Population aging has begun in earnest

Last year, I blogged about the demographic projections that Statistics Canada had prepared in 2005, and I noted that data post-2005 were tracking the lower bound for the working-age share of the population. They've since released another set of projections starting in 2010, and things don't look any better. The sharp rise in the retirement-age population has already begun, and very little can change the demographic trajectory of the next 20 years.

This post is based on the nine long-run projections simulated by Statistics Canada demographers; see here for more detail. The graphs below plot the upper and lower bounds of these scenarios. The range of variation is comparatively small over the next 20 years, because even if there's a sudden rise in the number of births, it will still take a generation before these extra children can enter the labour force.

This is the dependency ratio - the ratio of the non-working-age population to the working-age population:

The dependency ratio is currently at the lowest it will be during the 140-year period between 1921 and 2061. Even the most optimistic scenarios show a sharp rise during the next twenty years. (The blip in the dependency ratio between 1950 and 1970 is of course due to the baby boom.)

The not-quite-mirror image of this graph is the working-age population share of the total:

The peak occurred in 2008, and all scenarios point to a sharp fall in the working-age population share.

The retirement-age share of the population has been steadily rising over time, but will soon accelerate.

The lower bound of the projection has the share leveling off in 20 years, at a share 10 percentage points greater than it is now.

And for completeness, here are the projections for the share of youth (14 and under) in the population:

There is room for more short-term variability in this set of projections, because another baby boom is always a possibility.

None of this is new of course. But maybe these graphs will help make the point more clear.

Update: In response to Frances' request, here are graphs for some subgroups of the retirement-age population:

 

 

Comments

[Robert McClelland]

Gradually doubling immigration--with the additional immigrants being young adults--over the next ten years would accomplish the same thing as another baby boom. Plus it would solve the approaching labour shortage crisis.

[K]

So if population growth and productivity growth stay on trend, we lose about 1% of annual GDP over the next 20 years just from the relative decline of the working age population. And I don't suppose population growth is expected to keep up either, so like Japan, we will depend on lower rates to help sustain increasing debt burdens. A bit late to start thinking about generational accounting, I guess.

[Andrew F]

I'm cautious about Canada's ability to continue to attract quality immigrants in the future. It seems risky to base our strategy on it.

[RSJ]

"quality immigrants"

I hear this often, and my response is that you just need to attract a random sample of immigrants, and they will be no worse than the natives. Things like productivity are going to be a function of the domestic capital stock and infrastructure, so the immigrants will assimilate and become average very quickly, which is both good and bad.

[Frances Woolley]

Steve -
- It would be really interesting to do the projections on young-old, (roughly 65-74), middle-old (roughly 75-84) and old-old (85 +). My middle-old Dad is still working, and my young-old Mum is as fit or fitter than women 20 years younger than she is. But old-old typically have much much more expensive and intense care needs.

On immigration:
- if I ever reach old-old age (and, like Steve, if that happens, it'll be about when those dependency ratios in red are peaking/plateauing out), I'll need to hire people to do my laundry, cook my dinner, and meeting my personal care needs. "Quality immigration" isn't what's needed here - are the best and brightest of poorer places in the world really going to be happy changing old ladies' diapers?

Anyways, a paper by the CD Howe institute a little while ago cranked through the numbers and figured it would be pretty much impossible to "solve" demographic problems with immigration.

Moreover, immigrants bring with them their own set of values, cultures, expectations - and those persist. Imagine that you've come to Canada from a country with little taxation, corrupt government, and a strong expectation that people look after the health care needs of themselves and their families. You're told "when you earn a dollar, you have to pay 15 to 29% in federal income taxes, half of that again in provincial income taxes, 9.9% in combined employer/employee CPP premiums, EI premiums - oh, and why you buy something, you pay 5% to 15% in sales tax. This is going to pay for Granny's medical care needs." People will resist - and I mean strongly resist. It's easy enough to resist taxes if you're a small service-sector business - just disappear into the underground economy.

Basically, if you're one of those people who will hit old-old age when that dependency ratio is peaking, you're going to have a tough time of it. I wrote about some of these issues here.

[Stephen Gordon]

It would be really interesting to do the projections on young-old, (roughly 65-74), middle-old (roughly 75-84) and old-old (85 +).

Happily, that won't take much time at all. It'll be up soon-ish.

[Robert McClelland]

It's a basic supply and demand problem, Frances. And there are only two ways to increase the supply of labour; create it or import it.

[Frances Woolley]

Robert - "It's a basic supply and demand problem"

An inwards shift in the supply curve is great for people on the supply side of the market - it's not a problem at all.

Why should the desires of the baby boomer generation for cheap labour supersede the desires of younger workers for decently-paid employment?

[Patrick]

Grim. What can we do? Build-up a war chest, perhaps? How big would the war chest need to be and how can we accumulate it without wrecking the economy? Maybe a combination of carbon tax and much higher GST (e.g. 10-15%)?

[Nick Rowe]

Patrick's question raises the next question: what precisely do we put in the war chest? What goods and services will the future retired want to consume? Are those goods and services storeable? If not, what can we put in the war chest that can be used to produce those goods and services in future? Or, what can we put in the war chest that would be a good substitute for the goods and services that cannot be produced in future because future resources will be switched to producing goods and services for the retired?

(It concentrates the mind to think in real terms sometimes, not in terms of putting financial assets in the war chest. Since, in general equilibrium, financial assets don't produce real stuff, and don't transfer real stuff through time.)

[Robert McClelland]

Why should the desires of the baby boomer generation for cheap labour supersede the desires of younger workers for decently-paid employment?

As boomers exit the workforce the additional supply of imported or created labour will only maintain the current supply and demand ratio. So wages won't be depressed. I don't know how to alter Stephen's first graph, but it seems to me the upward curve would disappear if one additional worker was added for every additional retiree.

[Frances Woolley]

Nick - totally, completely agree with you.

Robert - "As boomers exit the workforce the additional supply of imported or created labour will only maintain the current supply and demand ratio."

- currently, supply exceeds demand, i.e. there is unemployment, so I don't really see the pressing need for immigration.
- if you ever find yourself with time on your hands, dig out and compare the % of the population who are employed in Alberta and in New Brunswick - I don't remember the exact numbers, but it's a huge difference.

The point is: there a large numbers of potential workers who are not in the workforce right now, but who could easily be persuaded to enter the workforce if jobs were available. There are people in the workforce seeking jobs who can't find them.

Here's an idea: Let's wait until we actually experience a labour shortage before taking steps to increase the labour supply?

Also: a large number of retirees does not imply a large demand for labour. I look at my father-in-law: every day he gets up, makes himself a pot of tea, heads down to the shops and gets a few groceries and perhaps a newspaper, comes home and watches the telly, perhaps putters around in the garden, makes dinner, makes tea - and that's it. In terms of the labour demand created by these activities - some demand for food production, some demand for production of television shows and other entertainment, but that's it. He's not about to buy new furniture or a new house or a new computer or go on a fancy holiday or... He does actually need the odd bit of medical care here or there, and takes a bus sometimes, and that creates some jobs, but you get the point.

The available evidence, as I've written about previously, suggests that people generally *do not* like to spend down their savings. They'd rather not consume.

[btg]

I think that the same graph has been duplicated - the one for age 85 and over is the same as th eone for ages 65 to 74... and nobody noticed.

[Gah! you're right - too quick with the cut and paste. Fixed]

[westslope]

"Here's an idea: Let's wait until we actually experience a labour shortage before taking steps to increase the labour supply?" -fw

I like it. Perhaps Canada should be in less of a rush to import workers who cannot communicate in either official language, are essentially unskilled and don't necessarily bring much to the table by applying cosmetic pesticides to your neighbour's lawn..... for example.

The current immigration system can take a big whack out of neighourhood social capital. Canadian aboriginals near immigration hot spots can look forward to armies of folks cruising across their lands and harvesting just about anything and everything in sight. Moreover, the current immigration and multicultural policies enjoy much support in western Canada because they are perceived as counter-weights to the influence of French-speaking Québec. Many western Canadians are extremely defensive about their rights as unilingual English speakers.

[btg]

Canada already has the highest level of immigration of any industrialised nation - increasing immigration will not work, for a variety of reasons.

One problem has beent hat the immigrants we decide to let in are too old - then by the time they get through the waiting list they are even older! we give bonus points to people in their late 40s and into their 50s - people the same age as the youngest baby boomers. if we let in a 40 year old, we get 25 years until they turn 65, then maybe they are dependent on others for 15 to 20 years - letting in 40 year olds won't do much in the long term for the dependency ratio.

what is also misleading is that prior to 1970 the participation rate of people in the working age was much lower - because fewer women were in the workforce. on the other side, since the 70s people stay in university longer, delaying when they enter the workforce. with fewer children, we save on elecmenary level education spending, but are spending more on university level education.

the best solution is the obvious one - gradually increase the retirement age to age 70, which is a reflection of longer lifespans. at the same time, we should be getting employers to increase thenumber of years people have to work before they can get a full pension, to reduce early retirement.

plus, people over 65 are staying inthe workforce, sometimes taking lower wage jobs rather than sitting at home. merely using people age 25-65 as a proxy for who will actually be working is a bit blunt and inaccurate.

[CBBB]

A large number of the young in Canada today are either unemployed or underemployed (working jobs way below their skill level). I know from experience that Canadian companies generally do not want to invest anything in training or development of their employees, even young people with proper university educations. The young generation is not being put to its fullest potential and will be largely wasted and so Canada must either have much higher productivity growth or continue to attract skilled immigrants.

[Patrick]

It's clearly not easy to stockpile health care services. Even physical assets like a building can't be built and sit empty for 5 or 10 years waiting to be used. I suppose we could invest in stuff to make those who are working more productive. I guess every little bit helps.

Just fiddling with the retirement age doesn't seem to me likely to help much. Take Frances' example, would her father-in-law consume any more if he was working part time as a Wal-Mart greeter? I doubt it.

I see that the first two graphs are looking more and more like the they did during the baby boom. Things were pretty good with all those unproductive babies around as long as their parents were spending. Maybe we just need to find some way to get the old people to spend down their savings as they age. Why are people so reluctant to spend down savings? Fear? Satiation? Preference for old stuff? Pass it on to kids? Maybe we could find some incentives that would induce Granny to go buy a new iPhone and replace the hideous old couch...

[K]

Nick:  I guess storage of goods would be the problem in a closed economy.  But maybe even then, it wouldn't be impossible.  If we do get Japan-style stagnation then negative real rates will be quite accomodative of storage.  So maybe we could stuff warehouses full of trucks and washing machines for later.  But the world as a whole doesn't have a baby boomer problem.  So we can just buy foreign financial assets (whose real returns are much greater than stored goods) and turn them in for goods as our future needs materialize.

[Wonks Anonymous]

RSJ, Garett Jones has done research on this. Immigrant outcomes vary a lot by country of origin. Canada is a nice enough place that it can be a chooser, rather than a beggar.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1627400

[Shangwen]

Grim, but what a relief to see our governments are taking the impact on health care so seriously....

[RSJ]

Wonks Anonymous,

I have a hard time taking anything coming out of George Mason seriously. But in any case, you don't care about immigrant earnings -- of course there will be a correlation between immigrant earnings and IQ. What you care about is the effect on the economy as a whole, and there are several studies, most recently by Peri that argue that even though an infusion of unskilled labor in the short run will reduce the capital intensity of the economy, within about 7 years, that effect dissapears, and you get to keep the higher incomes per capita with no long run reduction output per person. That's what I meant by "it doesn't matter". You do not need "quality" immigrants, you need quality institutions.

[Determinant]

Frances wrote:

Here's an idea: Let's wait until we actually experience a labour shortage before taking steps to increase the labour supply?

Yes. So much yes. I can see no rational argument for increased immigration while we are still mired in an unemployment problem. Demographically, the Echo Generation, the baby boom's kids, have just started to join the workforce. They ran smack into a demand-collapse/balance sheet recession the likes of which we haven't seen since the 1930's. Unemployment and underemployment in this cohort is rife.

CBBB made the point about this here:

A large number of the young in Canada today are either unemployed or underemployed (working jobs way below their skill level). I know from experience that Canadian companies generally do not want to invest anything in training or development of their employees, even young people with proper university educations. The young generation is not being put to its fullest potential and will be largely wasted and so Canada must either have much higher productivity growth or continue to attract skilled immigrants.

To which I add that I am a member of the Echo Generation who has seen this first hand. I will show you a lineup of my friends plus myself who are unemployed or severely underemployed. I have seen multiple employers express the desire that I commute an hour to their location instead of moving closer so I can be more "disposable". I have never made wage demands in my life except to get the market, average rate. To hold out for something approaching a career and a living wage (can support a family, consider marriage, save for downpayment) in this economy requires hardheadedness bordering on mania.

I can be no more direct than to say that the problem Stephen enunciates is not a problem. The argument is baseless and contradicted by the evidence of unemployment. We still have a reserve army of unemployed labour. Until that is dealt with, until Canadian businesses start screaming for people there are no grounds, none, to consider other options.

Stephen, I greatly respect you but I am taking direct aim at your argument and opening up with everything I have. Fair warning. If Frances wants to create a micro post about the differences between generations over unemployment, immigration and the structure of the labour force my future contributions will likely provide ample fodder.

Let the generation war begin.

[Nick Rowe]

Frances: "Nick - totally, completely agree with you."

Actually, now I remember, I think I got this idea from you, a couple of years back!

K: "Nick: I guess storage of goods would be the problem in a closed economy."

Two points:

1. Since much of the world is facing roughly similar sort of demographics, and the world is a closed economy, I think that's the relevant thought-experiment, mostly. (I'm vaguely thinking of doing a post on the demographic challenges for finance. What we have now, I think, is something that is globally unprecedented. And "Finance" is being required/expected to do more than it has ever done before, and it's showing the strains. Can't get my head quite clear on this though.)

2. The storage of real goods could be a storage of capital goods rather than consumer goods. Investment.

[K]

Nick: It seems to me that as long as yields are reflecting future nominal growth then finance can do the job. And I don't see the difference between holding physical capital assets and holding stocks and bonds (as a society - not as an individual) so long as Tobin's Q is one. But if we hit the zero bound we will have trouble, so we may need to run higher inflation. Anyways, looking forward to your post.

[Andrew F]

In Canada, we're heading for an age of gigantic pension funds. The CPP alone will have over $700 billion in assets by 2050. Add in the Caisse de depot, and a bunch of public sector pension funds, and the assets will be well into the trillions.

I wonder what kind of effect that might have. It might be fine if it were just Canada, as much of those assets will be outside of our country, but I imagine this situation will be mirrored in many other greying Western economies. Will having large percentages of our liquid financial assets in stodgy institutional hands have a detrimental impact?

This seems pretty relevant to discussions about expanding CPP benefits and offering a supplemental defined contribution pension scheme, as this will only exacerbate the situation.

[Tina de Pierre]

In Canada, even with immigration growing, we're not going to be able to pay the pensions of the aging baby boomers. Why would a huge immigrant population want to pay for aging Canadians when they're sending part of their income back home?

[Stephen Gordon]

Andrew F: I've been thinking about that. A post is forthcoming.

[Robert McClelland]

Here's an idea: Let's wait until we actually experience a labour shortage before taking steps to increase the labour supply?

It's already happening. Prior to the recession there were labour shortages in Alberta and in the skilled trades. The recession has only masked this problem. Once the effects of it are gone however, the labour shortage will once again be evident and worse than it was before.

[btg]

In the long run, we're all dead, of course, but in the ong run, how do we deal with this problem:

1. as the ratio of retirees per worker increases, we can also reduce the average benefit payment in relation to the average earned income. carry his to the extreme and reduce payments to near zero, then there isn't a problem. of course, retirees are voters.

2. obviously, we can raise taxes (including payroll taxes). over time, if the life expectancy increases and people retire early - not collecting beenfits but living off of other income - then the ratio of workers to benefits recipents could go to 1 pensioner per employee - if benefits are 50% of average incoem which means a 50% tax rate just to pay for pension benefits, yet alone health care and everything else.

3. as i suggested, the best way is to increase the age at which people receive benefits - as life expectancy increases, this is an absolut necessity. increasing the age by 1 year means that 1% more of the population are working and paying into the program AND that that 1% isn't getting benefits. obviously, if the age is raised high enough, to 100 years old, then few people get beneits, while there are many people paying in. if you had a completely stable population (replacement birth rate, no immigration) but over time the life expectancy increased, then the dependency ratio will obviously get worse if the age for benefits doesn't increase in proportion to life expectancy - the original age of 65 really isn't appropriate given that life expectancies are longer and that people are much healthier at age 65 tyhan they used to be.

4. growth. either population growth of high levels of immigration can be used to maintain a ratio of workers to retirees receiving benefits. however, this is aponzi scheme - a pyramid scheme. we live in a finite coutnry/planet with finite space and resources - in the long run, malthus was right, or the club of rome etc. - population growth cannot continue forever. all that immigration or a high birth rate does is to delay the day of reconning, and make it more difficult to solve when that happens because there will be fewer reousrces/less arable land, etc. per person.
we also face the reality that in industrialised countries, people do not want large families, not unless they are wealthy enough to have one spouse stay at home and still be able to buy all the consumer goodies they want (either that or, like quebec, we end up having to subsidise families to have more children - but that means less money for retiree benefits). canada offers political stability, low crime/corruption, and a high standard of living - immigrants will always want to come here - or at least, ones who are poor will, even if taxes are high, as they were in the 50s through the 70s. but growth, even through immigration, is not without costs - to maintain standards, population growth requires spending for infrastructure - transit, roads, hospitals, and the people to staff them - and in the short run this negates the ability to also pay money for retirees without sacrificing something or lowering the quality of life - much as the inadequate infracture and resulting traffic congestion has done in toronto - possiblly leading to road tolls or higher taxes to fix.

going through the above options, we might need to do some of each - maybe trim some benefits - they are already clawed back for high income retirees, and we cannot control the birth rate but we can be more family-friendly. immigration is such a sacred cow in this country that we will never reduce it to zero - even cutting it in half to the per capita level of the US or Australia would be a victory.

the most realistic and fair option is to delay retirement.

[Ian Lee]

Andrew F and Stephen:

Are you not examining a later stage of the evolution of capitalism - studied by Berle and Means in 1932 in "The Modern Corporation and Private Property", which analyzed the separation of ownership from control, whereby managerial capitalism displaced the robber barons e.g. Rockefeller, Carnegie who actually ran the first large corporations (Chandler, Strategy and Structure).

Are we not now observing a similar displacement of "managerial capitalism" (also analyzed by Chandler, The Visible Hand), with "pension fund capitalism" e.g. Calpers, Teachers, Caisse de Depot, CPP.

I cannot find the stat, but some time in the 1980s (if I recall financial economist Michael Jensen accurately in his Theory of the Firm or the "Eclipse of the Public Corporation"), the majority of the shares of publicly traded firms in the US, became owned by pension funds of various kinds - and not by the Bill Gates and Warren Buffets. Again, I cannot find the stat, but I recall the trend is similar in Canada.

This long term transformation in corporate structure and control, makes for some amusing reflections on politics and economics, when "we the people" attack "greedy corporations" for exploiting we consumers - when these corporations are majority owned by us citizen-consumers and managed by giant pension funds on our behalf to maximize returns, to provide secure pensions for us in our dotage.

[btg]

there is no labour shortage in this country - there are skills shortages - but our immigration policies do little to solve this, nor are our education polices addressing the shortages (doctors) well either.

why is it so wonderful for somebody to move from india of the phillipines to northern alberta, and for us to still need to spend money for language skills, skills recognition etc., instead of encouraging unemployed people to move from high-unemployment areas to the areas where unemployment is low?

a loabour shortage is actually a good thing, exept in extreme situations, as a shortage of labour means higher wages, it means that unproducitve uses of labour cannot compete -that means higher productivity. high immigration is one reason why wages have been stagant and producivity in canada has been so dismall, while other places with no immigration and low birth rates(like south korea or other asian tigers) have had both. low wages also discourage capital investment that would increase productivity - as opposed to population growth which sucks up capaital to expand infrastructure.

bigger is not better - a bigger population is not a richer or more productive one, particularly in a country so dependent an resources. in fact, a bigger population in places like ablerta means more resources are consumed domestically, that there are fewer resources per capita, or that they must be extracted at a faster rate and thus depleted sooner.

[Determinant]

Patrick wrote:

I see that the first two graphs are looking more and more like the they did during the baby boom. Things were pretty good with all those unproductive babies around as long as their parents were spending. Maybe we just need to find some way to get the old people to spend down their savings as they age. Why are people so reluctant to spend down savings? Fear? Satiation? Preference for old stuff? Pass it on to kids? Maybe we could find some incentives that would induce Granny to go buy a new iPhone and replace the hideous old couch...

This is one traditional argument for defined benefit pension plans. Without fear of outliving your savings, as this plans are annuities, you can spend your entire income.

I fear the shift to defined contribution plans will bite business in the bum in a way they didn't expect.

[Andrew F]

Defined contribution pensions can be annuitized through retirement through proper insurance providers.

Turning every employer into a life insurance company by having them run DB plans was something that, in retrospect, was going to lead to many disasters.

[Determinant]

I agree completely and have said the very same thing myself. But Canadians are loath to annuitize DC pensions or RRSP's. They have to be dragged kicking and screaming to do it.

However if you put the words "Defined Benefit Pension" on it, they drool. It's an inexplicable psychological reaction.

[Jacques René Giguère]

Determinant:
In a DBP, the anxiety of deciding what and when to do it is taken out of your hands. You make only one decision : choosing your employer. And at the time, usually, the pension consideration is far in the future and heavily discounted.