Making demography relevant: The Canadian baby boom

Insurance: Mathematics North-Holland

and Economics

3 (1984) 279-285

279

Making demography relevant: The Canadian baby boom Robert

L. BROWN

use the Government

Department of Statistics and Actuarial Science, Waterloo, Waterloo, Ontano, Canada N2L 3GI

Llnruersit_~~of

The paper presents a model for teaching demography used at the University of Waterloo which requires student projects. Three projects are described in some detail. They are analyses of unemployment rates. future housing requirements in the Province of Ontario, and the need to modify the normal retirement age of 65 used in the Canada/Quebec Pension Plan. Keywords: Canadian baby room, Labour force tion. Unemployment, Housing; Social security; Quebec pension plan; Normal retirement Age.

participaCanada/

Publications

Section

of the

Arts Library extensively. This has proved to be a valuable learning process in itself. Students are encouraged to meet with me regularly to make sure that they are progressing satisfactorily. After providing some background material on the

baby

boom,

I will describe

three

of

these

projects in some detail. The three projects chosen have all been of a quality that earned them publication in trade journals

and, further,

just

will be the effects

how far ranging

Canadian

they illustrate of the

baby boom tidal wave.

2. Background 1. Introduction For course

the past decade, in demography

Waterloo.

I have been teaching a at the University of

The course was designed

dents and often included

students

for senior stuwho were using

this selection as a course credit toward a Masters degree. The text was Introduction to Demography by Spiegelman the Society

which was also the required

of Actuaries

text for

Part 5 examinations.

To

increase the effectiveness of the course I decided to assign each student a major project that was an applied demographic problem. This experiment has turned out to be extremely successful. In the first two weeks of the thirteen week term, each student meets with me to have their project summary approved. The summary consists of a short outline of the topic and the student’s ‘plan of attack’. At this time, I acquaint the student with the existing literature pertinent to the topic (see references). The projects are due the last day of class and are worth 20% of their final mark. The project must be presented in a format appropriate for a senior essay. While length is not the prime concern, these projects are usually twenty to thirty pages long including supporting data, computer programmes, etc. To complete such a project, students need to 0167-6687/84/$3.00

Figures 1, 2 and 3 illustrates the Canadian baby boom tidal wave. Figure 1 shows birth rates; Figure 2 total fertility rates, and Figure 3 live births. By introducing this material, one has an excel-

0 1984, Elsevier Science Publishers

27 _-

Per 1 000 population

-

28

24

-

20

16

-

12 -

6-

4-

0

’

1901

1911

I

I

I

I

I

I

1921

1931

1941

1951

1961

1971

Fig. 1. Birth rates, 1901 to 1981.

B.V. (North-Holland)

I I 1981

R.L.

280

Brown

/

The Canadian

interesting to note that the birth rate peaked 1947; the fertility rate in 1956, and the number live births in 1959.

Per woman

4.0 -

baby boom

3.5 -

While social scientists

3.0 -

in trying

to explain

they

I have

did,

number

have put time and effort

why birth

always

of live births

in analyzing

baby

2.0 -

ple must be provided with including financial security.

and actuaries

0.5 -

as

the use of the Canadian

manufacturers,

with how many peogoods

and

services,

I feel that the use of birth rates

vertisers, retailers, and manufacturers, have measured this demographic phenomenon with a start-

’

1907 1911 1921

1931

1951

1941

1961

1971

1981

ing point of 1945.

Thus,

they assume

that

the baby

are aged 25 to 40. Given

that

I feel these users of demographic

sta-

tistics hitting opportunity

to define

and

boomers

assumption,

rates, 1901 to 1981.

Fig. 2. Total fertility

differentiate

have been misled

today,

and, as a result,

their target market.

measured

most easily and distinctly

350

1926

Fig. 3. Live births,

193:

1936

1941

1921 to 1981 (Source:

1946

Statistics

1951

1956

Canada).

are not

These business people are concerned with demand units. In that sense, the baby boom can be

the

three measures: birth rate, fertility rate, and number of live births. In describing the baby boom it is

1921

changed

as a measure of the baby boom is unfortunate. Because of an emphasis on that measure, demographers have described this increase in birth rates as the post war baby boom. As a result, some ad-

1.0 -

lent

advertisers,

are concerned

In this respect,

1.5 -

0

Retailers,

rates

emphasized

2.5 -

boom.

in of

1961

1966

1971

1976

1961

(if somewhat

R. L. Brown / The Canadian b&y boom

arbitrarily),

as being the period from 1952 to 1966

(with a convenient peak at its mid-point in 1959) when births in Canada exceeded 380000 per annum. Only in that fifteen year period did births exceed 380000 per annum. If one lowers this level slightly other years enter, clouding the definition

dependency is today.

281

ratio will be more than double what it

This

burden

if

retirement practices remain unchanged. We will return to a more complete discussion

will double

the pension

of

this social security funding problem

in Section

5 of

by producing local modes. In fact, between 1952 and 1966 Canada had 6.75 million births so that at

this paper. With this background, tion to work on their

students were in a positerm projects while the

the

lecture

to

end

of

Canada’s

the

boom

population

(in

1966)

one-third

of

was age 14 or under.

required

time

was

used

readings

proceed

in Spiegelman’s

through

the

text.

What followed the baby boom was the equally important baby bust resulting in the tidal wave phenomenon. the

real

It is this boom-bust

problems.

deserted.

Social

Schools

security

cycle that creates

are

systems

built

and

then

are defined

3. Future unemployment in Canada (Student co-author: Michael Manning

then found not affordable. The Table 1 can be used to illustrate the effect that the baby boom will have on Canada’s social security fertility 100000,

(1981))

and

system. This table, assuming constant of 1.8 and net annual immigration of shows dependency ratios both past and

in

The paper maintains that two forces combined the 1970’s to raise Canada’s unemployment

rates to levels usually experienced

only in times of

severe economic depression, namely, the entry of the baby boom into the work force and the coincidental sharp rise in female labour

force participa-

future. Note that although youth dependency is already at an all-time low, it will go still lower in

tion rates. During the 1970’s, Canada

the future. We also see that the major

ing labour force in the industrialized world. In 1981, one quarter of the Canadian labour force was aged 15 to 24 and almost one-half of the

the

aged

dependent

until well after 2011.

population By 2031,

increase

does however,

not

begin

the aged

Pop’n 65 + / 18-64

Pop’n O-17/ 18-64

Total dependency

1901 1911 1921 1931 1941 1951 1961 1971

9.3 8.2 8.7 9.8 11.2 13.5 14.3 14.4

74.9 68.2 12.6 66.6 56.5 60.8 72.8 63.4

84.2 76.4 81.3 76.4 67.7 74.3 87.1 77.8

1976 1981 1986 1991 1996 2001 2011 2021 2031 2041 2051 2061 2071

14.4 14.8 15.4 16.7 17.4 17.5 18.7 25.0 31.7 30.3 30.6 31.0 30.6

52.8 44.9 41.6 41.1 40.3 37.6 33.9 34.6 35.0 34.4 34.1 34.6 34.7

67.2 59.7 57.0 57.8 57.1 55.1 52.6 59.6 66.7 64.7 65.3 65.6 65.3

Source: Statistics Canada

had the fastest grow-

unemployed were in this age group. But what followed the baby boom was the baby bust. Figure 4 shows the average annual growth

Table 1 Dependency ratios, 1901 to 2071 (in 8) Year

in

rate of the Canadian or looking for a job) on the following (a)

labour -

force (those

and our projections

working based

assumptions:

Immigration

would

be level

at a net

of

50000 per annum. (b) Fertility rates would grade down to 1.7 by

Fig. 4.

282

R.L. Brown / The Canadian hahv boom

1991 and then remain

level. (This is not a signifi-

cant factor since few of these babies labour force by the year 2000.) (c)

Female

labour

force

Canada$ certain

will be in the

participation

projected job

unemployment

creation

rates

given

rates

rates

would rise slowly but never exceed levels 5% less than those now experienced by males. (d) Mortality would improve only slightly. (Again this is not a significant factor.) Not only do we find a sharp decline in the growth of the labour force in total in the next twenty years, but, more important, we find a decline in the numbers highest 1980’s

of those in the age group of

unemployment and through

2JOBLESS

RATE

Fig. 5.

(ages 15 to 24) in the late

most of the 1990’s.

The second factor which raised the unemployment rate was an increased female labour force

the record of any other major industrialized as shown in Table 2.

participation rate (percentage of those over 15 in the labour force) from 38.3% in 1970 to 50.3% in

In an effort to analyze future employment rates, we did a number of computer projections. Our projections were based on realized experience to

1980. While one cannot predict future female labour force participation rates precisely, it is true that the rate of increase we would

female

than

male

labour

rates by the 1990’s and, by the

year 2000, some age groups would have labour force participation rates in excess of lOO%! Obviously this is impossible be rejected. The rising

Figure 5 shows the results.

will have to slow. Otherwise,

have higher

force participation

mid-1981.

nation

and such projections

unemployment

rates

must

during

the

4. Future housing requirements in Ontario (Student co-authors: Sue Tomkins and Mark Griffin In 1977,

(1982))

a report

on future

housing

require-

ments in the Province on Ontario (which has over one-third of Canada’s population) was done by

1970’s, in my view, were inevitable given the underlying demographic trends. To maintain that the

Peter Barnard of Housing.

cause

Requirements 1976-2001” was being used by planners and developers as a basis for many im-

was a weak

Canadian

economy

the Canadian Over the years, achieved a remarkable job-creation 15 years

ending

in 1981,

employed increased by average annual increase these large absolute

is wrong.

economy record.

the number

had In the

of people

3.7 million or 50% (an of 2.8%). Not only are

increases,

they surpass

by far

comparison

of job growth 1975-81

Canada United States Japan France Germany Italy United Kingdom Source:

OECD.

2.8 2.1 1 .o -1.2 0.1 0.8 - 1.0

(% increase)

Annual

average

Ministry Housing

portant decisions. By 1981, several of the assumptions used by Barnard, which had seemed realistic in 1977, were seriously out of line with reality. In 1981, Sue Tomkins set out to redo the projections using more realistic assumptions. Her projections were improved fin.

Table 2 International

Associates for the Ontario The report “Ontario

upon one year later by Mark Grif-

Barnard had assumed a constant fertility rate of 2.105 and net immigration of 50000 per annum. But during the 1970’s, fertility rates in Ontario had continued to decline and by 1981 seemed to be stabilizing at around 1.800. It should be noted, however, that the fertility rate assumed is not very important in estimating total households to 2001, because those born in 1976 will only be 25 years old in 2001. Migration, on the other hand, is a very important

factor in projecting

future housing require-

R.L.

Table 3 Projections

of Ontario

Brown

/

The Canadian

households

Year

Brown et al.

Barnard

1976 1981 1986 1991

ments.

In fact,

housing

Number of households

Annual growth

Number of Households

Annual growth

2 591968 3012875 3 421532 3707813 3 964 327 4211203

84181 81731 51256 51303 49 375

2591968 2 935 252 3246177 3426522 3 558 145 3667965

68657 62185 36069 26 325 21964

by the 1990’s,

required,

was on account

according

46%

of the new

to Barnard’s

analysis,

of migration.

Net migration to the Province of Ontario had gone from + 30000 in 1976 to - 15000 in 1980, as young Ontarions

moved West to participate

in the

resource boom of Alberta and British Columbia. In doing our projections, we assumed a fertility rate of 1.8 and net migration the results given in Table 3. Ontario had been building homes a year. When Barnard’s it was received

283

baby boom

as a ‘doom

of zero. This led to

quirement out of general Canada/Quebec Pension a pay-as-you-go basis. All three of these dramatically

2031.

around 90000 new report was released,

and gloom’ document.

The cause of his projected decline in housing starts was the baby bust that followed the baby boom. According to these projections the housing industry’s future is even worse than previously projected.

in Table

will more Hence,

Guaranteed Security

schemes

as the baby

after 2016. As shown Ratio

tax revenue; (3) and the Plan which is funded on

double

has a three-tiered

ment-sponsored

social

plans, and individual sions are actuarially fected

system

for its aged dependents;

by changes

However,

government

security,

sponsored

now

the cost per taxpayer

of funding

Income

and

could

Supplement

more

than

Pensionable

future, the YMPE

double

and the

Old

in the

Age same

level called the Year’s

Earnings

(YMPE).

In the

will equal the average industrial

wage. The

of financial

namely,

govern-

private

pension

savings. Because private penfull-funded, they are not afin underlying

Dependency

between

Presently, employees contribute 1.8% of eligible earnings to be matched by the employer (self-employed contribute 3.6%). Contributions are not required below a defined minimum level of earn-

career Canada

to retire

period. For the Canada/Quebec Pension Plan, the projections indicate even more serious financial strain.

Maximum

security

affected

begin

1, the Aged

than

ings nor above a maximum 5. The coming crisis in social security (Student co-author: Sharon Thaxter (1981))

will be

boomers

demographics.

systems, being on

a ‘pay-as-you-go’ basis, are sensitive to demographic changes. There are three segments to the governmentsponsored tier: (1) the Guaranteed Income Supplement which is paid on a needs basis out of general tax revenue; (2) the Old Age Security which is paid universally to those meeting a residence re-

retirement

benefit

average eligible

is defined

earnings

as 25%

of

(for those earning

the YMPE each year, it is 25% of final three years’ average earnings because of the way the wage indexation

formula

is

defined).

The

pensions,

which commence at age 65, are indexed to the Consumer Price Index. The contribution rate of 3.6% in total was set at a level that would generate a fund in the early years of the plan when many workers contributed but few received benefits. These funds were lent to the provinces. The provinces are expected to pay interest on the debt and repay the debt itself when the cash flow becomes negative (expected in early 1984). When the 3.6% contribution rate was estab-

284

R.L. Brown / The Canadian baby boom

lished in 1966, it was anticipated that it would remain at that level and then rise slowly to an ultimate level as the plan matured. At that time the cost estimates did not anticipate the baby boom/bust cycle. It is difficult to believe that the next generation of workers will be willing to fund the C/QPP given the contribution rates now being projected. The report of the Royal Commission on the Status of Pensions in Ontario (Haley, 1981) included the following comments: “On a pay-as-you-go basis. where benefits are paid as they fall due without any assets being accumulated, the 3.6% contribution rate covers the benefit payments until after 1985. The cost would rise steadily thereafter to a peak of 9.28% in 2030. With full funding (i.e. level premium funding with unfunded liabilities at 1980 amortized over 50 years) the contribution rates would be required to increase to 12.53% in 1980. The fund would increase from $25 billion in 1980 to $712 billion in 200 and $8.86 trillion in 2030”.

The commission recommended that the Canada Pension Plan should be funded on a pay-as-you-go basis with a contingency fund maintained at the level required to satisfy twice the year’s benefit and administration cost pay-out three years in advance. The solution that has been adopted in the U.S. with respect to a similar funding problem has been to raise the normal retirement age from 65 in 2003 until it is 67 by 2027. In this project we attempted to find a shift in the normal retirement age in Canada that would avoid the sharp rise in the aged dependency ratios outlined in Table 1. As the basis of our analysis, we used a Statistics Canada population projection that assumed net immigration of 75000 per annum, mortality that decreases slightly to 1986 and remains level thereafter, and fertility that declines to a level of 1.7 in 1991 and remains constant thereafter. Based on that population projection and a large number of retirement formulae, we chose a model whereby the eligibility age for social security benefits (now 65) would rise by three months each year starting in 2008 until it reached age 70 in 2027. The effect on dependency ratios can be seen in Figure 6. Because the dependency ratio remains fairly level from 1999 to 2007, we decided that 2008 was the best point to start the retirement age change. It would be difficult to postpone it beyond 2008.

19;o

Ii80

l&O

2doo

2dlO

2d20

2d30

Fig. 6. Retired population per 100 workers aged 20-64. (I) if retirement age remains at 65; (II) if retirement age is raised according to the model.

As can be seen from Figure 6, there are presently more than six workers per aged dependent. If no change is made in the normal retirement age, that ratio will go to three workers per retired dependent as anticipated in Table 1. With our proposed formula, however, the ratio would never reach five workers per retiree and, hence, the C/QPP contribution rate would not have to rise to 9.28% as projected by the Haley Commission. Further, if today’s rate of mortality improvement continues, Canadians could spend as much time in retirement under the new formula as they expect to today.

6. Conclusions This paper has attempted to outline an approach to making demography relevant to undergraduate and graduate students. I believe that this approach has increased the enthusiasm of my stu-

R.L. Brown / The Canadian baby boom

dents

and enhanced

their overall

education.

Fur-

ther, it has produced a number of worthwhile analysis, three of which have been summarized herein. The publication of these analyses has reinforced

the student’s

interest

in applied

demogra-

phy.

References used in class projects Asimakopulos, A. (1980). The Nature of Publtc Pensron Plans: Intergenerational Equity, Funding, and Saving. The ECOnomic Council of Canada. Brown, R.L. (1983). Actuarial aspects of the changing Canadian demographic profile. Transacf~on of the Socrery of Acfuarles 34, 373. Brown, R.L. (1982). Migration fogs the crystal ball - Ontario housing demand to 2001. Canadian Building, April 1982. Brown, R.L. and M. Manning (1981). Unemployment problem will go away. The Financial Post. August 29, 1981. Brown, R.L. and S. Thaxter (1981). Raise the retirement age. Benefits Canada, July/August 1981. Calvert, G.N. (1977). Pension and Suruiual. Financial Post Books. Canadian Life Insurance Association (1980). Public Retirement Programs - A Posttron Paper. Cam. S.G.E. (1980). The impact of demographic and social trends on employee benefits - A Canadian view. Employee Benefits Journal, Summer 1980, Page 2. Cofirentes (1977). Committee on Financing Benefits ofthe Quebec Penston Plan and Supplementary Pension Plans.

285

Croll, D.A. (1979). Retirement Without Tears: The Report of the Special Senate Committee on Retirement Age Policies. Denton. F.T., A.L. Robb and B.G. Spencer (1980). The Future Financmg of the Canada and Quebec Pension Plans: Some Alternatwe Possibilities. Economic Council of Canada. Dept. of Insurance (1977). Canada Pension Plan. Statutory Actuarial Report No. 6, as at December 31, 1977. Economic Council of Canada (1979). One in Three - Pensions for Canadians to 2030. Foot, D.K. (1979). Public Policy and Future Population in Ontario. Ontario Economic Council. Foot, D.K. (1982). Canada’s Population Outlook: Demographic Futures and Economic Challenges. Canadian Institute for Economic Policy. Guerard, Y. (1980). Double C.P.P. benefits - It won’t solve the current problem. EeneJits Canada, February 1980. Haley, D. (1981). Report of the Royal Commtssion on the Status of Pensions in Ontario. Lazar, H. (1979). The Retirement Income System in Canada: Problems and Alternatives. The Report of the Task Force on Retirement Income Policy. National Council of Welfare (1979). Women and Pooerty. Ontario Treasury Studies 16 (1979). Issues rn Pension Policy. Ministry of Treasury and Economics. Pesando, J.E. (1979). Indexing of private pensions: An exhange. Canadian Public Polrcy 3, 425-429. Pesando, J.E. (1979). Private Pensions in an Inflationary Climate: Limitations and Policy Alternatives. Economic Council of Canada. Statistics Canada (1978). Social Security. National Program Catalogue 86-201. Weitz, H. (1979). The Foreign Experience With Income Marntename for the Elderly. Economic Council of Canada.