Considering the rising costs of retirement in recent years—along with projected future increases—the “golden years” are looking a little tarnished.
Sylvester J. Schieber, chairman of the U.S. Social Security Advisory Board, made some grim predictions for the retirement situation in Canada and in the U.S. at the 2008 Pensions Summit in Toronto on Monday.
Ensuring adequate retirement income can be a costly proposition. In the U.S., says Schieber, the costs to finance workers’ retirement income have increased dramatically from 9% of payroll in 1960, to 17% to 25% of payroll in 2005. He estimates these costs will increase to 20% to 30% of payroll by 2030.
“Retirement today costs a great deal more than it did in 1960…that’s part of the reason why we have seen the turmoil in the retirement markets that we have seen in recent years,” he adds.
Canada will also face cost increases, but may fare better than the U.S. By 2030, Schieber notes, financing Canadian workers’ retirement income security will cost about 16% to 25% of payroll.
And that’s without even looking at healthcare expenditures. Schieber notes that, from 1960 to 1970, Canada and the U.S. were spending similar amounts on healthcare as a percentage of gross domestic product (GDP), and the life expectancies in both countries were the same. Then, the two healthcare systems diverged.
In 2005, the U.S. was spending approximately 15% of GDP on healthcare, compared to 10% in Canada—yet the Canadian life expectancy increased by about 1.5 years. Fast forward to 2030, and Schieber estimates that the U.S. will be spending more than twice what Canada is spending on healthcare. “It’s not clear that we’ve realized a lot of benefits from all of this added money that we’re spending,” he remarks.
If this course persists, once workers have paid their own share of retirement and healthcare costs—along with the taxes to cover social insurance programs—they won’t have much left. By 2030, Schieber continues, it could cost U.S. workers from 52% to 60% of their career earnings, depending on the age at which they retire.
Canadian workers will fare somewhat better—by 2030, it could cost them around 32% to 40% of earnings. “The 32% to 40% may look bad,” he adds, “but by comparison, the cost is going to be relatively moderate compared to their U.S. cousins.” He believes that the improved outlook for Canada is due to two key factors: the differences in the delivery of healthcare and the decision to prefund a portion of the national retirement system.
Schieber says it’s important to be aware that retirement costs for future generations will be higher than they have been previously, and that “pay-as-you-go” financing will only aggravate the situation. He also warns that we shouldn’t consider the costs of retirement without also keeping healthcare costs in mind.
Canada and the U.S. both face challenges with respect to retirement funding—challenges that will become even more pronounced as the baby boomers move into their retirement years. And the fact that many people are retiring earlier and living longer compounds the issue. If the projected cost increases are accurate, something’s got to give.
“We can calculate these numbers, and make a convincing case that all of this is doable and we should live happily ever after,” says Schieber. “But there’s a cost to be paid if we’re going to deliver these things.”
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