A Marco Economic Indicator of Age at Retirement

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					                             A MACRO-ECONOMIC INDICATOR
                                OF AGE AT RETIREMENT
                              Robert L. Brown,* Robin Damm,† and Ishmael Sharara‡

          This paper explores the relationship between the Wealth Transfer Index (WTI), a statistic defined by
          Brown and Bilodeau (1997), and retirement age, which is the age at which the workers in an
          economy cease to be economically productive. Appropriately expressed as a ratio of consumption
          demand to labor productivity, WTI is a barometer for the demand for wealth placed on the workers
          of an economy. This paper explains why a relationship between this statistic and retirement age
          must exist. Using Canadian historical median retirement age data compiled by Statistics Canada
          and calculated values of the WTI for the same period, three linear regression models are fitted. The
          conclusion from these models indicates that there is a strong positive correlation between the WTI
          and average retirement age.
             This paper also briefly looks at the well-documented demographic shift expected to occur in
          Canada because of the baby boom– baby bust tidal wave. The aged dependency ratio is expected
          to increase dramatically, reaching 45% in 2036. A practical application of the WTI model suggests
          that the baby boom cohort may experience a rise in the normal retirement age in the period
          2017–34. They will, in effect, be forced to retire at ages that will allow for an “acceptable” transfer
          of wealth from the workers to dependent Canadians. Using one of the fitted linear regression
          models, and projected values of the WTI, the paper concludes by projecting the median retirement
          age to 2041 for Canadian workers.

INTRODUCTION                                                                  tions, charitable donations, and voluntary altru-
In an economy it is the labor force that produces                             ism.
the goods and services demanded by consumers,                                    Brown (1999) argues that there is a limit on the
both productive and unproductive. Through                                     demand for wealth transfer that can be borne by
large-scale macro-economic wealth transfer                                    the workers in an economy. He maintains that
schemes such as social security, education, un-                               the economy has “self-adjusting” mechanisms
employment insurance, and national health care,                               (acting through the government, employers, indi-
wealth is redistributed from the workers to the                               viduals, or economic forces) that always ensure
beneficiaries of these schemes. The redistribution                             that, at any given time, only an “acceptable” de-
is accomplished by means of the sale of assets by                             mand for wealth by dependants can be placed on
retirees (e.g., pension asset liquidation), taxes on                          workers. One way to maintain an acceptable bal-
the workers’ earnings, social security contribu-                              ance is a shift in the average age at which a
                                                                              worker retires (i.e., ceases to be economically
                                                                              productive). Workers will retire at the earliest age
*Robert L. Brown, Ph.D. F.S.A., F.C.I.A., A.C.A.S., is Professor in the       that is “affordable” in a macro-economic sense.
Department of Statistics and Actuarial Science, University of Water-             This paper attempts to validate this argument
loo, Waterloo ON Canada N2L 3G1, e-mail,                by using a statistic called the Wealth Transfer
  Robin Damm, MMath, is an Actuarial Associate at Towers Perrin, 150          Index (WTI), which measures the relative de-
Sixth Ave. SW, Suite 3700, Calgary, AB T2P 3Y7, Canada, e-mail:
                                                                              mand for wealth placed on the labor force by the
  Ishmael Sharara, MMath, A.S.A., is with Hewitt Associates, 25 Shep-
                                                                              young, unemployed, and aged. Using Canadian
pard Ave. West, Toronto, ON M2N 6T1, Canada, e-mail:                          data, we show that a strong positive correlation                                                          between the WTI and average retirement age in

2                                                         NORTH AMERICAN ACTUARIAL JOURNAL, VOLUME 5, NUMBER 2

fact does exist, thus supporting the hypothesis         as is. First, the study on which the weights are
that the average retirement age of a given popu-        derived is now 20 years old. It is true that, in
lation will shift to allow for a stable wealth trans-   1982, Foot (1982, p. 135) corroborated the
fer from the workforce to all dependent Canadi-         weights (and suggested that, in the United States,
ans. The paper concludes by projecting the              the ratio of transfers to the aged would be about
average age at retirement for the Canadian work-        three times the transfers to youth), but no later
ing population for years to 2041, using historical      data exist. There are many reasons that, over a
retirement age data from Statistics Canada, aver-       20-year time span, the weights would have
age rates of productivity improvement, and fore-        shifted. Educating the young has become more
casted values of the WTI.                               expensive, as has health care for the elderly.
                                                        Some social security payments (e.g., Old Age Se-
                                                        curity and the Guaranteed Income Supplement)
THE WEALTH TRANSFER INDEX                               are indexed to inflation, whereas others (e.g., the
The WTI, developed by Brown and Bilodeau                Canada/Quebec Pension Plans) are indexed (prior
(1997), is a statistic that measures the relative       to retirement) to wages. Furthermore, ad hoc
supply of and demand for wealth among the Ca-           amendments to all of these plans have taken place
nadian population. It is defined as                      over this 20-year period. At the end of the day,
                                                        however, these data are all that are available.
          1.866     Y     1     U     4.636    A        Thus, we argue that we should continue the study
 WTI                                               ,
                              LF                        as outlined.
 Y Youth, 0 –19                                         CANADA: DEMOGRAPHICS AND
 U Unemployed adults                                    IMPLICATIONS FOR THE FUTURE
 A Aged, 65 and over
                                                        The Canadian baby boom– baby bust demo-
LF Employed labor force ages 20 – 64.
                                                        graphic profile has been well documented. The
   The weights of 1.866, 1, and 4.636 were derived      rise in birth rates during the 1950s and early
by McDonald and Carty (1980, pp. 16 –17) for the        1960s, coupled with the dramatic decline in these
Task Force on Retirement Income Policy (1979)           rates in the 1970s, will shift the population age
and depict relative wealth transfer weights for the     structure over the coming years. Exacerbating
young, unemployed adults, and the elderly, re-          the rise in the number of seniors in Canada is the
spectively. The weights do not have any meaning         fact that life expectancy is increasing (see Table
by themselves; they are only weights relative to a      1). Figure 1 outlines the historical and projected
weight of 1 for unemployed adults. It is important      distribution of the young, adult, and the aged in
to note that the transfers to the aged are almost       Canada to 2100. Clearly, this “aging” of the pop-
exactly 2.5 times the transfers to youth. These         ulation will create a heavy demand for wealth
weights are based on total payments for health          transfer from the workers to the elderly, which
care, education, unemployment transfers, and re-        could create pressure for an increase in taxes and
tirement income security made by any govern-            other contributions from the workers’ earnings,
ment (federal, provincial, or municipal). While         all else being equal.
this does not represent the totality of dependency         However, this shift could mean that baby
costs, it does capture the key macro-economic           boomers simply will not be able to retire at the
indicators. It should be noted that a factor for        ages currently accepted as the norm. There are
productivity improvement should be included in          several reasons why this might come true. As-
the denominator for comparisons of wealth trans-        sume that the massive baby boom cohort at-
fers over a period of years. For example, even if       tempted to retire at ages now accepted as normal.
the demand for goods and services by dependants         As the baby boomers attempted to liquidate their
were to grow, the increased demand for wealth           assets to buy goods and services, these asset
transfer could be met if the workforce became           prices could become depressed.
more productive.                                           Furthermore, because the much smaller baby
   There are problems with the use of this index        bust generation is now the only source of labor,
A MACRO-ECONOMIC INDICATOR            OF   AGE   AT   RETIREMENT                                                                               3

                                                                  Table 1
                                                 Life Expectancy in Canada (1931–1994)*

                                         At Birth                               At Age 65                               At Age 75
        Year                  Male                    Female            Male                Female              Male                Female
        1931                   60.0                    62.1             13.0                 13.7                7.6                  8.0
        1951                   66.3                    70.8             13.3                 15.0                7.9                  8.8
        1971                   69.3                    76.4             13.7                 17.5                8.5                 10.7
        1991                   74.6                    80.9             15.7                 19.9                9.6                 12.5
        1994                   75.1                    81.1             16.1                 20.1                9.9                 12.7
*These are period life expectancies based on the q’s experienced in the reference year, without projection.
Source: Statistics Canada (1986, 1995a, 1997).

production in the economy could suffer a slump,                                ANALYSIS OF THE WTI VERSUS                      THE
while demand for consumable goods and services                                 HISTORIC RETIREMENT AGE
remains level. The expected result would be price
                                                                               Table 2 gives calculated values for the WTI based
                                                                               on data for the years 1976 –98, yearly productiv-
   To the extent that the retirement decision is
                                                                               ity improvements for the same period, and me-
dependent on the real value of assets accumu-
                                                                               dian retirement ages for Canada for the years
lated versus the current cost of goods and ser-
                                                                               1976 –95 (Statistics Canada 1999). Statistics
vices, then it is clear that some baby boomers
                                                                               Canada has published data on age of retirement
might be forced to postpone their exit from the
                                                                               only since 1976, so no earlier periods could be
workforce (see also Schieber and Shoven 1994).
Employers, as well as governments, would also be
                                                                                  A linear regression model of the average retire-
expected to provide incentives for later retire-
ment because there would be a decline in the
supply of labor (Statistics Canada 1996, p. 39).
                                                                                                 Table 2
In other words, the baby boomers might be forced
                                                                                Median Retirement Age and Wealth Transfer
to adjust to new ages of retirement that would
continue to allow a constant wealth transfer from                                  Index (Adjusted and Unadjusted) for
a stable workforce to all dependent Canadians.                                                 1976 –1998

                                                                                                     Productivity                    WTI-
                                                                                 Year       MRA        Increase        WTI          Adjusted

                      Figure 1                                                   1976       65.00        1.89%         2.962         2.962
                                                                                 1977       64.92        0.00          2.927         2.872
      Distribution of Historical and Projected                                   1978       65.00        0.00          2.847         2.793
             Population by Age Group                                             1979       64.92        0.46          2.747         2.696
                                                                                 1980       64.83        0.00          2.684         2.622
                                                                                 1981       64.92        0.92          2.617         2.556
                                                                                 1982       64.83        2.28          2.721         2.633
                                                                                 1983       64.67        3.13          2.708         2.559
                                                                                 1984       64.75        1.73          2.639         2.413
                                                                                 1985       64.67        0.43          2.571         2.307
                                                                                 1986       64.58        0.43          2.515         2.267
                                                                                 1987       63.25        0.00          2.488         2.232
                                                                                 1988       63.83        0.00          2.443         2.192
                                                                                 1989       63.33        0.43          2.441         2.190
                                                                                 1990       62.92        0.85          2.475         2.210
                                                                                 1991       62.58        1.68          2.582         2.284
                                                                                 1992       62.33        0.41          2.636         2.289
                                                                                 1993       61.83        1.65          2.632         2.274
                                                                                 1994       62.33        1.21          2.605         2.209
                                                                                 1995       61.75        0.40          2.583         2.159
                                                                                 1996                    2.81          2.579         2.166
                                                                                 1997                    0.78          2.551         2.073
                                                                                 1998                                  2.506         2.017
Source: Office of the Superintendent of Financial Institutions (1998).          Source: Statistics Canada (1999), Brown and Bilodeau (1999).
4                                                       NORTH AMERICAN ACTUARIAL JOURNAL, VOLUME 5, NUMBER 2

ment age was fitted against the WTI, adjusted for                          Figure 3
annual labor productivity improvements (see Fig-                   Model 2, 1982–1995
ure 2). The median retirement age for a particular       Overlay Plots of Actual Versus Predicted
year was regressed on the resultant WTI of that           Average Retirement Age for Canada
same year. Significant overall regression was ob-                    with Lagged WTI
tained with an R2 statistic of 0.55. The regression
equation is
Median Retirement Age (years)       55.40
        3.47   Adjusted Wealth Transfer Index.
   A second regression model—also accounting
for labor productivity improvements in the calcu-
lation of the WTI—was fitted (see Figure 3). The
median retirement age for a year was regressed on
the WTI lagged six years; that is, the retirement
age of year t was regressed on the WTI of year t
6. Results for this model were impressive, with an
R2 statistic of 0.91. The obtained regression equa-
tion is
                                                      the tax rate). This could take years. Finally, after
Median Retirement Age (years)       52.77             a response decision has been reached, time would
4.22   Adjusted Wealth Transfer Index (lagged).       be required for implementation of the suggested
                                                      course of action. For example, if the WTI de-
  Lagging the WTI used in the regression model is     clined, it might be possible for governments to
plausible because individuals, employers, and         lower taxes, for manufacturers to lower prices, or
governments all need time to make adjustments         for employers to enhance pension benefits. Any
to accommodate new realities. The lags involved       of these actions would allow earlier retirement.
can basically be placed into three categories: rec-      As a second example, with the impending de-
ognition, decision, and implementation lags.          mographic profile where the baby bust generation
First, the agent involved (individual, employer, or   will be the source of labor, it might be expected
government) needs to identify and recognize that      that both employers and governments would offer
a wealth transfer shift has occurred (either up-      late retirement incentives. However, they would
ward or downward). Once this has been identi-         require time to identify the need and then to
fied, time is needed to respond (e.g., by changing     implement the incentives. It would also take time
                                                      for the employee to factor these incentives into
                                                      his or her retirement decision. Thus, a six-year
                     Figure 2                         time lag is completely plausible.
              Model 1, 1976 –1995                        Finally, a linear regression model that did not
    Overlay Plots of Actual Versus Predicted          account for labor productivity improvements was
     Average Retirement Age for Canada                fitted using lagged values of the WTI observed
                                                      during the period 1976 –95 (see Figure 4). The
                                                      results show that the regression is still significant
                                                      (R2 0.84) and that the WTI is a useful predictor
                                                      of the median retirement age (although not as
                                                      good as model 2). The regression equation is
                                                      Median Retirement Age (years)         46.77
                                                      6.24    Wealth Transfer Index (lagged 6 years).
                                                        The regression results for the three models,
                                                      particularly the lagged WTI model, show the ex-
A MACRO-ECONOMIC INDICATOR   OF   AGE   AT   RETIREMENT                                                                   5

                    Figure 4                              (1984, 1989, 1995b) up to 1994. We then use an
             Model 3, 1976 –1995                          ARIMA1 time series methodology to project these
   Overlay Plots of Actual Versus Predicted               rates to 2006, after which the rates are held con-
    Average Retirement Age for Canada                     stant. The participation rates are segregated be-
            Ignoring Productivity                         tween the sexes and different age classes while
                                                          the unemployment rate is obtained for the entire
                                                          adult population. By knowing the number of peo-
                                                          ple in the various age and sex categories, the
                                                          model forecasts the number of employed and un-
                                                          employed Canadians to 2041.
                                                             The model assumes an annual increase in pro-
                                                          ductivity consistent with the historical increase
                                                          from 1976 to 1998 (in terms of 1986 dollars). The
                                                          productivity increase during this period averaged
                                                          0.9% compounded per annum (pa). The WTI (ad-
                                                          justed) to 2041 is then found using the projected
                                                          population and employment data, with the labor
                                                          force component adjusted to reflect productivity
istence of a strong positive correlation between             Using the six-year lagged regression we ob-
the WTI and median retirement age. The WTI                tained in the previous section (model 2), we are
quantifies the economic force that “decides” the           able to project the median retirement age in Can-
average age at retirement as a ratio of consump-          ada to 2047. The result is displayed in Figure 5. If
tion demand to production supply. Because of              the retirement age rises, it is assumed that these
this definition of the WTI and the regression re-          workers have the labor force participation rates of
sults, it might be plausible to infer a causal rela-      those ages 60 – 64.
tion between the WTI and median retirement age.              From Figure 5, we can see that the median
                                                          retirement age is projected to decrease generally
                                                          until 2017, when it reaches a local minimum of
The previous section provides a model (model 2)           1
                                                           For more information on the ARIMA (autoregressive integrated mov-
with which to project the retirement age in the           ing average) process, see chapter 4 of Time Series and Analysis:
                                                          Forecasting and Control (Box and Jenkins 1976).
future. To this end we also need to project the
WTI into the future. Statistics Canada (1994)
has projected the 1993 Canadian population to
                                                                                Figure 5
2041 under four different sets of assumptions
                                                                  Median Retirement Age in Canada
(low-growth, medium-growth, and two high-
growth projections). This paper employs the me-               with Productivity Improvement of 0.9% pa
dium-growth projection (projection 2); it is con-                            (1996 –2047)
sidered to be the most realistic, and Brown and
Bilodeau (1999) used the same assumption in
their paper. These data provide us with informa-
tion on the number of the young (ages 0 –19),
adults (ages 20 – 64), and elderly (ages 65 and
older) in Canada to 2041.
   To determine the number of employed and un-
employed adults, we use a method similar to
Brown and Bilodeau. Historical participation
rates and unemployment rates for various age and
sex groups are available from Statistics Canada
6                                                        NORTH AMERICAN ACTUARIAL JOURNAL, VOLUME 5, NUMBER 2

60.3 years. After this date, the increase in the                           Figure 7
number of elderly and the decrease in employed             Median Retirement Age in Canada with
adults results in a higher median retirement age           Productivity Improvements of 0.0% pa
as workers must stay longer in the workforce to                         (1996 –2047)
achieve a constant WTI. The increase is projected
to last until 2034, when the median retirement
age is 60.9 years. After that, the retirement age is
again projected to decrease. In 2041, the median
retirement age is forecast to be 60.6 years; it will
be 60.0 years in 2047.
   We also show future projected retirement ages
with 1.5% pa productivity growth (Figure 6) and
no productivity growth (Figure 7). Finally, in Fig-
ure 8, we show that the annual rate of productiv-
ity growth required for no increase in retirement
age is 1.29% pa.

                                                          This projection of the expected retirement
SUMMARY                                                age is consistent with a philosophical view that
There appears to be a very strong positive corre-      government transfers, including education, un-
lation between the WTI and retirement age based        employment insurance, and social security,
on Canadian historical data for the years 1976 –       represent wealth transfer. But wealth can be
95. It is plausible that because of the time re-       transferred only after it has been created, and
quired for recognition, decision, and implemen-        then only in the amount that has been created.
tation, the effects quantified by the WTI will be          This paper concludes that, historically, workers
lagged several years (apparently close to six          have retired at the earliest possible age that was
years).                                                affordable given the limits on the potential trans-
   The regression model obtained (model 2) was         fer of wealth. The paper further concludes that
used to project future retirement ages. It indi-       this will continue to be true, whether legislated by
cates that the median retirement age in Canada         government or not. If true, the retirement age
will generally decrease from 61.75 in 1995 to 60.3     experienced by the workforce is just another re-
years in 2017, increase slightly to a local maxi-      sultant variable in a macro-economy that must
mum of 60.9 years in 2034, and then decrease           operate in balance: that is, the variable “retire-
once again to 60.0 years at the end of the projec-
tion period, 2047.
                                                                           Figure 8
                                                          Median Retirement Age in Canada with
                    Figure 6
                                                         Productivity Improvements of 1.2895% pa
    Median Retirement Age in Canada with
                                                                        (1996 –2047)
    Productivity Improvements of 1.5% pa
                 (1996 –2047)
A MACRO-ECONOMIC INDICATOR      OF   AGE   AT   RETIREMENT                                                                         7

ment age” is just another balance-point variable                     ———. 1999. Historical Median Retirement Ages in Canada.
that will be decided by economic realities, not                           Ottawa: Ministry of Industry, Science and Technology.
                                                                     TASK FORCE ON RETIREMENT INCOME POLICY. 1979. “The Retirement
government legislation.
                                                                          Income System in Canada: Problems and Alternative Pol-
                                                                          icies for Reform.” Ottawa: Ministry of Supply and Services.

BOX, GEORGE, E. P. AND G. M. JENKINS. 1976. Time Series and
     Analysis: Forecasting and Control. San Francisco: Holden-
     Day.                                                            BERNARD DUSSAULT*
BROWN, ROBERT L. 1999. Economic Security for an Aging Cana-
                                                                     This paper has much more profound implications
     dian Population. Society of Actuaries Monograph
     M-RS99-2. Schaumburg, IL.: Society of Actuaries.
                                                                     than its title suggests. The authors are to be con-
BROWN, ROBERT L., AND C. BILODEAU. 1999. “The Canadian Wealth        gratulated for being so prolific in the production
     Transfer Index.” Proceedings of the Canadian Institute of       of quality research papers that benefit not only
     Actuaries, 1996 –97 28(2): 435–54.                              the actuarial community but also all the players
FOOT, D. K. 1982. Canada’s Population Outlook. Canadian In-          involved in the evolution toward better designed
     stitute for Economic Policy. Toronto: James Lorimer.            social security schemes around the world.
MCDONALD, L., AND E. B. CARTY. 1980. “Effect of Projected Popu-
                                                                       I naturally tend to consider that the statutory
     lation Change on Expenditures of Government.” In The
     Retirement Income System in Canada: Problems and Al-
                                                                     actuarial reports on social pension schemes (such
     ternative Policies for Reform, vol. 2, 16-1–34, ed. Task        as OASDI and SSI in the United States, and CPP,
     Force on Retirement Income Policy. Ottawa: Minister of          OAS, and GIS in Canada) are the end of the road
     Supply and Services.                                            in terms of information required for government
OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS. 1998. Can-   decisions on the financing of such schemes. I,
     ada Pension Plan Seventeenth Actuarial Report as at 31          therefore, tend to think that all other reports and
     December 1997. Ottawa: Ministry of Finance.                     papers relating to the analysis of those schemes
SCHIEBER, S. J. AND J. B. SHOVEN. 1994. “The Consequences of
                                                                     are the useful policy tools required in examining
     Population Aging on Private Pension Fund Saving and Asset
     Markets.” NBER Working Paper No. 4665. Cambridge, MA:
                                                                     various options for the design of the benefits pro-
     National Bureau of Economic Research.                           vided through, and the underlying financing of,
STATISTICS CANADA. 1984. Labour Force Annual Averages, 1975–         such schemes. My discussion is, accordingly, in
     1983. Catalogue No. 71-529. Ottawa: Ministry of Industry,       two parts relating to financing and social policy,
     Science and Technology.                                         respectively.
———. 1986. “Longevity and Historical Life Tables
     (1921–1981) (Abridged).” In Canada and the Provinces.
     Ottawa: Ministry of Supply and Services.
———. 1989. Labour Force Annual Averages, 1981–1988. Cat-             The paper is not just another one providing good
     alogue No. 71-529. Ottawa: Ministry of Industry, Science        food for policy thought. Before I start comment-
     and Technology.                                                 ing on the main target of the paper, namely re-
———. 1994. Population Projections for Canada, Provinces              tirement age, I want to bring the following extract
     and Territories, 1993–2016. Catalogue No. 91-520. Ot-
                                                                     to the attention of chief actuaries responsible for
     tawa: Ministry of Industry, Science and Technology.
                                                                     the long-term financial valuation of social secu-
———. 1995a. Life Tables, Canada and the Provinces, 1990 –
     1992. Catalogue No. 84-537. Ottawa: Ministry of Industry,       rity schemes:
     Science and Technology.
———. 1995b. Labour Force Annual Averages, 1989 –1994.                    Furthermore, because the much smaller baby
     Catalogue No. 71-529. Ottawa: Ministry of Industry, Sci-          bust generation is now the only source of labor,
     ence and Technology.                                              production in the economy could suffer a slump,
———. 1996. Canada’s Changing Retirement Patterns: Find-                while demand for consumption goods and services
     ings from the General Social Survey. Catalogue No. 89-            remains level. The expected result would be price
     546-XPE. Ottawa: Ministry of Industry, Science and Tech-          inflation.
———. 1997. Report on the Demographic Situation in Canada,
     1996. Current Demographic Analysis. Catalogue No. 91-
     209-XPE. Ottawa: Ministry of Industry, Science and Tech-        *Bernard Dussault is a Consulting Actuary, 1797 Rue des Arbres,
     nology.                                                         Orlean, ON KIE 2T7, Canada, e-mail:
8                                                          NORTH AMERICAN ACTUARIAL JOURNAL, VOLUME 5, NUMBER 2

   Not only do actuarial reports normally provide        turn, should slow the pace of declining mortality.
a relatively low volume of documentation on the          These are examples of what an assumption’s
rationale used by the valuation actuary for the          framework should cover. Productivity (i.e., real
determination of key economic and demographic            GDP per capita or real salary increase) may ap-
assumptions, but those assumptions also appear           pear to be the only isolated assumption not
to be chosen without reference to an explicitly          strongly correlating with any other key economic
and substantially documented framework of                or demographic assumptions. However, as aging
benchmark values. No surprise then that Brown,           increases the average age of the labor force, one
Damm, and Sharara are the first (to my knowl-             should strongly consider that it might also reduce
edge) to alert those valuation actuaries implicitly      productivity.
that the rationale for their inflation assumption            As demonstrated in the paper, a sustained an-
might be somewhat flawed.                                 nual productivity rate close to 1% would more
   All assumptions are probabilities to which a          than offset the effect of aging on the balance
certain degree of uncertainty applies. This degree       between demand and supply. Without such pro-
is normally relatively high, with at least one ex-       ductivity, Brown, Damm, and Sharara say “some
ception: fertility. This also applies to the pro-        baby boomers might be forced to postpone their
jected worldwide aging of populations. Indeed,           exit from the labor force.” However, they would
the Canadian population aging projected for 2030         not be naturally forced, willing, or in a position
results mainly (about 90%, the remaining 10%             (considering the above suggested correlation be-
relating to declining mortality) from the world-         tween aging and productivity) to increase their
wide decrease in fertility over the past 30 years        productivity in order to reset the demand/supply
and the projected sustained low fertility for the        imbalance or to bring inflation down.
21st century.
   It is precisely the population aging, which is
projected with a relatively high degree of cer-          Social Policy
tainty, that will inevitably induce an imbalance         Actuaries in North America started over 20 years
between the demand for and the supply of goods           ago to warn governments and the public that the
and services. In the Old Age Security (OAS) Pro-         population is aging and projected to continue so
gram, Fourth Actuarial Report (OSFI 1999), the           at a steeper rate during the 21st century, and that
age dependency ratio (ADR), at a level of about          this would increase social security costs. From
20% for year 2000, is projected to climb gradually       the very beginning, this sparked discussions on
to 35% by 2030 and to 44% by 2100. Those are             increasing the normal retirement age (NRA) as a
tremendous increases. My personal reaction to            means to contain such costs. In the U.S., an in-
the authors’ implicit warning is twofold:                crease from 65 to 67 in the NRA was legislated
                                                         under the OASDI in 1983 but to apply on a grad-
●   The risk of inflation (i.e., higher than 3% on
                                                         ual basis (over 24 years) starting only in 2003.
    average) might not have been properly ac-
                                                            Although such a solution has also been dis-
    counted for in the cash flow projections pre-
                                                         cussed at large in Canada, the NRA has so far
    sented in the Fourth OAS and 17th CPP statu-
                                                         remained 65 for Canadian social security
    tory actuarial reports.
                                                         schemes. Various other means have been exam-
●   Policymakers should urge governments to pre-
                                                         ined to deal with the projected increases in CPP
    scribe a ceiling (e.g., annual salary increase) on
                                                         costs. One must note that OAS and GIS projected
    the price-related indexation generally applying
                                                         costs decrease in the long-term as these are price-
    to pensions in pay.
                                                         related rather than earnings-related programs. In
   Understandably, a given assumption (e.g., infla-       this connection, one may refer to Graph II.2 of
tion) should not be reviewed and revised in iso-         the OAS Fourth Actuarial Report at www.osfi-
lation. The reduced annual demographic growth   (Office of the Chief Acturary, Actuarial
resulting from lower fertility should normally en-       Reports). The CPP was reformed in 1997 with the
tail lower economic growth (consistent with a            understanding that an increase in the NRA had
presumed natural equilibrium between demand              been considered but not retained at this time as a
for and supply of goods and services), which, in         means to reduce future CPP contribution rates.
A MACRO-ECONOMIC INDICATOR   OF   AGE   AT   RETIREMENT                                                    9

   Nonetheless, the macro-economic indicator of           amining the pattern of the projected MEIAR val-
age at retirement (MEIAR) conceived by the au-            ues. On the basis of a starting value close to age
thors is not, and does not pretend to be, an indi-        62 in 1996, the MRAC projected using the MEIAR:
cator to be used to index the NRA under the
Canadian social security schemes (OAS, GIS,               ●   decreases until 2016 (to close to age 60),
CPP). One must first keep in mind that this indi-          ●   increases to close to age 61 by 2036, and
cator is in respect of the median retirement age in       ●   drops back close to age 60 by 2046.
Canada, that is, resulting from all employed per-            Many people (even experts) actually link the
sons in Canada as opposed to the NRA under the            2016 –2041 hump to the baby boomers. That is
OAS, the GIS and the CPP, which is simply set at          erroneous. MEIAR is a compounded demograph-
age 65 presently. In other words, one should re-          ic-economic indicator. Baby boomers are the re-
frain from falsely concluding that the median re-         sult of an exclusively demographic, not economic,
tirement age in Canada, projected using the               fluctuation. One must accordingly refer to a
MEIAR, would stabilize the pension costs under            strictly demographic indicator to assess the im-
OAS, GIS and CPP. In fact, it would not for any of        pact, be it demographic or economic, of the baby
these three programs. However, the MEIAR might            boomers. The ADR values shown in Table
actually be a consistent tool for indexing the NRA        VII.B.10 of the Fourth Actuarial Report on OAS
under the OAS and the GIS if the objective of             are ideal in that respect. As mentioned earlier in
these programs were to transfer income between            this discussion, ADRs shown in Table VII increase
active workers and seniors at a relative level con-       without interruption from year 2000 to 2100.
sistent with the stabilization of the demand/sup-         That table shows values for a limited number of
ply ratio.                                                years only, but the complete year-by-year demo-
   However, the pattern of the projected median           graphic projection (of the Fourth OAS Report)
retirement age in Canada (MRAC), as shown in              supports this statement.
Figure 2 of the paper, deserves some attention               Still, the most striking conclusion that can be
and explanation. If one puts the projected MRAC           drawn from the projected MRAC values is that,
(Figure 2) and the projected OAS costs (Graph             assuming a productivity rate close to 1%, not only
II.2 of the Fourth Actuarial Report on OAS) side          would the current demand/supply ratio remain in
by side, the similarity of the two curves is strik-       balance, but also the actual median retirement
ing. In fact, it is doubly striking as they have the      age would be reduced from 62 to 60. However, it
same shape with a six-year lag. This is not a             must be pointed out that with a nil productivity
coincidence even if Figure 2 represents an age            rate, the demand/supply ratio would be stabilized
and Graph II.2 a paygo rate. The reason for the           only provided an increase of over five years in the
similarity is that a paygo rate is an ADR dis-            median retirement age, as reported in Brown and
counted for productivity, whereas the Wealth              Bilodeau (1997).
Transfer Index (WTI— used as a template to de-               The reason for the huge impact of a mere 1%
velop the MEIAR and the MRAC)—is an ADR                   productivity rate on the retirement age is that
adjusted to include the youth dependency rate as          productivity applies to the entire national pay-
well as weights for relative (youth, juniors, and         roll, whereas the portion of the payroll earned
seniors) dependency costs.                                by workers over age 60 is quite small. This is
   The inclusion of youth in the WTI could disturb        because the population in the 60 –70 age range
materially the pattern of the MRAC curve, but it          represents less than 20% of the population in
does not because of the small and reduced                 the 20 –70 age range (due to mortality increas-
weights of children in the WTI, both in terms of          ing by age) and because employment rates are
their proportion and of their dependency costs            much lower for the 60 –70 age range than for
compared to seniors. Such similarity does not             the 20 – 60 age range.
exist between the MRAC and the CPP projected
paygo costs because the CPP is an earnings-re-
lated (standard of living) rather than a price-           Conclusions
related (purchasing power) program.                         No one knows what the productivity rate will be
   Another point deserves some attention in ex-           on average in the long term. However, productiv-
10                                                        NORTH AMERICAN ACTUARIAL JOURNAL, VOLUME 5, NUMBER 2

ity may reasonably be expected to be lower in the      will just result in reduced standards of living. This
long run in light of the aging of the population.      will likely be the economic outcome, and its effect
   In any event, in a context of low or nil produc-    on social security programs can only be cost in-
tivity, where the objective is to stabilize the de-    creases and/or benefit reductions.
mand/supply ratio, the average median retire-
ment age would need to be increased whenever                                    References
the WTI increased. In this case, it is not guaran-     BROWN, R. L. AND C. BILODEAU. 1997. “The Candadian Weath
                                                            Transfer Index,” in Proceedings of the Canadian Institutes
teed that the labor market could absorb such an
                                                            of Actuaries 28(2): 435–54.
increase. The multiphased transition approach          OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS. 1999.“Old
for retirement, discussed inter alia by Robert L.           Age Security Program, Fourth Actuarial Report.” Ottawa:
Brown in one of his several research papers (In-            Ministry of Finance. Online at http: //
stitute of Insurance and Pension Research, Uni-
                                                       Additional discussions on this paper can be submit-
versity of Waterloo, 98-05), is likely the only tan-   ted until October 1, 2001. The author reserves the
gible solution for dealing optimally with unknown      right to reply to any discussion. Please see the Sub-
but actual future variations in productivity and       mission Guidelines for Authors on the inside back
employment rates. And any eventual failure of          cover for instructions on the submission of discus-
the labor market to absorb an increase in demand       sions.