byron g spencer mcmaster university presentation at the annual conference national initiative for...
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Byron G SpencerMcMaster University
Presentation at the Annual ConferenceNational Initiative for the Care of the Elderly
University of Toronto24 May 2012
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Joint work with Frank DentonSuddenly thrust into policy debate!But a different take
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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
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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)
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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) %
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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)
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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) %
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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
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Population aging is inevitable!
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Even doubling immigration would still result in substantial population aging
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-- as would much higher fertility
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-- as would re-defining ‘old’
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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
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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.
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OAS, GIS, and CPP/QPP benefits as percent of pre-retirement incomeSource: Baldwin (2009)
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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
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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)
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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
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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.
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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
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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
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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?
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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
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Age-eligible portion increases, but --
10
12
14
16
18
20
22
24
26
2010 2015 2020 2025 2030 2035
AE0
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Age-eligible portion increases, but --
10
12
14
16
18
20
22
24
26
2010 2015 2020 2025 2030 2035
AE0
AE1
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Age-eligible portion increases, but --
10
12
14
16
18
20
22
24
26
2010 2015 2020 2025 2030 2035
AE0
AE1
AE2
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Age-eligible portion increases, but --
10
12
14
16
18
20
22
24
26
2010 2015 2020 2025 2030 2035
AE0
AE1
AE2
AE3
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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
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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
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What of LF / A-E Pop’n?
2.0
2.5
3.0
3.5
4.0
2010 2015 2020 2025 2030 2035
AE0
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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
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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
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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
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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
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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
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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
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-- the contribution rateParticipation Rates Adjust
6
7
8
9
10
11
12
13
2010 2015 2020 2025 2030 2035
AE0
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-- the contribution rateParticipation Rates Adjust
6
7
8
9
10
11
12
13
2010 2015 2020 2025 2030 2035
AE0
AE1
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-- the contribution rateParticipation Rates Adjust
6
7
8
9
10
11
12
13
2010 2015 2020 2025 2030 2035
AE0
AE1
AE2
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-- the contribution rateParticipation Rates Adjust
6
7
8
9
10
11
12
13
2010 2015 2020 2025 2030 2035
AE0
AE1
AE2
AE3
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-- the contribution rateParticipation Rates Adjust
6
7
8
9
10
11
12
13
2010 2015 2020 2025 2030 2035
AE0
AE1
AE2
AE3
AE4
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-- 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
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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