Wednesday, May 16, 2012

How do we get more people to work for more years?

Many countries have fallen into a trap with an aging retired population and shrinking work force.   This ultimately leads to a problem when the majority of a people in a given country are not working for a living.   For  the dependent people to survive, they require the working population to provide for them.

The retirement age of 65 came about in the 19th century when the average man was lucky to live to age 65 - government sponsored retirement was not going to be a decades long thing for most people.   We now are in the situation in many countries where a 65 year old is expected to live another 20 or more years.   It is not good for the well being socially or financially for a large portion of the population to be retired.

It would be ideal of the average person had a 45 to 50 year working life - start work between 20 and 25 and finish at age 70 to 75.

So where to start?

First off, no white collar public sector worker should be allowed to collect a pension before age 70.   They should specifically be bared from collecting OAS, CPP or their government pension before their 70th birthday. They also need to all move to defined contribution from defined benefit pensions.   Provincially I would phase this in over 30 years with a transition away from the current magic number of 85 (your age and years of service combined) to the age of 70 through changing the magic number by 1 each year though allowing people to retire at 70 if they reach that first.

Second, people should be allowed to contribute to their pension up to age 75 if they want to.   They should also be allowed to continue adding to their RRSP till then as well, the requirement to cash out your RRSP creates a financial disincentive to people working longer.

Third, people should be allowed to defer collecting their CPP and OAS for as long as they like.   In return they should be rewarded with higher payments in the future, say a 50/50 split on the savings between government and the person.   What are the actual numbers?  I am not sure but I know actuarially this could all be worked out.

Fourth, reconstruct CPP so that it is a properly full funded pension system and one in which current contributions pay for current retirees.   To do this would take a long time, it would have to be phased in with an ever increasing portion of the contributions going into individual accounts for the people that are paying into CPP, doing this would mean that people see a direct connection between continuing to add to their CPP and therefore work longer.   The transition would likely be something on the order of 30 years.

Fifth, change EI so that it is a proper insurance system and have the money paid in by each person go into an account for themselves.   If at the end of their working life they did not use up their EI funds, allow 50% to be contributed to their personal RRSP and have the other 50% go towards fully funding their CPP.

Sixth, make it easier for people under age 30 and over age 60 to start their own businesses.   Provide financial incentives to people starting businesses through such things as fully refundable tax credits.

Seventh, make all income earned by anyone under age 20 free of income tax and then transition to paying full income taxes at age 25.  I would allow youth to also opt out of CPP and EI up to age 25.

Eighth, all anyone over age 75 to work up to 20 hours a week tax free.   The income they earn from working would not be counted as income on their income tax return.

  • Society benefits because with more people working there are more people adding value in society and this means economic growth.   Increasing our labour force by 5% would increase the GDP of the country by roughly 7-8%, basically enough to comfortably avoid the next global recession.
  • Getting people to work longer also means we have more retained knowledge within the work place.
  • Keeping older people actively working longer will keep them mentally and physically fitter for longer.
  • As a society we have the cost of government spread out over a larger portion of the population.
  • With youth working earlier and keeping more of their money, they will be able to spend more and will be able to save more for what they need in their lives.   It would make realistic for someone to finish high school  and work for a couple of years to pay for going to university.
  • Seniors would have a larger purchasing power if they worked longer and this would increase demand in society.   It would also mean that more wealth it collected within a family which would eventually be able to pass down to the next generation.
As a society we need to ensure that we have enough people working and we need to reward people for choosing to work for more years in their life.

1 comment:

Anonymous said...

I like some of your ideas, but I worry that any reform of retirement benefits (including the points you've outlined) could neglect the disparity in health that occurs after people turn 60.

While more and more seniors are in better health and are able to continue working, a sizable chunk of the senior population still experiences poor health and reduced physical capacity.

I'd worry about these people if the rule changes were hard and fast and did not allow for flexibility.

I'd prefer retirement/pension reform that took health concerns as one of its key factors and still retained a more traditional benefit system for those who needed it.