The Pension Blueprint podcast video transcript 

Episode 12: An economist’s outlook on retirement

Jackie DeSouza: Hi, everyone. I am Jackie DeSouza, and this is The Pension Blueprint from OMERS. This is the final episode of our second season. I hope you've enjoyed the conversations we've had over these episodes. I'm extremely proud of the season, and honestly, I learned a lot from our guests, and that's no exception in this episode either. We're ending on a great note with a wonderful guest, Robert Lavigne. Robert is the Senior Managing Director of Economic Research at OMERS, which means that he advises the plan on a wide variety of economic and financial issues. He's an economist by training, so he has a special interest and expertise in the macroeconomic and long-term economic trends that are affecting the global pension market. Robert is a big picture thinker, and that's a perfect fit for our final episode of the season. We're going to be asking him to tell us about the emerging trends in the pension landscape and how things might evolve over the next several years. We want to know what changes people should expect over the next decade? What will retirement look like 10, 20, or even 50 years from now? Robert is funny and engaging, and he's great at taking these hugely complex ideas and distilling them into information that people without degrees in economics can understand. I can't think of a better way to end the season. Thanks again to all our listeners and OMERS members for listening, and please enjoy this conversation with Robert Lavigne. Robert, welcome to The Pension Blueprint. Thank you for being here today.

Robert Lavigne: Thanks so much for having me, Jackie. It's a pleasure to be here.

Jackie DeSouza: So let's get right into it. So you are the Senior Managing Director of Economic Research at OMERS. It's a big title. So tell us a little bit about your role and ultimately, how it would impact our members.

Robert Lavigne: I'm very fortunate to work at OMERS. In a way, it's a dream job, right? I get to look at the economy and help the people of Ontario, and it's not so obvious to be able to do that as an economist. Often, we're working on Bay Street or providing financial advice or working for a corporation. But here I get to work for what I sort of consider the people of Ontario. OMERS is a wonderful pension plan. The members are fantastic. They are really the backbone of Ontario, so it's a pleasure to work for them. I guess you could say I sort of work on three frequencies, if you will, in my role at OMERS. First of all, I'm part of a bigger team, economic research, and we have some fantastic talent there. So really, I get to represent them. I think that's the best way of thinking about it. We have three frequencies. So we have some investor-relevant information that we provide, trying to give let's say our folks in capital markets or our broader investment teams and private markets some insights about how the world's evolving and how they can shift our portfolio to support our returns over time. So I would say that's sort of macro financial advice, if you will. And then if we step back a little bit in perspective, the macroeconomic analysis. So where is the global economy heading? What stage are we in the business cycle? And that's helpful for operational planning for the Pension Plan. And we think about different scenarios. How could the world evolve? And then there's, if you step back yet further, and now you're probably at 40,000 feet, it's sort of the longer-term, slow-moving trends that we look at, structural changes over time. So a warming planet, maybe geopolitical shifts, and of course, the planetary aging, the aging of the global population.

Jackie DeSouza: So you mentioned demographics, and I know you're doing some research into demographics, especially as the population is aging. So can you tell us a little bit about the research that you're doing and how this aging population is impacting the economy?

Robert Lavigne: Yeah, that's a big question. Demographics has gotten a lot of press recently, right? We're in the midst of pretty significant demographic change, and there are people on both extremes. So on the one hand, if you look at levels, well, we've never been more people on the planet than we are today. So we're eight billion people and counting, and we'll be growing as a planetary population for the next 10 years still. That compares to four billion people when I was born, right? And 1.6 approximately at the turn of the century.

Jackie DeSouza: And I want to say, you weren't born that long ago.

Robert Lavigne: In the '70s, let's just keep it at that. So that's exponential growth. And so if you look at it from the environmentalist perspective, then we're way too many people on this planet. Maybe a declining population ultimately is not a bad thing from that perspective. I do feel that's a little extreme though. On the other hand, you've got folks that worry about population collapse, so the opposite and they're humming and hawing about all sorts of terrible things that will happen as our populations shrink in the future. And they'll say things like, "Oh, remember the decline of the Roman empire, and this is going to happen again." And again, that's a little extreme. What I like to do is sort of straddle those two extremes. And the honest truth is though that we are in the midst of dramatic change. Our populations are aging. Inevitably, there will be some sort of population decline over coming years, and it's really the combination of two factors. One is that there's never a boom without a bust. So over the past century, we've grown dramatically, right? And so that's the first aspect. And so unless we keep that birth rate up, inevitably, there's going to be a decline. And then what happens, as we grow wealthier, and certainly, the world has grown wealthier over the past century, and certainly over the last several decades, birth per woman decline, right? So we now find ourselves, we used to be at an average, at the turn of the century of like five or six children per woman. And now we're pretty much globally at replacement rate 2.1, right? Even India now is at 2.1. So still, India is a country that's benefiting from a demographic boom. Nevertheless, less and less children are being born. And this occurs for a variety of reasons, but it's an empirical fact. So around the world, the number of children per family is just falling. And in advanced countries, such as Canada, it's more like 1.5, right? So we're not replacing ourselves. So this doesn't really affect our population size for a while because our longevity is also increasing, right? But there will inevitably come a time in the next 20 or maybe 30 years when the death rate is going to be considerably bigger than this ever-declining birth rate. And at that stage, you're going to have a decline in population. We're already seeing it in Japan, we are seeing it in Korea, and most recently, we've seen it in China. So these countries are canary in the coal mines for us. But what most interests me as an economist is not so much those endpoints, but more about how we get there, the transition.

Jackie DeSouza: Yeah. Lots of information there and it's fascinating. So some of the research you've done, you've broken down the impacts of aging into three categories, right? You've said economic, social, and political. So let's start with each of those, maybe the economic impact first, how is aging affecting our economy?

Robert Lavigne: Yeah, that's a big question. Let me just maybe start with the shorter perspective. So let's say over the medium term, next three to five years, let's say. And we'll take it from a North American perspective to begin. Up until recently, the saving rate has been quite high because people were saving for their retirement, right? But now, in 2021 in United States, that was the peak retirement year for the boomers, right? And something special happens after you retire. So your savings behavior changes, right? And all of a sudden, you start to dissave. So you've accumulated up until your retirement, it's sort of like in a pension plan. And then you begin to draw down and you're no longer saving as much. In fact, you're consuming more.

Jackie DeSouza: Yeah. You're spending that money that you saved.

Robert Lavigne: Exactly. Right. And you're no longer in the workforce, so you're not sort of contributing to the aggregate wealth, if you will, right? This is happening. And in fact, if you look at consumption per capita, it's much higher among older folks than it is among the, let's say median working age population. A lot of this is due to medical expenditures. So as we get older, we may not be buying three TVs, but we are going to the hospital more often. And that's expensive. So our later years, the last 20 years of our lives, we're consuming more, even though it doesn't necessarily feel like consumption, but we are consuming medical services a lot more. And so that's pretty dramatic. And we're seeing medical expenditures rise as the population ages. So bottom line, what I want to say is that you can expect a boost in demand going forward as we shift towards greater consumption as an economy. At the same time, we are not going to work like we used to. So there's less people coming into the office. And unless we get an enhancement in productivity, our growth rate is going to slow. So we'll be demanding more goods and services, but we won't be producing them at the same rate. So there's going to be a growing difference between demand and supply going forward. And so in economist speak, we'd say that our positive output gap. And that's going to have some consequences on the economy. So we expect there to be a little more inflation going forward. Probably higher interest rates because there's going to be a lot of investment over this period. So it's a fortunate period in a way for investors, but there's less savings out there. And so the price of that is going to rise. So interest rates are probably higher. So we're in kind of a higher for longer mode, I think, backed, in part, by demographics. So in the short run, I think it's sort of positive for the economy.

Jackie DeSouza: Right, well, people aren't going to be happy that interest rates are going to stay high for the next few years. When we're recording this podcast, just the other day, the Bank of Canada lowered its key interest rate. So I think people are thinking, "Okay, the interest rates are going to start going lower from here on in," but you're saying no.

Robert Lavigne: Listen, they're high because we had a surge of inflation post-pandemic. And that had to be dealt with. Right. But what I mean is that we're going to be shifting from a world of 0 to 1 or 2% interest rates after the Global Financial Crisis. And that lasted for about a decade. Imagine then shifting up to the 3, to 4 to 5% range, and it will oscillate within that. But there's a level step up as many Canadians are finding out as they renew their mortgages now. So even if rates come down a tad, thank you, Tiff, they're still significantly higher than what they may have last time they went into their bank's office or whatever, and worked on their mortgages.

Jackie DeSouza: I guess that's just the way it's going to be.

Robert Lavigne: I suspect that will last for a little while. Yeah.

Jackie DeSouza: Okay. Well, thanks for letting us know that. So one of the other impacts of aging we have to think about is on our social wellbeing. So what are the impacts that you're seeing or that we will see in the future?

Robert Lavigne: The reason we're talking about demographics so much nowadays, it's because of the boomers, and there's such a large cohort. the boomers have transformed the North American economies and the Canadian economy especially through their lifecycle. So it's really been a boomer's story over the last several years that will continue to be a boomer story as they age and then our society tilts towards accommodating the needs of an older population, right? So our median age is rising. And you'll see probably our economy shifting more towards elderly care, shifting more towards leisure, more in general towards consumption as I just spoke about. So that's the positive side of things, but I think there's also a negative side, as there is for everything really. Not everyone has saved enough. We can expect maybe some increases in elderly poverty for those who haven't been able to put aside enough, unless, of course, the government redistributes a little bit more, but that can be difficult because it probably means raising taxes on a labor force that is shrinking and smaller. To a certain extent, it'll be a little difficult for some people I think going forward. But overall, I'd like to look at it in a sort of balanced way. Maybe we'll become more wiser as we get older as well, right? So like, we'll be able to manage these things. And I think whatever challenges I speak about today, they're within our means to manage. We just have to look ahead and plan thoughtfully.

Jackie DeSouza: Now, you mentioned some of the political implications of aging, you said elderly population, the government's going to have to make some changes. So does that change the way that the government budgets over the longer term as this population continues to age?

Robert Lavigne: Well, absolutely. And aging expenditures are probably going to be every government around the world's main outlay, right? Most countries in the world have a pay-as-you-go pension system, public pension systems, right? So that means that tax revenues collected from the workforce go directly to pay a pensioner. There's no capital pool that's accumulated to pay for future outlays.

Jackie DeSouza: Like the investment teams that we have generating those returns.

Robert Lavigne: Exactly. Yeah. For most economies, and the old ones, especially like Italy now, or Greece or Japan, aging has kind of snuck up on people in a way. And this is going to be difficult for governments to maintain as dependency ratios worsen over time, and you get ever less number of workers and a rising number of dependents, right? So that will be a stress on governments. And there's really only kind of three solutions to this, right? You can raise more taxes, but there's a limit because you'll crush growth and then you're not better off necessarily as a government doing so. You can cut benefits, never popular, or you can extend the age of retirement, which is another way of cutting benefits when you think about it. That's been the way that most governments have proceeded so far. But there has been pushback and there has been backsliding. We've seen recent events in France, and it's difficult for a population to accept that kind of disappointment, especially near retirement. And there's a certain entitlement. I think people feel they're owed this and they may be correct. And so that's difficult, that's difficult at a political level for sure.

Jackie DeSouza: So is Canada prepared to deal with this oncoming sort of aging population? And are we doing better than other countries?

Robert Lavigne: It's going to be a challenge for Canada, but I don't think there's a country that's better set up to manage that challenge. I think we have two special ingredients. One, we have large immigration flows. Immigration is probably the most effective tool to deal with an aging population. In fact, you're creating some instant adults, if you will that don't require the education, training and the 18 years of preparation.

Jackie DeSouza: Right, because they've already got it. They're coming into the country with it.

Robert Lavigne: And on average, the immigrants that are coming to Canada are about 28 years old. So that rejuvenates our population. So countries, unlike people, can actually go back in age. So actually, from 2022 to 2023, I think our median age actually shrank from 42 to 41 or something like this. A small shift. Nevertheless, that's all because of newcomers who bring many wonderful things to Canada. Another thing is that we have, by and large, fully funded pension systems, and especially the one that counts for the aggregating population would be CPP. And that's fully funded. Amazing foresight by our governments of the past. And we should thank them. We have a fully funded public pension system, and that is so much better than a pay-as-you-go system. So that's an advantage for Canada. And those two factors I think make the coming challenge a little easier for our country.

Jackie DeSouza: Right, so you mentioned the immigration, which is a good thing, and we've really increased our numbers, right? About a half a million people now annually coming into Canada. And that sort of changes the landscape quite a bit. But those people are going to age as well, right? So doesn't that impact CPP and Old Age Security and some of the other benefits that we have?

Robert Lavigne: Well, it does, of course, but it's a net benefit. So I guess if the age of immigrants coming into Canada was exactly the same as the median age, then like, it just changes the size of the issue, but it doesn't change the dynamics of the issue. But the people that are coming are younger. So think of it like, it sort of spreads out the problem and it deals with that hump of the boomers that are there a lot right now. And so if we have a bigger Gen X or millennials, let's say, then they're just better able to manage the transition. So it's like bolstering the workforce, if you will. And yes, of course, they will contribute to CPP and all that for a longer period of time because they're coming in relatively earlier compared to the median Canadian now, right? So it's a net benefit. Of course, it doesn't fundamentally change the challenge facing us. It just alleviates it, it makes it a little easier, spreads out the problem over time a little bit more. And that's really important because when you're making structural changes, you need time, you need time to convince people. And eventually, retirement will probably look a little different over the coming decades, but making that transition very quickly can be disruptive and will ideally make it as less painful as possible.

Jackie DeSouza: Right, yeah, that's really interesting. Okay, so Robert, if you had a crystal ball and you're looking forward, and I know you're an economist, so you don't use crystal balls. So if you look forward 10, 20, maybe 50 years into the future, how do you see retirement changing over those decades?

Robert Lavigne: Well, I don't know if I don't have a crystal ball, but it's very cracked and dim, and I just look at it occasionally. Once we're past this boomer hump, and I guess if you say in 20 years, we'll largely be past that adjustment period. I think things are just going to calm down, right? Financing our pensions and our longer lifespans will become less of a public challenge. So that's one thing. We still have to get there. But looking out into the future, I think things will have calmed down. We'll have stabilized, people will probably retire later.

Jackie DeSouza: Because they're living longer and want to work.

Robert Lavigne: Around the world. Sure. Like for example, the retirement age in China now for men is like something like 54, for women, it's 50. Sure that's going to rise over time and probably get closer to where we are. And where we are now is probably going to be not exactly... we're probably going to be in the 70s or whatever when we retire. And that's not necessarily a negative thing. I know it sounds like that if I say it like this, but our lifespans are going to be lengthening and our health will be improving over those years. So I think our active period where we can make large economic contributions, that period will be increasing over time. So I feel that if we can match that increase in longevity in our productive lives, and we'll probably be engaged ever more in services, ever more in sort of engaging kind of work. Then it will be actually not that difficult to work a few extra years. We may even want that. And then we see that a lot among folks. They don't have a desire to retire so early. And I'm not speaking for everyone. There are some jobs where you need to retire early. Very physical jobs for sure. That will remain the case. But I think for many people, as we move to increasingly a service-oriented economy, we'll find that they can retire later. I think also people will need to start saving earlier. The boomers haven't saved a tremendous amount. They're extremely wealthy, but it's unevenly distributed. So there are some for whom, and this is why boomers are booming right now, it's because they are wealthy and they are getting ready to spend a lot. And some boomers, I don't want to characterize them all in the same way, but they are getting ready for like some travel now, all right? They're saying, "Oh, okay, I've worked all this time. I've paid my house, whatever, and I'm going to travel now." And if you look at the sort of goods that are being consumed nowadays, where's it booming? Carnivals are booming. And dental repair is booming, eyesight. Hobbies, okay? RV sales, okay? So like people are shaping up and gearing up to go out but they have the wealth to do that. Boomers own most of the economy, so they're in very good financial shape but not everyone, not everyone. So we'll see some stresses. Inequality, stresses. Aging will cause some degree of inequality, exacerbate things a little bit. And I think the future generations will have to start saving earlier, to be honest. And in a higher rate world, if you believe my story, the benefit of compound interest is just going to be that much more powerful. So I think that our public governments would do well in general to encourage people to start saving earlier now in light of what will probably be a fairly long retirement period. So even if they retire later, we're going to have to be thinking about two lives now. There's the work life and then there's the retirement period, which could be very long. We could be thinking 30, 40 years. So that's a second life where you want to remain engaged, helpful, useful, you want to do stimulating things. Now's the time to write the book or whatever, right? So my sense is that you're going to have to plan for that. People are going to have to plan. So they're going to have to be more foresightful. I look at Gen Zs and my kids are Gen Zs, and I look at them and I think they have a very thoughtful approach. They care about work-life balance for sure. Sometimes they complain about that a bit too much. But they do look at the future I think more than perhaps my generation did. They're planners. And so if we can get them to save earlier and think a little bit about what they want to do afterwards, before like two, three years before that retirement date approaches very quickly, I think we'll all be better off. They'll certainly be a bit better off. So in that way, I think, retirement's going to be shifting over the next several years.

Jackie DeSouza: Yeah, for sure. And you mentioned the Gen Z. I have Gen Z kids as well, and millennials, and retirement's definitely going to look different for them. You've sort of mentioned some of the reasons why, but can they have some hope as well for the future?

Robert Lavigne: Oh yeah. I think there's tons of hope, right? I mean, listen, it's hard to forecast out all that time. Every generation has its challenges. And in the grand scheme of things, the challenge we're now facing, demographically speaking, is nothing compared to 100 years ago, 200 years ago, right? We still had plagues, we still had disease and we were beset by wars and we're in a relative period of calm. Although recently, things have heated up a little bit for sure. And we're facing different sort of challenges going forward, the climate and whatnot. Every generation will rise up to the challenge, right? I have complete faith in our children to do the right thing. Not right away maybe, but eventually. Just like Winston Churchill said about democracies, right? They'll eventually do the right thing after they've tried everything else. But they'll eventually do the right thing. So I have a lot of hope in the future. This is one of the challenges they'll face. They'll face many kinds of challenges in a way, like we are facing them right now, and we'll have to appropriately use the resources at hand to deal with that challenge. You can only plan so much. That's why the real value of a DB plan, of a defined benefit plan is to take away some of that uncertainty, right? There's a lot of uncertainty. You never get it all perfectly planned out, but at least you can control a little bit of it, have some foresight into that. I'm very optimistic about the future. This is a good time to live, especially in Canada. In the grand scheme of things, if you had to choose a place from heaven to parachute in on the world, where would you want to go? I mean, I think a lot of people would choose nowadays, compared to earlier times, and I have hope that it's going to be even more attractive for people in the future. There's all sorts of marvels out there, things that could potentially be huge game changers, like AI. I am, for one, not a person who frets about robotization or automation or AI. I think bring on the robots, we're going to need them. We're going to need all the kind of innovations that we can deal with a demographic issue. So I welcome that. And I think that's the way our children look at the future. They welcome it, they embrace it, they live in it.

Jackie DeSouza: Right. That's great. So you welcome our robot overlords. (both laughing)

Robert Lavigne: Well, maybe not the overlords part. We'll see how that goes. Robot helpers is the way I see it, right? Star Trek world. Captain Kirk presses a button, gets his food. Like, that's what I would love, right? That's technology at the service of humanity.

Jackie DeSouza: That's awesome. Thank you so much, Robert. This was a great conversation.

Robert Lavigne: My pleasure. Thanks so much for having.