Aging Populations and the Demise of the Pension Plan Promise

To avoid having to impose a higher payroll tax on their working force, governments all over the world are racking their brains to be able to find policies that could save them from a pension fund black hole.

The deal seems great. Give us your money now, pay fewer taxes, and we’ll take care of you when you retire or if you become ill. Pension plans, whether government compulsory or industry-specific, are marketed as the wise thing to do to ensure revenue during your old days. Most people believe that their money is held with care until the time for them to receive it back comes. However, it’s not always so simple.

What usually happens is that the money given out to the retiree comes, to a certain extent, from the people still in the workforce. The demographic dependency ratio, which is the working-age population over the non-working-age population, is a great indicator of a population’s eventual ability to fund its retirees’ pension (Canada, s.d.).

For most pension plans, it was assumed in many countries that the population growth rate would increase or remain stable but not diminish. However, in Canada and China, as well as in several European countries like France, the demographic pyramids are slowly but surely inverting themselves. What that means is that the working population will have to economically support an increasing number of retirees through higher payroll contributions or direct financial support like in China.

The difficult demographic road ahead for China is in part motivated by the legacy of the one-child policy and cultural elements, but also the drastic change in way of life for a significant amount of the population in the last few decades. We now have young workers supporting their parents through retirement, who often also have parents to take care of themselves. Therefore, a working couple might have to support two pairs of parents and grandparents. This economic pressure results in increasing debt levels which in turn hinders economic growth  (Wang, 2023). 

The rule is simple: more money leaving than entering creates debt. Deficits in pension plans are not new and are becoming the norm. In 2014, Quebec passed a pension reform bill that angered the union coalition of more than 65, 000 white and blue-collar workers. The purpose of this reform was to find a way to offset Quebec's $4 billion pension deficit, but this reform clashed with the promise and marketing of the pension plan: you do your part, we do ours. The arguments opposing the reform were centered around the idea that the government hadn’t done its part by failing to foresee the possibility of an imbalanced worker-to-retiree ratio (Kelly, 2014).

To avoid having to impose a higher payroll tax on their working force, governments all over the world are racking their brains to be able to find policies that could save them from a pension fund black hole. Pushing the retirement age to later is one of the policies adopted by the French government for example. After President Emmanuel Macron announced that he was planning to change the retirement age from 62 to 64, over a million protesters flooded the streets of Paris in disagreement with the plan (Cohen & Breeden, 2023). France is not the only place where this type of policy has been explored. In Canada, conservatives and liberals have been juggling with the retirement age. On one side, they want to push it to later to reduce the economic strain, on the other, they believe that this spending would contrarily help the economy in the long run (Press, 2016).

Ultimately, the question of trust emerges from this pension plan hassle. Will governments make up for the deficits caused by aging populations or will they increasingly impose policies that will add economic pressures on the workforce? Will the people who invested their money for decades collect their dues? For now, in Canada, it seems as if they might, but it is important to note that Justin Trudeau’s Liberal Party has been leading the country since November 2015, and that conservative parties in Canada usually have different stances on public spending and deficits. Nothing is ever truly set in stone. 

Written by Sinan Bankaci