course

decisions in a way that avours people spendingshorter periods o their lives in work.

Te reorm process could be designed to providea non-threatening opportunity or broader publicdiscussion about retirement-age expectations moregenerally, including both in private pensions andin individual retirement planning.6 Alternativeconcepts, such as linking pension eligibilityto longevity, could be debated. As noted, theactual reorms themselves could be modest and

without the large negative eects that have madepension debates so difcult in some countries.Not all the reorms would need to be introducedsimultaneously; the implementation o some couldbe phased in over a quite lengthy period o time.

Gradual introduction would also provide anopportunity to examine the distributional eects othe changes. For example, there may be some peoplewho cannot work longer and who, i the age oeligibility or pension benets is increased without

compensating changes made elsewhere in the system,may have to remain longer on other benets or otherincome sources that are less generous than pensions.

While the numbers o people in these situationswill be small, there would be time to introducecompensating measures should this prove needed.

Very gradual increases in the age o public

pension eligibility with lengthy advance warning,similar to the approach being used in the UnitedStates,7 would seem to be a sensible reorm route.Such reorms should involve gradually raisingthe age band at which one could receive C/QPP.Denton and Spencer (2010) provide practicalexamples o how this could be done and examinethe consequences o dierent phase-in scenarios.Similar changes to the Old Age Security (OAS)would provide consistency in signals about

retirement ages. Design options would need to takeaccount o the possibility o actuarially adjusting theOAS to allow it to be taken earlier or later, alongthe lines o the C/QPP and to ensure that thereare no unintended negative eects on recipients othe Guaranteed Income Supplement.

An important goal o the reorm process wouldbe to help re-connect pension, and other retirementincome policies, with emerging labour market,social and demographic realities. Later retirement

can be a win-win situation, both or those retireeswho choose it, and the policymakers who mustadapt to it.

6 Based on a review o the Canadian literature and international experience, Hering and Klassen (2010) conclude that thepublic would react positively to gradually introduced, small changes in the context o a public debate that examined thealternatives. Te public resistance seen in France and other countries, where much deeper reorms are indicated, would notoccur i reorms were introduced along the American model.

7 In 1983, the United States passed legislation to gradually increase the age o eligibility or Social Security benets. Techanges did not start until 2003 and will be phased in by small increments until 2025 when the eligibility age will reach 67.


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2 2

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December 2011 Ambachtsheer, Keith P., and Edward J. Waitzer. Saving Pooled Registered Pension Plans: ItsUp o the Provinces. C.D. Howe Institute E-Brie.

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