October 12, 2005

Blurb: Canada's aging population presents serious long-term economic challenges. But the country's short-term outlook looks great.

Forget Freedom 55

By Peter Diekmeyer o Bankrate.com

During the 1990s, one of Canada's largest life insurance companies captured the public's imagination with its "Freedom 55" product. As its name implied, the policy enabled customers to retire comfortably as early as their 55th birthday.

The ingeniously named Freedom 55, which now comprises an entire division of London Life, came to represent the baby-boom generation's dream of a well-earned early retirement after a career of hard work. But while many Canadians continue to buy Freedom 55 policies and even more of them are buying into the dream of an early retirement, in coming years that dream will be increasingly hard to achieve.

The reason is that Canadians just aren't dying like they used to. At the turn of the 20th century, the life expectancy of most Canadians was barely 60 years. But new advances in medicines are pushing Canadian life expectancies well into their 80s. That means in coming years, as the baby-boomers begin to retire in great numbers, there will be fewer active workers to support seniors' growing medical and pension costs.

"With advances in medical technologies, soon, if a person retires at 55, his remaining life expectancy will be longer than his entire working career," said David Burke, director of national retirement programs for Watson Wyatt Canada. Burke made the comments in a keynote address at a day-long seminar on the future of the Canadian economy conducted by the Conference Board of Canada for senior corporate economists earlier this week. The broad thrust of the various presentations was that while Canada's short-to-medium term outlook is fairly positive, the longer term picture contains significant demographic challenges.

The short-term looks good
The good news is that the stars seem to be aligning in Canada's favor. The Canadian economy has created an average of 25,300 jobs per month since 2002, far above its long term average. The good news is likely to continue. According to Pedro Antunes, a Conference Board economist, Canadian economic growth should spike from 2.7 percent in 2005 to 3.1 percent in 2006.

The degree to which oil-rich Canada's position is the envy of world markets, can be seen in the strengthening loonie, which is now treated as a "petro-currency." The correlation between oil prices and the loonie is so strong, that one economist estimates that every $10 per barrel of oil price increase, generates a corresponding $0.05 increase in the loonie relative to the greenback.

The fact that interest rates are currently running far lower than they are south-of-the border is also good news. Lower borrowing costs stimulates overall demand because it means that Canadian businesses, consumers and homeowners all pay less when they buy new durable goods such as machinery, automobiles and housing.

The productivity challenge
Longer term though, the picture is a bit cloudier. Birthrates among Canadians at 1.6 per 1,000, are far below the 2.1 per 1,000 that is needed to replace those that are dying off. The result, says Burke, is that the proportion of retirees to active workers is going to increase drastically in coming years.

Burke, who is an actuary by trade, helps big companies such as Merck Frosst Canada, Quebecor World and Astral Media, to structure retirement plans for their employees. And he regards the combination of aging baby-boomers with declining birth rates as one of the most important challenges facing Canada's future.

"Economic growth is made up of increasing population and improving productivity," Burke says. "And since the percentage of Canadians who are of working age will be decreasing. Those that remain will have to be more productive if we want to maintain our standard of living."

According to Burke, there are several potential solutions to deal with the coming rise in the number of retirees, relative to the working age population. These include increasing the proportion of women in the labor force, boosting the number of immigrants and keeping seniors longer in the workforce.

Boosting the percentage of women in Canada's labor force is the most obvious solution. Despite enormous advances in recent decades, women continue to be underrepresented in the workforce, in all age groups, even among those long past child-bearing age. The only problem is that the participation rate of women in Canada's labor force is currently hovering at about 75 percent, which is one of the highest levels in the western world. That means incremental increases in the number of working Canadian women are unlikely to be substantial.

Immigration is another widely-touted solution. However despite the acknowledged economic benefits derived from immigration, the number of immigrants that would be required to maintain the current worker-retiree balance is so high, that it would likely cause significant adjustment problems. That's especially true in large cities, which tend to accept the bulk of new arrivals.

Canadians may have to work longer
Probably the most promising solution says Burke, would be for Canadians to spend a little more time in the workforce before packing it in.

That would bring two key benefits. "It would generate additional revenues for those seniors who continue to work and it would reduce the number of years that pension plans would have to make payouts," says Burke. "The average retirement age here in Canada is 61, but in Japan it is 68. If the Japanese can work longer, why shouldn't we."


Peter Diekmeyer is the Montreal Gazette's management columnist.

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