Canada is projected to see a 4% drop in its working-age population over the next eight years, putting additional pressure on underfunded plans, according to new research from Mercer.
The 15 to 64 age group will drop by as much as 6% as a percentage of total population in some nations over the next eight years, and Canada faces one of the biggest declines in this age group. The percentage of Canada’s overall population coming from this age group is slated to drop from 69% today to 65% in 2020, while the percentage of those 65 or older is expected to climb from 15% to 18%. Japan and Russia are also projected to see a 4% decline in their working-age population as a percentage of total population, while Hong Kong will see a 6% decrease. A 2% decrease is projected in China, the U.K. and the U.S.
Many governments have recently moved to combat these demographic shifts through a mixture of increasing the minimum payment age for state pension and reducing the pension benefits paid. According to Scott Clausen, partner in Mercer’s Canadian retirement business, Canada began taking mitigating steps even earlier.
“Unlike many countries around the world, Canada acted in the 1990s to help mitigate the future impact of an aging population on its national pension system,” said Clausen. These steps included increasing Canada Pension Plan (CPP) contribution requirements to an amount larger than needed to meet benefit payments at the time. Excess contributions invested by the CPP Investment Board are expected to help mitigate contribution increases or benefit reductions that would otherwise have been required as the population aged. Earlier this year, Canada also made changes to its old age security program where the commencement date of benefits will gradually increase from age 65 to age 67.
Deborah Cooper, partner in Mercer’s retirement business, said governments, employers and employees all need to revisit long-held beliefs around retirement planning in order to prepare for the impending shift.
“Governments are already moving in this area by removing default retirement ages or adjusting normal retirement ages. At Mercer, we are seeing movement on the corporate front, too. More clients are asking us to investigate phasing out traditional pillars of retirement such as fixed pension benefits. Instead, they are interested in implementing new types of scheme design, such as the workplace savings products in the U.K.
“Also, recently, the steady reduction in the age at which people leave employment due to age has slowed and even reversed in some countries. It suggests that individuals are beginning to react to the increasing cost of retirement at existing ages.”
Mercer points out that while Canada is well positioned to handle the demographic changes, there are additional steps the country can take. The 2012 Melbourne Mercer Global Pension Index ranked Canada fifth of 16 countries evaluated. The report’s authors identified steps that could be taken to further improve the country’s pension system, including the following:
- increasing coverage for employees in occupational pension schemes through the development of an attractive product for those without an employer-sponsored scheme;
- increasing the level of household savings; and
- maintaining the real value of accrued pension benefits from resignation until retirement.