retirement

retirement

I figured I'd weigh in with those who are arm wrestling Michael Kinsley.

The system in the USA sounds similar to what we have here in Canada. Up here, the Canada Pension Plan payment is deducted directly off the top of your paycheck. Those currently in the workforce pay the pensions of those who are retired.

It is obvious to people my age (36) or younger what will happen in the next thirty years. The Baby Boomers will be reaching age 65 between 2010 and 2029. As this massive population bulge retires, there will be a sharp increase in the number of people withdrawing from the pension plan and a sharp decrease in the number of people paying into it.

Add to this that people are living longer every year. Half of the Boomers will live past the age of 78, perhaps more than half as medical technology continues to improve. In Canada, that adds another wrinkle to the problem; our already-overburdened health care system will undergo even more financial strain as technology improves (and as the new treatments involved become more expensive) and there are more older patients in the system.

One difference between the Canadian and American systems is that the CPP goes into a separate account, not into general revenues as in the USA. Canada's pension plan currently has a surplus due to a massive increase in the CPP premiums; such a situation will not remain stable. In six or seven years the trickle of retirees will turn into a flood and the surplus will be drained. At that point, the government will either have to draw money out of general revenue (and increase taxes to make up the shortfall) or increase the CPP premiums again.

So more and more retire, fewer and fewer are contributing, and the amounts they contribute increase, directly or indirectly. A tipping point occurs when one in three adults is retired: the taxes required to sustain the pensions and health care system become so high they cripple the economy. Then one month the pension checks just. don't. come.

The first pension plan was brought about in Germany in the late 19th century by Bismarck. The same system is in use pretty much unchanged today, with the age 65 as a magical cut-off age. In Bismarck's time, fewer than one percent of the population lived to the age of 65; such a system is sustainable, as there are always far more people working than retired. Today with the average person living 13 years beyond the age of 65, a population bulge like the baby boom is enough to bring down the system.

There are two solutions to this problem. The first is a solution that bothers Michael Kinsley: let people keep their own money to invest for their retirements as they see fit. I guess that idea is just too American for Kinsley.

The second solution assumes that pension plans will continue to be government programs. In order for pension plans to remain viable without crippling the economy, the retirement age must gradually be increased. That is, raise the age to 66 in 2006, to 67 in 2010, to 68 in 2014, to 69 in 2018, and so on. The last of the baby boomers would thus retire in 2037 at the age of 73 rather than in 2029 at the age of 65. For the last of the baby boom, that means eight more years of contributing to their own savings and eight fewer years receiving pension checks from the government. For me, that means retiring in 2043 at age 75.

One of these solutions must be chosen eventually. If the status quo remains too long, then in another 13 or 14 years there will be a crash in the pension plan. By 2018 half the boomers will have retired, and will be expecting a pension check every month. And they damn well better get it; seniors tend to vote in large numbers.