You can get what you want

As the West faces a mass of retiring boomers, what impact will the labour force drain have on its economies? Here’s what the experts predict.

On July 15, before tens of thousands of fans on the Plains of Abraham in Quebec City, the Rolling Stones gave the final concert of their Zip Code Tour, the only show to be held in Canada. As usual, Mick Jagger, aged 71 (he turned 72 on July 26), ran back and forth and pranced, jumped, wiggled, strutted and sang his way through 18 of the Stones’ greatest hits, completing the gig with, of course, Satisfaction — or the lack thereof.

Jagger does not officially belong to the boomer generation, since he was born in 1943 (he’s part of, yes, the “silent” generation, as this cohort is usually identified), three years before the largest generational legion started its demographic invasion. Yet, arguably, few celebrities could better pose as an icon of the boomer generation, which includes those born between 1946 and 1964.

Today, Jagger’s iconic status is probably more relevant than ever. “I can assure you that Jagger’s grandfather did not jump around the way he does,” says Yves Carrière, professor of demographics at the University of Montreal. Just as they have rewritten many pages in the book of social practices, the boomers seem determined to rewrite a few chapters on retirement.

RETIREMENT DRAIN

If the grandfathers of rock have not yet retired, however, many who belong to the generation that followed them — the largest in most western countries — already have. In the past few years in Canada “there has been a steep rise in the rate of retirement, from 0.8% to 1.2% of the total labour force,” says Pedro Antunes, an executive director and deputy chief economist at the Conference Board of Canada in Ottawa.

The problem is obviously not confined to Canada. All of the major economies, and many emerging ones, face the problems of an aging population, a lowered fertility rate and increasing droves of retirees. In a 2000 study, the OECD projected that by 2035 to 2045, there would be a near doubling, on average, of the ratio of citizens over 65 to the working-age population.

What impact will such a drain on the labour force have on the economy and on government revenues and spending? Economists and forecasters agree that it will be significant. But how significant? For some, it will be disastrous; for others, it will be just a strain; for still others, it could prove surprisingly mild.

One of the economists who has been crying wolf for a long time is Laurence Kotlikoff, a professor at Boston University. In The Coming Generational Storm, a book he co-authored in 2004 with Dallas Morning News columnist Scott Burns, Kotlikoff claimed that the US government had lost its compass, allowing a huge gap of US$51 trillion to build between what it expected to spend and the revenues it expected to collect. (In February Kotlikoff told the Senate Budget Committee that the fiscal gap has now widened to US$210 trillion.)

The authors argued if the US government continued on this path — and everything indicates that it has — the country would face “the moral crisis of our age,” threatening the economy with a “headlong plunge toward Third World status.” Americans would inevitably face skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment and political instability.

To fill the fiscal gap, Washington could obviously raise taxes or reduce spending. Unfortunately, Kotlikoff predicted that the path it was most likely to follow was that of seigniorage, printing tons of money to increase revenue and inflate itself out of debt. For a population that increasingly relies on a fixed income stream during retirement, that is the worst imaginable solution.

Eleven years later, the catastrophe Kotlikoff and Burns predicted still has not hit American — or Canadian — shores. But maybe it is only a question of time, given that seigniorage, in the form of the Federal Reserve’s quantitative easing policy, has been massively implemented since the financial crisis.

THE END OF THE DEMOGRAPHIC DIVIDEND

Many economists acknowledge that the mass retirement of the baby boomers will bring about some stress on the economy, but unlike Kotlikoff, they think it will be manageable. A number of factors come into play, and their consequences are not easily fathomable: job and skill replacement rates, productivity and innovation, savings and spending patterns, and reductions in government revenues and spending.

One of the most troubling variables in the boomers’ retirement equation is the fact that in the past 30 to 40 years, “manpower increase has been the main propeller of growth, and it was the case even more in Canada than in other OECD countries,” says Alexandre Laurin, director of research at the C.D. Howe Institute in Toronto.

Jean-Yves Duclos, professor of economics at Laval University in Quebec City, calls that rise in manpower the “demographic dividend.” “It added one percentage point of growth in the last decades, but now we’re entering into a period when this dividend disappears. It will even become negative.”

As a result, “we will have fewer people producing goods and more people consuming them who don’t participate in the production process,” says William Scarth, professor of economics at McMaster University in Hamilton.

This prompts the question of how the vacated jobs will be filled. Will the new entrants, mostly from the millennial generation (born between 1981 and 1997), have the required job skills? Antunes suggests there will probably be a gap in experience and knowledge. “The ones replacing the boomers may not be as productive. We could find it hard to fill those jobs, and be constrained in our choice of employees,” he says. This doesn’t mean an absolute decline in the labour force, he cautions, but the rate of job growth will slow and the economy will suffer accordingly.

Are you ready for retirement?

THE VIOLINIST’S PRODUCTIVITY

This job deficit only adds to an existing productivity and innovation deficit. Canada’s economy is increasingly service oriented, and will become more so as the boomers age and require even more services. Scarth points out that the service areas are much less sensitive to productivity improvements. “How do you raise the productivity of a concert violinist?” he asks.

“Our companies invest less in technology and in physical capital than what we witness in other advanced countries, and such has been the case for a good number of years,” says Duclos. A 2014 OECD study highlights Canada’s slow and steady deterioration: R&D expenditures by businesses fell from 1.26% of GDP in 2001 to 0.88% in 2012, while total R&D expenditures declined from 2.09% of GDP in 2001 to 1.69% in 2012, the OECD average being 2.4%.

Government revenues and expenditures are crucial areas of concern. The growing phalanx of retired boomers will inevitably create constraints on budgets and other troublesome economic effects.

“Population aging is now the leading explanation for sluggish government revenue growth,” wrote Laval economics professor Stephen Gordon in a National Post column on Quebec’s last budget presentation (March 23). And the John Ueland Quebec budget may “serve as a template for other Canadian governments in the near and medium term,” he warns.

However, it appears that government revenues could very well keep up. In the US (where the demographic deficit resembles Canada’s, but is not as acute), a study by the Federal Reserve Bank of Kansas City finds that with a greater proportion of retirees, the aggregate state tax revenue would have been lower by only US$8.1 billion, or 1.1%, in 2011.

HEAVY SKIES OVER PROVINCES

The real crunch will most likely be felt on government expenditures. An aging population will require increasing benefits payouts, but mostly it’s healthcare costs that will explode, and pressures are only starting to build, says Laurin, adding: “Chances are that things will not be pretty in a few provinces.”

Ontario is a case in point: a December 2014 C.D. Howe Institute brief, Managing Healthcare for an Aging Population: Ontario’s Troubling Collision Course, reports, “Today, healthcare consumes 42 cents of every dollar spent on provincial programs. Without a change of course, health spending would eat up 70 percent of the provincial budget within 12 years, crowding out our ability to pay for many other important priorities.”

Will the growing ranks of boomer retirees lead the economy off a precipice? “Let’s not panic,” says Scarth. There are a few compensating factors. Immigration is one of them. “We could crank up immigration and import lots of young people,” he suggests, though he points out that Canada is already one of the most generous countries on that count. He also proposes that an increasing labour shortage could benefit the younger generations through higher wages, allowing governments to increase taxes without too much pain and pay for the increased weight of boomer retirees.

Scarth adds, “If people are rational and forward looking, they will save more and retire later.” This is already partly the case. Two 2015 reports, one by McKinsey & Co. and another by the C.D. Howe Institute, assert that a large majority of Canadians are saving sufficiently for their old age. McKinsey reports that 83% of the nation’s households are on track to maintain their standard of living in retirement.

And Canadians are already adding years to their work lives, according to a 2011 Statistics Canada study, Delayed Retirement: A New Trend? Particularly noteworthy is the employment rate of men aged 65 to 69, which has “almost doubled between 2000 and 2010.”

All in all, it would appear that the boomer retirement wave will not drown the Canadian economy, which will suffer, but only slightly. Scarth predicts that by 2030, living standards will be seven percentage points lower than they would normally have been without our aging demographics. Antunes and Duclos expect a lower than normal performance for Canada’s economy in the coming decades in the range of one percentage point: if annual growth would normally have been 3%, it will instead be 2%. It is not insignificant, of course, but it will not be a catastrophe.

A MORE DYNAMIC ANALYSIS

Carrière proposes a more dynamic view of Canada’s future that sees all actors, foremost the boomers, adjusting their behaviour to meet the challenges. For one thing, he believes that what we could call the Mick Jagger Factor will increasingly play a role. People are already retiring later and will increasingly do so, in part because life expectancy is lengthening.

According to the new Canadian Pensioners Mortality Trends tables (CPM 2014), the median life expectancy for men and women aged 65 is 23 years. That means that half of them will live up to 88 and 25% can expect to keep going until 95. That’s a lot of years to stay at home watching TV and trying to finance one’s consumption habits. So we can expect many more Canadian boomers to either retire later or go back to work.

Carrière also warns us to pay attention to the right issues. For example, he points out that Canada’s pension situation is much better than it is in most OECD countries. In 2010 in France, the public expenditure on the pension system represented close to 13% of GDP; in Germany, it was more than 10%. The OECD average was about 7.5%. In Canada, pensions absorb about 4% and will grow to 6.2% by 2060 when the proportion of seniors reaches the highest it has ever been. “That means Canada still has a comfortable cushion,” Carrière says.

We should also be careful about the way we look at healthcare costs, he cautions. “From 1998 to 2008, population aging represented only 10% of the growth of healthcare costs. The bulk of the growth hinged on increases in items such as doctors’ salaries, technologies and the price of drugs. If ever our aging population explains the totality of our increasing healthcare costs, then that will be just fine. It will mean that we will have finally controlled all the other costs.” That is clearly not the case yet.

Maybe Canadians should stop singing Jagger’s Paint it Black and consider what many boomers thought all along: You can — sometimes — get what you want.

About the Author

Yan Barcelo


Yan Barcelo is a journalist in Montreal.

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