Firestorm Rages Over Increasing Retirement Age

Firestorm Rages Over Increasing Retirement Age

In the past week, Prime Minister Harper has set off a firestorm by suggesting that in order to deal with rising demands on government finances, Canada has to consider raising the country’s retirement age from 65 to 67. At the same time, he has said immigration will be an important part of Canada’s economic strategy.

Mr. Harper has not released any details of his plan, so it is difficult to comment on exactly what he has in mind. However, we will comment on his intention to make immigration a part of Canada’s economic strategy. If by that statement Mr. Harper means that he will use immigration to solve Canada’s aging population issues, he should sit down with a very detailed C.D. Howe study done in 2006 which pointed out that making immigration an important part of Canada’s economic strategy would bring enormous numbers of immigrants to Canada and would be wrong.

He should also admit that if he is looking for ways to save at least $20 Billion a year and probably much more than that, he should cut immigration, almost all of which is unjustified and almost all of which has done much economic damage. Mr. Harper knows that an excess of labor suppresses wages and that that has occurred over the past 20 years with the arrival of over 5 million people, most of whom Canada did not need.

Mr. Harper is also very much aware that 165,000 parents and grandparents are waiting in the immigration backlog. If he is truly concerned about the health care costs of Canada’s elderly, he should not be adding to health care costs by allowing more elderly people into Canada.  Jason Kenney has suggested a possible solution : giving foreign elders long-term visitor visas and requiring them to buy health insurance. But the big problem with that solution is that it will have to be carefully monitored and that the monitoring will be costly. Ottawa’s record on monitoring and enforcement is not good, to say the least.

To return to the point that immigration should not be a significant part of Canada’s economic strategy : Over 20 years ago, the federal government commissioned two very detailed studies. One by the Department of Health and Welfare looked at whether immigration would solve aging-population problems. The other by The Economic Council of Canada examined whether immigration could help to end economic downturns by stimulating Canada’s economy. Both studies concluded that immigration would not solve these problems.

Subsequent studies done in the UK and in Australia came to similar conclusions.

As a number of Canadians know, Ottawa ignored the recommendations of those studies. It went ahead and dramatically increased immigration in 1991.

A more recent study done by Professor Marcel Merette of the University of Ottawa repeats the point that Canada has better options than increasing immigration in order to deal with the aging population issue. Merette states that higher labor force participation rates and higher retirement ages can to a considerable degree offset the negative economic effects of aging. In addition, higher levels of education (for young people particularly) and the introduction of new labor-saving technology can reduce the economic effect of aging. In contrast, increases in immigration do not achieve these effects and probably cause negative effects.

Professor Merette does not directly explain how increased immigration affected Canada’s economy from 1990 to the present. However, his conclusions imply that if an increase in immigration would not be a positive thing now, then a large, ongoing immigration increase from the 85,000 intake of the early 1980’s to 250,000 in 1991 was a serious mistake—-to say the very least.

Here are some of the points Professor Merette makes in his study :

(1) The average retirement age in 1976 was about 64.5. In other words, not long ago, Canada had a retirement age close to the one proposed by the Prime Minister. For the 22 years from 1976 to 1998, the retirement age declined steadily. Since then, the retirement age has increased slightly. At the time of Merette’s study in 2009, it was 61.4.  Appropriately, Merette asked what caused the decrease. His answer is that Canadian institutions and economic conditions played a major role.

(2) Regarding the role of institutions, Merette says that the decrease in the retirement age after 1976 is correlated with Canadian income security programs. One of these programs, the Spousal Allowance program, was introduced in 1975, a year before the decrease in retirement age began. It was paid to 60 to 64-year-old spouses who were not yet eligible to receive Old Age Security and the Guaranteed Income Supplement. Merette says that one study found that the introduction of the Spousal Allowance reduced the labor participation rate of older men in eligible couples by 6 to 7%. He adds that another institutional factor that played a role in reducing the retirement age was the introduction of the early retirement provision in the Quebec Pension Plan and in the Canada Pension Plan. But he notes that this issue has not been completely settled.

(3) Regarding the role of economic conditions, Merette says that the recession of 1981-82 caused many older workers to lose their jobs and to take early retirement. The recession of 1991-92 had similar effects. The high unemployment rate (around 10%) of the first five years of the 1990’s lowered the overall labor participation rate and probably caused many workers to retire involuntarily. Merette adds that the significant drop that occurred in the retirement age in the mid 1990’s was due to restructuring and down-sizing that occurred in the public sector. This caused many older workers to take early retirement packages and leave the labor market.

(4) However, since 1998, older workers have increased their presence in Canada’s labor force. And Merette says that this is great news for the economy of Canada.

(5) The negative effects of an aging population are well publicized : Total labor force participation falls. Per capita GDP decreases. The country’s labor supply declines in quantity and quality. Savings and capital also decrease. The positive effects are that as the labor force decreases, wages increase and employers increase their investment in labor-saving technology. In contrast, unnecessary immigration, the kind that Canada has had 20 years of, suppresses wage increases by providing excess workers.

(6) To determine whether immigration would help solve population-aging issues, Merette examined three immigration scenarios. In one, immigration was kept at the current level. In the second, immigration was increased to 1% of  Canada’s population. In the third, the quality of immigrants was changed so that a significant number of those who were allowed in were highly skilled. Merette found that the third scenario had a significant positive effect.

(7) However, Merette found that increasing the retirement age from 61.2 to 62.2 had the same effect as importing a substantial number of highly skilled immigrants. Moreover, increasing the average retirement age to 65 had even more dramatic positive effects. Doing this would triple the economic benefits and would be equal to causing a 9% rise in the labor supply. Doing this would also allow governments to reduce the Canada Pension Plan rate (government contributions?) by 25% and the Quebec Pension Plan by 38%.

(8) In addition, encouraging young people to invest in their education was important. Pointing out that such investment  could increase students’ short-term and long-term economic well-being had had a very positive effect on baby boomers in the 1970’s, 80’s and 90’s. Positive forecasts could achieve the same effect on today’s young people.  Merette implies that immigration of both low skilled and highly skilled discourages young people from investing in education.  He does not mention the effect of Employment Equity programs on Canadian-born, but those have undoubtedly had a significant negative effect. particularly on white males.

(9) General conclusion : Higher labor force participation rates and higher retirement ages can to a considerable degree offset the negative economic effects of an aging population. They are better tactics to use than an increase in immigration.