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The costs of an aging population

What's wrong with this picture?

First, we get the latest of a series of studies telling us that Canadian baby boomers are doing a miserable job saving for retirement. Their plan seems to be to borrow heavily now and figure out the consequences later.

Next, we get our Prime Minister making a big-deal speech at the World Economic Forum saying that it is time to reform the system of entitlements in Canada and -- by the way -- don't figure that the Old Age Security system is going to be there.

Let's step back a bit.

The Bank of Canada has been saying all year that Canadians have too much debt and that the situation puts the economy at risk. Fair enough. Reacting to that, CIBC Economics came out with a study that uses a micro level study to figure out just who is holding the debt. What they found was that most people are doing okay, but that a subset of households are in debt and getting more in debt. More interesting, their data showed that those 'heavy debtors' (basically those with a debt to income ratio of over 1.6) were disproportionately over the age of 45. That segment of the population has been growing with the aging of the baby boomers, but the debts of the segment have apparently been growing more quickly.

Other studies, in the U.S. and in Canada, have basically shown the same thing. Boomers -- not all of them, but a clump -- have met some bad economic luck over their careers. They have experienced job disruptions and income stagnation too. They have also made lifestyle choices that are different than earlier generations. They have stayed in school longer (amassing debts), had kids later, and gotten divorced (and split up assets) more often than their parents generation. None of these things are consistent with building up retirement wealth.

If anyone needs a nice security blanket in retirement, it's them.

But then, the Prime Minister has a point too. With the aging population, the cost of maintaining the Old Age Security program is headed higher -- way higher. Some estimates say that it will cost the government triple in 2030 what it did in 2010. And OAS is not financed by workers through their careers -- it comes strictly from general government revenues. For sure, it is a good time to start the discussion about just how the government is going to pay for programs like that and not end up in some kind of Greece-type nightmare.

Of course, there is still time to turn everything around.

The boomers with the debt issues can start slashing expenditures, paying off debt and saving more. The government can make some changes now -- like raising the retirement age, which is what the UK recently did -- to finance programs. None of the choices are going to be painless, however.

The bottom line however, is that the no-plan people better come up with a plan because the Prime Minister has a plan for them or rather has plans to not have a plan for them.

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