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The Actuary The magazine of the Institute & Faculty of Actuaries

Shifting demographics and economic security

All else being equal, if every member of society lives longer, then the population will age. Thus, enhanced life expectancy, through better nutrition, child spacing/family size, housing, public sanitation, and medical care, is an important part of the population aging paradigm, but it is not the most important part.
More important are the dramatic demographic shifts that took place in both Canada and the United States in the second half of this century. In Canada, it is expected that over the next 40 years the percentage of the population aged 65 and over will double, while the percentage of the population aged 85 and over will more than triple. This has important implications for economic security programmes.

The effect on employer-sponsored economic security programmes
The ageing population will put pressure on employer-sponsored pension plans in a variety of interesting ways. Many of the accepted norms of today may be reversed in the next 40 years. As shown in table 1, ages at retirement have fallen significantly.
In the United States, labour force participation rates are no longer falling, but have bottomed out. This, coupled with the dramatic shift in availability of labour that will occur when the baby-boomers start to retire (especially after 2010), suggests that the trend to earlier and earlier retirement has or will soon end, and that there will be an absolute reversal in this trend. In return, older workers, when in demand, may request more flexible pension and retirement transitions.
Furthermore, an ageing workforce will cause group fringe benefit costs to rise. In response, employers are moving from defined benefit group plans to defined contribution plans to cap their costs.

Productivity and retirement age
As the baby-boomers retire and liquidate their assets, share values could be negatively affected. At the same time, the increased demand for goods and services required by the elderly may cause their prices to rise. Overall, there will be a greater burden per remaining worker to transfer wealth to retirees through the proxy of social security and healthcare.
The equilibrium between production and consumption can be maintained if we find a way to produce more goods and services when needed. That can be achieved in two ways. First, we can maintain or increase the size of the labour force. Second, we can increase the productivity of every worker.
Brown and Bilodeau (1999) argue that an extra period of work of an additional four to five years would be necessary to maintain economic balance in Canada if there is no productivity growth. This might be acceptable in terms of public policy, because life expectancy has improved measurably this half-century, with essentially little or no commensurate rise in the age of entitlement for social security.
Table 2 shows that the shift required in labour force participation (ie an additional four to five years of work) is less than the shift in improved life expectancy over the period of analysis.
Maintaining or increasing the size of the labour force will most probably also necessitate the provision of significant incentives for workers to stay active longer, as with phased retirement programmes or more flexible pension provisions.
However, if the workforce can become more productive, such a rise in retirement age would not be necessary. In fact, Brown, Damm, and Sharara (1999) have shown that if the economy can grow 1.3% per annum faster than costs, then the Canadian average age at retirement need never rise.

A crisis?
Many observers view the impending aging of the population as a potential crisis. The word ‘crisis’ is very interesting. It requires two Chinese characters for a literal translation. In turn, if these two Chinese characters are translated back into English, their literal translation is ‘dangerous opportunity’. The workers and consumers of Canada are desperately seeking economic security. With each passing day, they have less and less faith in the ability of government to provide them with that security. Instead they are looking to their employers and the financial services industry to fill that void and supply the appropriate retirement savings and economic security vehicles. This will be a challenge, but it will also be a great opportunity for those who are properly prepared.