Canada

Ending the encouragement of early retirement right away and gradually pushing back normal retirement age from 65 to 67 are among the measures needed to reduce the impact of aging on public finances as well as to ease labour shortages.

In an Economic Note published by the Montreal Economic Institute, economist Norma Kozhaya concludes that "it is essential to start the necessary reforms right away before demographic phenomena lead to lower economic growth that will reduce wealth creation in Quebec."

Some of the solutions

A number of moves could be considered to raise the participation rate of older people on the job market and to reduce the negative economic effects of aging while helping maintain the viability of existing retirement plans. These measures include:

- Favouring later retirement by raising Quebec Pension Plan payments immediately by 0.7% per month rather than the current 0.5% for retirements taken after age 65 and ending encouragement of early retirement through an equivalent reduction rate in payments to beneficiaries who retire before age 65.

- Gradually pushing back normal retirement age from 65 to 67 over the next 12 years. This is justified by higher life expectancy and by improved health among older people. This solution has been adopted in the United States and more recently in Germany. The United Kingdom is also moving toward comparable solutions.

- Permitting private plans to introduce a penalty for currently allowable early retirements by means of a simple actuarial reduction starting at age 55.

Current retirement plans penalize work

Laws governing retirement plans and tax laws often make it pay better to retire early rather than to keep working. According to the Chief Actuary of Canada, the current system is unfair to people who retire later and is too generous to those who retire early. Moreover, phased retirement measures are seldom used in Quebec: between 1991 and 2001, only 19% of employees retired gradually from the labour market, compared to 81% who retired completely.

A worrying situation

The aging of the population and the impending mass retirement of baby boomers are already starting to create labour shortages and will soon cause weaker growth in the economy. This will also result in lower growth of tax revenues just as requirements and spending levels go up, especially in health care. The situation is particularly worrying in Quebec, where people tend to retire earlier and where labour force participation among older people is lower than in the rest of North America. The birth rate is also lower. In addition, the population below age 15, which will soon form the labour force, has fallen in Quebec while increasing elsewhere. In the next 25 years, the population aged 65 and over will double while the younger population will keep falling in Quebec and rising elsewhere.

Assuming that labour force participation rates remain constant, the decline in Quebec's working population starting in 2013 may have an impact on production. The average annual growth in real GDP per capita could be just
1.1% between 2020 and 2030, whereas it has been 1.6% in the last 25 years. The Quebec pension board estimates that the number of beneficiaries will rise 19% by 2011 and 90% by 2030. This rapid increase in the number of new retirees will put pressure on pension plans.

The Economic Note titled The Retirement Age in Quebec: A Worrying Situation was prepared by Norma Kozhaya, an economist at the Montreal Economic Institute. She holds a doctorate in economics from the University of Montreal (specializing in macro-economics and public finance) and is also a lecturer in the economics department at the same university.

The Note is available at www.iedm.org

The Montreal Economic Institute is an independent, non-partisan, non-profit body that takes part in public policy debate in Quebec and across Canada, offering wealth creation solutions on matters of taxation, regulation, and reform of health and education systems. Its publications since 2000 have included the Report Card on Quebec's Secondary Schools. In 2004 it won a Templeton Freedom Award for Institute Excellence for the quality of its management and public relations.

For further information: and interview requests: André Valiquette,
Director of Communications, Montreal Economic Institute, (514) 273-0969, ext.2225, Cell: (514) 574-0969, avaliquette@iedm.org

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