Apocalypse not now

By Marcel Côté

According to a widespread myth, western societies are headed for a major social crisis triggered by aging demographics and the retirement of baby boomers. And, the thinking is, there will be fewer workers will be available to support a growing number of dependents.

Dependency ratio
Demographers define the dependency ratio as the number of people aged 15 to 65 (the active population) divided by the number of people who are younger than 15 and older than 65. For the past 30 years, the dependency ratio in Canada has hovered at about 2.3. A few years from now, it will begin a downward trend, falling below 2 sometime between 2015 and 2020. At about 2035, it should break the 1.5 barrier, a level we have already seen in the 1950s when most dependents were less than 15 years old. If this trend continues, the dependency ratio in Canada could be less than 1 by the year 2050.

Based on these projections, many people believe our society is quietly headed toward a crisis, as future generations will no longer be able to provide economic support to seniors.

Skepticism
I have always been skeptical about such gloom and doom predictions. Society constantly adapts to pressures. Furthermore, the dependency ratio is not a very reliable indicator. On one end of the spectrum are young people aged 15 to 25, considered part of the active population, who are less and less likely to work and should therefore be considered dependents.

Moreover, seniors older than 65 are representing a growing part of the workforce — a good reason not to consider them automatically dependents in the future. Some will work because they need to, but as can be observed today, many will work because they find it personally satisfying, as working can be pleasant.

In addition, there are two other major trends that greatly mitigate the impact of these demographic changes: the rate of women’s participation in the labour force, which continues to climb, and the average education level of the workforce, also on the rise. The more educated a person is, the more likely he or she will work. These two factors combined will result in a significant increase in the future labour supply.

Increased work hours
Work by Alain Denhez, an economist-analyst with the federal government’s Policy Research Initiative, shows that these two trends are contributing to an increase in the number of hours worked that matches the increase in population. The retirement of baby boomers will easily be absorbed, causing a slight downward adjustment of about 4% sometime about 2010 and 2015, but merely offsetting the gains of the past decade. This baby boomer decrease will be easily compensated by normal productivity gains of 1% to 2% a year. After 2015, the number of hours worked will start to rise again in proportion to the population.

This means that the actual dependency ratio, measured by the number of hours worked per capita, will stabilize in the medium to long term at a higher level than what was observed a few years ago. The message is clear: there will be no demographic crisis in the labour market in the future. The next generation will not have more difficulties in supporting retirees than this generation has.

In fact, productivity gains will continue to translate into a steady increase in wealth per capita. We will continue to get richer collectively. Just like today, the big question will be how society should redistribute this wealth — not whether there will be enough.

Marcel Côté is founding partner at SECOR Consulting in Montreal