Chapter 3 Retirement: New perspectives on the horizon1

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Introduction
What are the new perspectives that emerge from these trends?
The question of pension funding
The new context

Introduction

Retirement, as it is generally perceived, is a legacy of the outcome of World War II. At the time, life expectancy was only 63 years for men and 66 years for women. For most workers who reached the age of 60, the prospect of life after 65 was only a few years. Tired and often worn out from hard, physical labour, their only aspiration was to finish their job, which was often monotonous and failed to motivate them. For workers, retirement represented a few years of rest and relaxation.

For employers, retirement was viewed as a mechanism that allowed them to systematically renew their workforce. They faced new conditions created by the continual development of the methods used to produce goods and services, so that they were able to seamlessly replace older workers with younger, more qualified ones who were more capable of adapting to these new methods.

Retirement was generally considered to be a withdrawal from all productive activity. In a certain sense, workers ceased being active in society. From that moment, they were considered a burden on society, especially by the government. This perception of retired people is still common today.

The world we live in today is completely different from the world of that not-so-long-ago era. Profound changes have occurred in every aspect of life. Things that seemed inconceivable at the time have become a reality. For example, over a relatively short period of time life expectancy has increased to 76 years for men and 82 years for women. Due to progress made in information, medicine and working conditions, workers are generally in good health.

While life expectancy was rising in the population as a whole, the birth rate dropped dramatically. In 2001, the fertility rate reached 1.4, a rate well below the level required to ensure a stable rate of reproduction. This change is a fundamental one, although its scope was unexpected. The combined effect of a low birth rate with increased longevity has brought about a reversal in the age pyramid. For the first time, the elderly population is outgrowing the population of young people who will make up the future work force.

Although it is always risky to make predictions, it is expected that these trends of rising life expectancy and a stable birth rate will continue in the years to come. The consequences of this transformation of the population structure are substantial and highly diversified, but not all have been identified.

What are the new perspectives that emerge from these trends?

To begin, large numbers of workers are reaching 65, until now considered to be the normal age of retirement, which will inevitably lead to a significant decline in traditional labour. In other words, the abundance of labour of recent decades is gradually becoming a shortage.

Therefore, the number of people reaching the age of retirement will lead to increased demand for a wide range of services to satisfy their needs, such as health services, home care, housing services, physical and psychological support services, and recreation services. In short, we are entering an era of sustained growth in the demand for services to satisfy the needs of people 60 years of age and over.

We must ask ourselves how our public health and social services system will manage to avoid being overburdened, when it already cannot satisfactorily meet current demand. The commissions of inquiry and study committees that have examined this issue have concluded that health expenditures are increasing and will continue to increase faster than government revenues. In reality, health expenditures are four to five times higher for persons 65 years of age and over than for the population average. To narrow this growing gap, these diverse reports concluded that a real partnership between the public health system, the non-profit sector and the private sector is necessary. The objective is to develop new, more effective approaches in order to produce and deliver these services. On a political level, everything indicates that the population is increasingly in agreement with this direction.

People today are reaching the age of 60 in much better health than in the past, and this is all the more true for future generations. They are physically and mentally able and often want to remain relatively active. They are aware of the many years ahead of them, and many feel the need to be useful and give meaning to their life. Furthermore, they have learned that a too abrupt transition after a fully active life can be detrimental to their health and mental balance.

Opportunities will not be lacking. With a bit of imagination and good will, many people can contribute to satisfying a wide range of needs, as far as their health and abilities permit. For them, these may be opportunities to forge new friendships and to feel useful or even necessary.

Beyond this personal dimension, baby boomers cannot ignore the fact that they have a debt to society. As a whole, they benefited from a better quality of life and living conditions than the previous generations. So instead of incurring a fair share of the cost of services they benefited from, they are leaving a legacy of high public debt created by the overly generous public policies and programs of the past few decades. Consequently, for years to come, our children and grandchildren will be paying taxes that are much higher than the value of the public services they will receive.

The question of pension funding

The future of public pension plans that were based on distribution, or partially funded, raise a number of questions. How will the labour force, which is already heavily taxed from the public debt burden, be able to fund the pensions of the increasing number of retiring baby boomers?

Our pension system is made up of three components. After the war, all Canadians were guaranteed a basic pension of an equal amount starting at age 65. When the plan was created, the Canadian government made a formal commitment to it- the old age pension plan. The pay-as-you-go financing of this plan was ensured through a specific tax deducted from workers' income. Despite the government's commitment, and the fact that workers were making a specific contribution to this plan, people whose income is higher than a certain amount, which is relatively low, have in recent years seen their basic pension reduced or completely eliminated. Canadians must be more tolerant than our French cousins because there was no major reaction to this significant change.

The Quebec Pension Plan and its equivalent in the other provinces, the Canada Pension Plan, are the second components, or levels, in our protection system. These two plans are partially funded. The level of contribution of workers and employers is being raised significantly, well beyond the previous level, to help the plans respect their commitments. This gradual approach was taken rather than one that involves reducing benefits or delaying the start of pension plan payments. Like the basic plan, the gradual increase of contributions did not encounter any strong resistance.

The third component of our system consists of company and personal pension plans. The creation of these two plan categories was encouraged by the government, which offers appealing tax reductions.

The proportion of workers covered by defined benefit plans has continued to drop for several years in favour of money purchase plans. Overregulation is in part responsible for this trend. It is also possible that the considerable increase in capital-due to increased longevity- required to fund a given pension amount may also be a factor. Most workers are covered by the less generous, less secure money purchase plans.

In both these plans as well as personal pension plans, it is the workers who assume the risks associated with the investments. However, with the stock markets tumbling in recent years, the assets of company and personal pension plans have plummeted, which has brought about a number of consequences.

Baby boomers are therefore likely to reach retirement with lower and less stable pensions than in the past. The need to supplement these pensions will certainly be another reason for some people to continue working after retirement.

It seems worthwhile to mention the existence in Canada of a factor that to some extent may mitigate the severity of the problem that funding our social protection programs represents for the government. For many years, the government was deprived of income following tax reductions given to employers and workers who were saving for retirement. With droves of new retirees who have taxable pensions, this tax expenditure will turn into greater income.

The new context

Reaching the age of 60 no longer automatically means imminent retirement from working life and the beginning of a life on the sidelines of society. Because of all the factors mentioned, many people will want, and even have to plan this stage in their life in their own way. This can be a positive phase in the life of workers, depending on their health status, their financial situation, their desire to remain active, etc.

The concepts of mandatory retirement and normal age of retirement, which are still found in legislation and company pension plans, must be modified and be made more flexible. The conditions for involuntary retirement should no longer be determined in advance only by the government or company pension plans.

This new perception of retirement will also necessitate changes in the monitoring and regulation of the labour market. This is likely where the strongest resistance will be felt from workers' unions and other organizations whose interests lie in a rigid, structured labour market.

This is no more and no less than a genuine change in culture. Over the years, early retirement from the labour market was favoured. For most people, early retirement has practically become an acquired right.

The challenge is two-fold. First, we must highlight the knowledge and experience of people who wish to remain active, to participate in community life and society as far as they are able, and to supplement their retirement income. Second, to counter the labour shortage we are heading toward, the labour market should allow these people to remain active according to different conditions than in the past.

This is a fundamental issue. It must be ensured that the people reaching retirement age are no longer considered to be a burden on society, but rather as full-fledged citizens. The need to participate, to make oneself useful, to maintain the esteem that one's family, friends and the community have do not vanish at the age of 65.


Note

  1. This text is a translation of the original French version.