Canadians need to begin a discussion on an all-encompassing aging strategy given the longevity of its large baby boomer population and the inability of many to save adequately for retirement, a pension conference has been told.
Derek Dobson, CEO and plan manager at Colleges of Applied Arts and Technology (CAAT) Pension Plan, told an April Conference Board of Canada seminar that living until 90 is no longer a fairy tale for many Canadians.
In 1951, the average 65-year-old lived until 79; in 2051, 65-year-olds are expected to live until age 90, said Dobson.
Weaker economic growth
In addition to saving more and saving more carefully for retirement, this “burden of longevity” also comes with potential societal problems like higher healthcare costs (or reduced services) and the prospect of weaker economic growth, he said.
Saving for retirement for some individuals seems like an impossible task, said Dobson, but as with pension plans, individuals must set goals, save and plan for different kinds of risk.
“If we choose to ignore the facts and figures of the impacts of longevity, we’re in for some disastrous consequences,” he said. “We need to have some risk management principles when we get there.”
Canadians have a narrow view of what longevity really means, said Dobson, but it’s important to convince people that increased longevity in Canada is actually a good rationale for improving the retirement savings system overall.
“There should be a growing debate across Canada to develop a comprehensive aging strategy for Canada that’s inclusive of our retirement income strategy, that’s inclusive of a healthcare strategy and also an understanding of what we need to do individually and the impacts they’re going to have on taxation overall.”
All pension plans, public and private, are facing the longevity issue, he said. Some CEOs of defined benefit pension (DB) plans believe that longevity spells disaster for them and that “longevity equals unsustainability for DB plans.” But Dobson said plan administrators need to take incremental steps to make sure more payments are available over a longer period of time to accommodate longer-living retirees.
“Longevity is not a risk, it’s simply a cost, just like investment return expectations, salary scale assumptions, changing demographics of your workforce – these are all assumptions. If you get longevity wrong, it’s painful, it hurts. But if you get it right, there are no pain points at all.”
He gave the example of the number of pension payments from age 65 that are required given actuarial assumptions. In 1921, life expectancy at 65 was 78.6 years and the plan would have had to make 163 monthly pension payments. He estimated that in 2050, life expectancy at 65 will be 88-90 and the number of monthly pension payments could rise to an estimated 276-300.
Dobson said small pension plans might want to avail themselves of certain products to mitigate those longevity risks, while larger plans may require a change in assumptions. He added that converting DB plans to defined contribution plans doesn’t change the facts of longevity.
One of the biggest problems the industry faces overall is that longevity is often based on looking at history rather than the future. “A lot of the key policy issues that we face are heavily influenced by pundits who look backwards rather than forecasting them on a go-forward basis.”
Factors that increase longevity over time – improved health care, better nutrition, lifestyle changes, improved education and better workplace and safety standards – will all move forward and are expected to continue improving longevity.
Canada is far from being the only country facing the impacts of “the new normal” of longevity, said Glen Hodgson, senior vice president and chief economist at the Conference board of Canada.
Demographic forces are at play everywhere, except in Japan, Italy and Germany, where populations are shrinking.
U.S. growth spurt
The United States is on a growth spurt – good news to Canada given its proximity to the U.S. and its large trade relations. Being in this neighbourhood will affect this country positively over the next decade, said Hodgson.
The percentage of Canadians over 65 is growing and is expected to grow to almost 25% of the population by about 2035, he said. Canadians are also aging faster than Americans, and typically aging workforces have a deadening impact on global economic growth.
Hodgson predicted that Canadian labour force growth is expected to remain at around 1%. “Clearly, that’s going to take a lot of energy out of our economy on a going-forward basis.”
He suggested immigration numbers would have to rise considerably to replace the number of Canadians who die every year.
He also put forward the idea that older workers may be encouraged to work longer – potentially by giving them a lower tax rate. “I’m quite happy to take a bribe,” said Hodgson. “If anybody wants to lower my tax rate for me to stay in the workplace longer I’m quite happy. We haven’t had ideas like that yet, but the more we realize there’s a deadening force at play we may have to think about incentives to encourage people to stay engaged.”
Investors cannot look to the sky-high interest rates of the 1980s for their savings and haven’t been for years. But they will have to get used to interest rates on 10-year bonds remaining close to 4% to 4.5% for the foreseeable future, said Hodgson. It means investors will have to take riskier “bets” on their savings, including a shift to equity investments, he said.
On the economy generally, he said Canada, clobbered by low commodity prices, especially oil, will take a long time to recover.
What worries him the most though, he said, is the small amount of business investment taking place in the country. Hodgson said he made an assumption in the Conference Board’s long-term forecast that investment would help to drive growth forward, but it’s not materializing. In fact, he said, Canada is in a period now with less capital to create wealth than three years ago.
Less capital to create wealth
“This is scary because you’re not getting any of that boost in productivity if you are not investing,” said Hodgson. “Hopefully, 2017 is the year when we will actually turn the corner and we see investment growth again. Exports will save Canada, pulling us forward. But right now it’s hard to see any evidence of this happening, given the story across the country.”