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Canada's pension fund sponsors may want to ask Canadians a huge favour. If we could either work longer or die younger, that would be a big help. Thanks.
That's the crux of the dilemma presented by the Canadian Institute of Actuaries' (CIA) recent draft update of the country's pensioner mortality tables. It suggests that the average 60-year-old Canadian has nearly three more years of life expectancy (27.3 years for males, 29.4 years for females) than the existing set of mortality tables indicate.
That implies that defined-benefit pension funds in this country have been substantially underestimating the period in which they will have to provide payouts. Adoption of these new proposed mortality tables, as well as the continued mortality improvements predicted by the study, could "immediately increase pension accounting liabilities by 5 per cent to 10 per cent for many plans," consulting firm Towers Watson said.
We're healthier than previous generations, our medicine is better, and we're living longer. Average Canadian life expectancy (at birth) is 10 years longer for men, and seven years for women, than it was in the early 1970s. The trend is highly unlikely to reverse.
Pensions' best hope for some relief comes from the other side of the equation: If people simply retired at an older age, the pension liability could be kept in check. And why not? Anecdotally, we all recognize that a typical 65-year-old today doesn't seem nearly as old as a 65-year-old did 30 years ago. Yet we still look at 65 as the appropriate time to be put out to pasture – an age incorporated into Canadian old-age security legislation in the 1960s. (The federal government intends to raise the OAS eligibility age to 67, beginning in 2023.)
But here's the problem: Our behaviour in the past few decades suggests that being able to live longer hasn't coincided with being willing to work longer. Even though the average 65-year-old Canadian lives nearly five years longer than in 1970, the average retirement age fell by nearly four years between 1978 and 2008.
The trend has reversed a bit since the financial crisis – evidence that Canadians themselves have recognized the financial realities of stretching limited (and market-risk-exposed) savings over longer life spans. Still, the seduction of early retirement to a life of leisure and travel is pretty culturally entrenched at this stage. Simply raising the age for old-age benefits – essentially an economic punishment that would push people to work longer – could prove politically suicidal to parties courting an aging population.
A recent C.D. Howe report argues that policy solutions should provide economic incentives, rather than enforcement or economic penalties, to extend work participation beyond 65 (or, soon, 67). Among them is this novel idea: Allowing workers to draw from retirement savings and benefits in mid-life in order to finance education and re-training aimed at a second career – one that would keep them engaged in the workforce to an older age, and contributing to pensions for longer. If the pension system is going to avoid seeing its own life choked off by Canadians' longevity miracle, that's the kind of innovative thinking it's going to need.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .