The new economics of aging

Marcel Mérette

Pay no heed to the impending crisis said to be looming on the horizon… an aging population may actually benefit wealthy and poorer countries alike.

by Lili Marin

Labour market shortages, pension funds running dry, overburdened healthcare systems….The dreaded consequences of baby boomers reaching retirement age are enough to make anyone tremble with fear. But Marcel Mérette, dean of the University of Ottawa’s Faculty of Social Sciences and associate professor of economics, remains calm. or him, nothing is more unlikely than these pessimistic scenarios.

“We look at behaviours today and we make the implicit assumption that they will not change. But in fact, people tend to adapt… it’s human nature, and our economic system adapts as well,” he explains. Indeed, the work he has done with his colleague Patrick Georges on international trade has led him to optimistic conclusions.

A lack of qualified workers leads to improved working conditions and increased wages. Then, if wages go up, workers reaching the age of 55 or 60 will continue to participate in the labour force for another year or two.” That alone will mean population pressures won’t be as bad as anticipated,” says Marcel Mérette.

Professor Mérette, who began studying demographic change close to 15 years ago when he was with Department of Finance Canada’s research division, isn’t too worried either about how Canada’s baby boomers will live during their retirement years. Living comfortably during retirement depends on a system that is solid enough to support the anticipated costs.

Of course, the viability of the Canada Pension Plan and the Régie des rentes du Québec could be threatened by the declining birth rate and the reduced number of workers making contributions. However, funding of these pension plans undertaken since the end of the 1990s has created a reserve that will better be able to accommodate the aging population. And private plans such as the Registered Retirement Savings Plan (RRSP) should finally result in money going into government coffers.“We understand that we benefit from reduced income tax when we contribute to an RRSP, but actually, it is just deferring the tax payments. Right now, while many people are contributing to these plans, it is very costly for the government. However, with the changes in demographics, we’ll see the opposite of what is happening with the healthcare system. Soon the number of people withdrawing money from their RRSPs will increase and, as a result, so will the taxes they pay. The end result… the government benefits.” 

While wealthy countries will see the greatest rise in their populations in the 80+ age group, poorer countries will continue to have relatively young populations. And with young people comes the need to invest, particularly in infrastructure like schools. “The money has to be found to finance these investments. There is a good chance that part of the funds will come from wealthier countries, where there will be a greater concentration of people in their fifties saving for their retirement and looking for good returns on their investments,” points out Marcel Mérette, highlighting that some emerging countries have, for some time, been outperforming wealthy countries, particularly in terms of economic growth.

“There is an opportunity for developing nations to improve their situation,” says Mérette.“It goes without saying that demographic change cannot make up for poorly run governments, but the North-South divide can be narrowed.” Globalization would also allow the wealthier nations to better absorb the shock of the baby-boom generation hitting retirement age if the retirement savings are invested in developing countries that can provide better returns.

It still remains that the population’s structure will change extremely quickly. Beginning next year, the first group of baby-boomers— those born just after the Second World War— will be part of the 65+ age group.

Marcel Mérette intends to take his work even further. He hopes to examine both harmonization of international regulations related to the flow of capital as well as population and migration. To do this, he will continue to use general equilibrium overlapping-generation models, whose strength rests on taking into consideration the coexistence of people of all ages in an economy, providing a clearer picture of the true situation. 

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