The workforce is aging in most of the world’s largest economies, which is putting unfunded pension systems under a lot of pressure.
The working age populations in Canada, Japan and Russia are projected to decline by 4 percent of their total population over the next eight years, according to new data by Mercer. Hong Kong will experience a 6 percent decline, while China, the United Kingdom and United States are expected to see a 2 percent decline in the working age group as a percentage of total population.
Pakistan, Brazil, India, Indonesia and Mexico will see their working age populations increase slightly by 2020.
“While the changes seem small in percentage terms, one must remember that this is a dramatic demographic shift over the next eight years, represents hundreds of millions of workers, and can have a major impact on state pension systems. Most national retirement schemes are state funded and start paying pensions from around age 65, so a contraction in the numbers of the most economically active group will see a reduction in funds available for welfare, health and retirement programs.
Concurrently, the 65-plus group in a country might be increasing, drawing on a greater proportion of scarcer financial resources from the smaller working population,” said Deborah Cooper, partner in Mercer’s retirement business.
Many governments have reacted to their aging populations by a mixture of increasing the minimum payment age for the state pension and reducing the pension paid. According to Mercer, companies, already coping with the impact of demographic change in their own retirement plans, will be expected by employees in many countries to fill the gap in health and retirement benefits as the nation state retreats.
“To do this effectively, we believe that companies and employees need to revisit fundamental beliefs on how to prepare for and structure retirement,” said Cooper. “Governments are already moving in this area by removing default retirement ages or adjusting normal retirement ages. At Mercer, we are seeing movement on the corporate front, too. More clients are asking us to investigate phasing out traditional pillars of retirement like fixed pension benefits. Instead, they are interested in implementing new types of scheme design, like the workplace savings products in the UK.”
According to Cooper, “If you look beyond the overall percentage of the population that is “working age,” there can be offsetting positive factors. If the proportion of those of working age who are in employment, or actively seeking employment, has increased, it will help mitigate the problem. Also, recently, the steady reduction in the age at which people leave employment due to age has slowed, and even reversed in some countries. It suggests that individuals are beginning to react to the increasing cost of retirement at existing ages.”
In the 1990s, Canada made some changes in anticipation of just such an occurrence. According to Scott Clausen, partner in Mercer’s Canadian retirement business, Canada took a number of steps in the 1990s to help protect its pension system, including an increase in Canada Pension Plan contribution requirements to an amount larger than needed to meet benefit payments at the time.
The excess contributions are invested by the Canada Pension Plan Investment Board and are expected to help mitigate contribution increases or benefit reductions that would otherwise have been required as the population aged.
Canada also took significant steps to reduce its level of federal government debt. Earlier this year, Canada also made changes to its Old Age Security program where the commencement date of benefits will gradually increase from age 65 to age 67.
Mercer is a global leader in human resource consulting and related services.