David Dodge, former governor of Bank of Canada and former deputy finance minister, speaks at a panel of "Talking Economics" at the Canadian Embassy in Beijing on Nov. 18, 2015. (Photo: ECNS/Qian Ruisha)
(ECNS) -- By the year 2050, the population aged 60 or over is projected to reach nearly 2 billion, or more than 1 in every 5 persons. The ratio of working force to the retired will drop to under 2 in Europe, 3 in Northern America and under 4 in Asia, according to United Nations statistics.
As the world's aging problem intensifies, a revamp of the retirement income and health care systems is urgently needed to save enough for retirement, said David Dodge, Canadian economist, former governor of Bank of Canada and former deputy finance minister.
Dodge was invited by the Canadian Embassy in Beijing to speak at a panel of the "Talking Economics" series on Wednesday.
A multi-pier retirement income system is key to securing enough for old age
"A pure pay-as-you-go system will create social tension and impede growth as it requires very high payroll taxes when the dependency ratio becomes high," Dodge said. "If we rely entirely on saving for funded systems, however, that would discourage consumption and restrain growth."
Canada has a four-pier retirement income system, namely the public pension system, Canada Pension Plan and the Quebec Pension Plan, employer-sponsored pension plans and private savings.
The first pillar is mainly for the poor. Canadian citizens or legal residents who have lived in Canada for more than 10 years after turning 18, and who are 65 or older may be eligible to receive Old Age Security.
The second pillar is a monthly benefit plan for those who contribute based on earnings to the Canada Pension Plan, and is mainly for low and middle income earners. The third pillar of funded private plans is for middle income earners alone.
China is trying to transition the defined benefit, pay-as-you-go system to a multi-pillar model, while incorporating all enterprise and self-employed workers in cities and towns. But the system still suffers from a low contribution rate, low coverage and low return on investment.
To encourage higher contribution, Dodge said it's important to "make people fear that they won't get enough pensions when they retire," adding that it took Canada a decade to reform its retirement income system.
China's second-child policy may have little immediate impact
In its 13th Five Year Plan released in late October, China removed restrictions on having a second child for all couples. The move is seen as an effort to counter the aging population. But Dodge said in an interview that he's not sure if the policy could yield a much higher fertility rate.
"China is having policies like Western countries did, but I don't think they could have much impact," Dodge said. "Fertility will still be lower than the replacement rate. History tells us that when we're wealthy and we create opportunities for women, the chances of a fertility rate higher than 1.8 is low."
Dodge said it's important that China mulls later retirement ages.
"People are healthier and need to work longer, so facilitating employment in the 60s or even 70s is important both for employers and skilled workers."
Nations will need a health care overhaul
Population aging will contribute to a rise in health care and long-term care spending over the next 30 years. According to Dodge, among major economies, the rise would be largest for China.
"When you have a young population, what you need is mostly acute care – how to get them back to work quickly. When you have a large fraction of population over 70 you have to deal with chronic care," Dodge said.
He added that many countries including Canada and China will thus need an overhaul in the health care sector.
"The sort of facility we need, where we locate them and how we train health care providers – these mean enormous change in health care infrastructure. Today the doctor of the specialist is king, but in the future the ordinary personal workers like nurses will be most important."
In Canada, elderly care consists of nearly half the country's total health care spending. Dodge said that China has more time than Canada but would face exactly the same problem in years.
Dodge also urges more emphasis on "care at home," such as accessible housing and home care services.
