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The economic impact of aging workforce

on Thu, 10/08/2015 - 23:19

In the next 2 decades, we will have a very different family structure in our society. We will have more and more seniors and our working environment will be very different.

Dr. Patrik Marier, Professor and Canada Research Chair in Comparative Public Policy, Department of Political Science of Concordia University concludes at the Retirement Investment Summit Canada 20151 that: Aging population has “multifaceted consequences” 2. One of the consequences must be the impact and the complexity of workforce together with the economic effects…

During the period of 2000 to 2013, 10% of topics on policy problems associated with population aging published by leading newspapers in Canada was related to the labour market. In the past, people retired, on average, at age 60. Baby boomers talk about retiring at 69, or even later… if they don’t retire, because they probably need the salary, or just like working. They could still work for quite a while.

What had happened in the stock market, made boomers experienced their savings plunged. Low-interest rate environment makes it difficult for them to grow their investments back to where it was3.

 

Boomers not retiring…

While workers in their 40s are stuck in their career paths because the boomers are not retiring, and younger Canadians can't find entry-level jobs (what they are more interested in) to get started out. That directly impacted the participation rate, a

http://www.radiuspmars.com/documents/2015/presentations2015/Tue-0840-Pat...

little reported number that tracks Canadians with jobs and those looking for jobs as a percentage of the working-age population. Dipping to 66.1 per cent in the latest employment data for April 2015, down from 66.5 per cent from a year ago and from 67.8 in February 2008. The working age population is considered anyone over age 15 years, with no upper limit4.

When they do retire, organizations are to face losing a lot of talent. Around us, especially in the manufacturing sectors, lots of plants have more than half of their workers are at least 58 years old. These older sectors will have to try to replace their workers (which will be hard as younger kids, in their 20s, have no interest in getting into these kind of work) or risk having to shut down plants5.

Boomers retire might or might not be something they really want. As established earlier, some boomers just really like working. “Seniorpreneurs” currently account for a record high one-in-four self-employed individuals in Canada, and constitute more than 30 per cent of the total workforce over the age of 556.

Reporting income decreased…

More self-employed translate into less tax being collected and less amount of CPP being generated because of much lower reported income. In 1966, when the CPP was launched, a 15-year retirement with each retiree supported by 7.5 workers made the “pay go” CPP system seem viable. Contributions into the CPP would support payments out to retirees. Any excess could be invested with 20% funding expected by 2014 and 30% by 2075. Contributions were raised to address some of these issues starting in 1997. A 40% increase in retirement years by 2015 with only 4.5 workers supporting each retiree is prologue for 2075 (about 20% today) and will begin eating into capital in 2090 unless contributions are increased sooner7.

http://www.radiuspmars.com/documents/2015/presentations2015/Wed-0940-Mar...

On April 23, 2015, the Ontario Government, after about a year and half of introductory, as part of the Provincial budget, had announced, the province will introduce legislation that will finalize details of the plan that before January 1, 2017, based on extensive actuarial and legal analysis and ongoing engagement with Ontarians.

Canadians’ reported income during working years directly affects their retirement income. But the relationship between income and health is clear. Wealthier people are healthier. Older people on budget get sick more frequently and more seriously than younger people. Combine these facts and it is clear that retirees with inadequate resources will be even sicker and place an extra burden on healthcare resources that will already be under stress by demographics.

Personal income level controls lifestyle and daily spending. What next?

Economy slows down.

The Bank of Canada has projected slower labour force will limit economic growth to about 1.8 per cent in the next several decades, compared with 2.6 per cent for the 1977 to 2011 period. David Foot, author of Boom Bust and Echo, said “Slower economic growth is inevitable. And that means it gets increasingly difficult for governments to get themselves out of the deficits.”8

The Parliamentary Budget Officer also had a similar forecast, real GDP growth is projected to fall from 2.6 per cent a year, on average, from 1983 to 2013, to 1.5 per cent, on average, over the next two decades9.

Affecting home ownership...

Tony Crescenzi, executive vice president, market strategist and generalist portfolio manager at a leading investment firm - PIMCO Newport Beach office believes that based on the current and trending demographic changes, and the construction rate not catching up with demolition rate on new properties will continue to support U.S.’ home prices. Due to financial crisis, there were 800 thousand new households with adult offspring older than 30 years old living with parents, and 1.2 million new co-owner or co-renter households in U.S10.

He stated at a U.S. economy outlook that population growth is about 2.7 million annually. There are 2.6 persons per home, so the shelter need for population growth is supposed to be 1.1 million. This falls during the recession and had been weak until recently. On the other hand, demolitions are about 300,000 per year. These have to be replaced. However, construction of new shelter has been running under one million per year.
Demographics + Demolitions - Construction = annual need for shelter
U.S. is currently underbuilding relative to the growth in need for shelter. Even though fewer people as a percentage of the population are purchasing a home, the need for shelter is what really matters. Those that need shelter could of course resort to renting. That still boosts the value of homes because the act of renting creates value in empty space.

Looking ahead, demographic trends support the need for about 1.4 million new dwellings per year for the next several years, if not more - unless the economy weakens and household formation falls. So long as construction is below that, home prices will be supported.

On the other hand, in Canada, residential spending continues to lead overall GDP. Inflation near the Bank of Canada’s 2% target but financial instability increasing due to asset price inflation (specifically, in the housing market). Given the aging society, productivity issues and the massive accumulation of consumer debt, PIMCO believes the neutral bond-yield rate will be lower than the pre-crisis level of 4% nominal – it is likely closer to 2.5%–3.0% nominal (or 0.5%–1.0% real, assuming 2% inflation), on condition that the Canadian housing market experience a healthy correction. All these will directly affect the investing environment in Canada.

 

Sources:

1 A conference held in Toronto (April 21-22, 2015) http://www.radiuspmars.com/documents/2015/RISC2015-Agenda.pdf

 

2 Dr. Patrik Marier, Professor and Canada Research Chair in Comparative Public Policy, Department of Political Science, Concordia University. Adjusting Public Policies for an Aging Population: Lessons From Political Science and their Potential Impacts On Financial Services (April 21, 2015) Proceedings of a conference held in Toronto. http://www.radiuspmars.com/documents/2015/presentations2015/Tue-0840-Pat...

 

3 Mark Kennedy, National Post, Canada Census 2011: Canada's aging Boomers are placing new strain on business, government (May 29, 2012) http://news.nationalpost.com/news/canada/canadas-aging-boomers-are-placing-new-strain-on-business-government

 

4 Nathan Janzen, RBC Economics, Research, Current Analysis (May 2014)

http://www.rbc.com/economics/economic-reports/pdf/other-reports/Canada_participation_rate.pdf

 

5 Ann Loehr, Workforce Trends: How Baby Boomer Retirement Will Change the Workplace in the Next Decade. You Ready? (February 28, 2013) http://www.anneloehr.com/2013/02/28/workforce-trends-how-baby-boomer-retirement-will-change-the-workplace-in-the-next-decade-you-ready/

 

6 Manulife Sales Resources, Banking, Small Business, Canadian Landscape – Stats and Facts (current)

https://repsource.manulife.com/ds001ap/wps/myportal/Repsource/SalesResources/Banking/SmallBusiness/!ut/p/c5/rZDNboJAFIWfxQcoc-eHYVgy_JRBQClghQ1B01i0qKlGqk_fSbqpNrab3rs850vOOahG-rftqVu1x263bd_QHNW8UdiVNDAZgBVKUE6smBQOhQnWesUbuHMOXNFi6hBNZ6Zw-Vir9Iv-pqceqOwxnE1ijjV_TWfcBcVdQtMSE8jNWzohJigVSBLZnI6n7A_6Gc2BNfn6vFeXzeVpDcM5LwJVLNSQeIGOkpBj-RoXXkkKn-CDP3zkG4YPnjPgxMazIPOdyFu9y-XoR4_bnr9vmIa7_gVVqLbuuhig4h_zRqjuFr0xLHsDDCEsgQVlNrMsmzK9q0T7vizLU8zah2r0CbJDBxk!/dl3/d3/L2dBISEvZ0FBIS9nQSEh/

7 Mark S. Yamada, President CEO, PŮR INVESTING INC., The Ontario Retirement Pension Plan: It will change your life (April 22, 2015) Proceedings of a conference held in Toronto. http://www.radiuspmars.com/documents/2015/presentations2015/Wed-0940-Mar...

8 Canada’s Aging Workforce: Participation, Productivity, and Living Standards (Sept 2010) Proceedings of a conference held by the Bank of Canada. http://www.bankofcanada.ca/wpcontent/uploads/2010/09/beach.pdf.

 

9 Julian Beltrame, The Canadian Press. Retiring baby boomers starting to impact labour market, RBC says (May 21, 2014) http://kitchener.ctvnews.ca/retiring-baby-boomers-starting-to-impact-labour-market-rbc-says-1.1831567

10 Tony Crescenzi, PIMCO. PIMCO’s Outlook for the U.S. Economy, U.S. Monetary Policy, and Global Investment Strategy (May 2015) https://www.cfamontreal.org/static/uploaded/Files/

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