August 30, 2013
Retiring later makes dollars and sense for everyone
Against the background of an escalating volume of dire predictions from “experts” about the potential impact on the economy of an ageing population, a strong case can be made to demonstrate that in “real” terms, the population is actually getting younger.
In a recent C.D. Howe E-Brief, Professors Marcel Boyer and Sebastien Boyer describe that if one measures the average age of the population according to the number of years remaining in life, which takes into account the increase in longevity, the population is actually getting younger.
For example, in 1950, a typical 35-year-old Canadian could expect on average to live to the not very old age of 73.6. However, 60 years later, in 2010, that same 35-year-old could reasonably expect to be blowing out candles a full 8.2 years later at his or her 82nd birthday party. This decline in the “real” average age of the population is clearly illustrated by the increased ability and desire of Canadians to work longer than any previous generation.
The authors point out, as have other commentators on the subject, that up until now public policy has largely had a “one size fits all” approach to retirement. Once you hit 60 or 65, you retire and collect a pension and on your 71st birthday you can no longer contribute to an RRSP. Instead, you must turn it into an annuity, the proceeds of which are taxed as ordinary income.
These arbitrary rules are starting to severely distort individuals’ retirement decisions because they actively discourage a growing number of “younger” people who are willing and able to remain in the workforce. In so doing, they impose several costs both on the individuals who would prefer to remain in the labour force as well as on the economy as a whole.
Turning first to the individual costs, clearly the most obvious price of premature retirement is the financial penalty resulting from foregone income and savings. Another cost relates to individual health.
As the Statistics Canada Survey of Canadians over 55 revealed, individuals who had never retired, partially retired and those who had returned to work were on balance in much better health and were more physically active than those who had fully retired.
Moreover, the strong positive relationship between physical activity and longevity, as reported in a recent study by the National Institute of Health, suggests that these older workers will probably live longer.
From the perspective of the economy as a whole, forcing individuals to retire prematurely, simultaneously increases government transfers to individuals in the form of pensions, reduces personal income tax revenues and in the longer term puts increased stress on government finances through increased health expenditures.
Clearly, there are several compelling reasons for all levels of government to give those individuals over 65 who are willing and able to work a greater incentive to remain in the labour force. As Peter Hicks clearly states in C.D. Howe Commentary #345, it is a win-win situation for everyone.
Data Source: Statistics Canada; Chart: CanaData – Reed Construction Data.