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Illustration by Anthony Jenkins / The Globe and Mail (Anthony Jenkins)
Illustration by Anthony Jenkins / The Globe and Mail (Anthony Jenkins)


The later retirement solution Add to ...

It’s widely expected that Thursday’s federal budget will announce a gradual increase in the age of eligibility for Old Age Security to ease the burden of population aging on Ottawa’s finances.

This would indeed be a sensible and necessary reform, but for an entirely different and more immediate reason than a general concern for fiscal sustainability.

It would be a misuse of public funding to continue using 65 as the normal age of pension eligibility, when projections indicate that people, on average, will soon be working until 68, regardless of any changes to pension rules. Taxpayers’ money would serve a better purpose if allocated, for example, toward the health-care system rather than paying pensions to Canadians still in the work force, or discouraging those who would otherwise have kept working for a longer time.

Projections based on past retirement patterns and likely future economic pressures show that average retirement ages will increase from 63 today to 68 in the next decade. Looking back, we see that employment rates in the older age groups have been rising sharply and steadily. For instance, about half of those between 60 and 64 are currently employed, compared with about 30 per cent some 20 years ago.

Looking ahead, labour market pressures, changing work preferences among baby boomers, better health and a continuation of “push” factors such as inadequate private pensions and retirement savings will reinforce a continuation and acceleration of trends toward even later retirement. This trend provides win-win solutions on many fronts and should be encouraged by public policy.

Most past analysis has assumed that existing and past retirement patterns will remain unchanged into the indefinite future. This has created concerns about possible labour shortages when the baby boomers reach traditional retirement ages, starting now. But projections for reasonable increases in average retirement age show that the total number of workers (including older workers) will continue to grow to 2031 at almost the same rate as the historic trend.

Most important, the new generation of older workers will have the skills that will be in demand. The baby boomers are better educated and have much more experience in the knowledge economy than the current generation of older people they will replace.

Working longer will also ease the negative economic and fiscal consequences of population aging that have been so widely foreseen in terms of falling living standards for retirees and the demand on services as baby boomers become net users – as opposed to net funders – of government benefits.

More realistic assumptions about future trends in retirement ages make these potential problems largely disappear.

Additional working years before retirement will also greatly reduce the amount of retirement savings that are needed, with considerable impact on current discussions about the need for new private retirement savings instruments.

Harder to quantify are the social gains that will follow from working longer. It makes sense that we should not keep a fixed age of 65 as the normal retirement age in a world where people enter the labour market later as a result of longer periods of schooling, and where the length of life after 65 is growing as a result of better health and increasing longevity – with most of the additional period of life being in good health and with skills the economy needs. There’s even evidence to suggest that working longer will, on balance, result in even better health and increased individual well-being.

A gradual increase in the age of entitlement to Old Age Security would represent a good first step in a larger process of bringing the whole retirement income system back into line with current economic and social trends. Other elements might include introducing an actuarially adjusted age band for receipt of OAS (similar to that which now exists for the CPP and QPP), raising the minimum and maximum age bands for receipt of CPP benefits, and introducing modest changes to offset any unintended negative effects of changing pension ages on those who, for example, can’t work longer.

Baby boomers are once again setting the pace for societal change. Policy needs to catch up with them.

Peter Hicks is the author of the C.D. Howe Institute study Later Retirement: The Win-Win Solution. He is a former assistant deputy minister in several federal government departments, and he also worked for the OECD in Paris.

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