The Economic Benefits of Working Longer and the Financing of Social Security in Canada Maxime Fougère* Simon Harvey Policy Research and Coordination Policy Research and Coordination Human Resources and Skills Development Human Resources and Skills Development Gatineau, Qc, K1A 0J9 Gatineau, Qc, K1A 0J9 Maxime.fougere@hrsdc-rhdcc.gc.ca Simon.harvey@hrsdc-rhdcc.gc.ca Jean Mercenier Marcel Mérette Département de science économique Department of Economics et THEMA University of Ottawa Université Cergy-Pontoise Ottawa, Ont, K1N 6N5 Paris, France Mmerette@uottawa.ca Jean.Mercenier@eco.u-cergy.fr January 2005 Although the population is living longer, the trend in Canada and most OECD countries is towards older workers to retire at an earlier age, which raises public policy challenges in the context of population aging. This paper evaluates the economic cost of earlier retirement, the benefits of working longer in Canada and the consequences for the financing of social security. The analysis is conducted using a computable overlapping generations model calibrated on the Canadian economy. The paper’s key finding indicates that a gradual increase in the average effective retirement age from 61 in the early 2000s to 65 by 2014 could raise real per-capita GDP by more than 8% by 2030. This in turn would give room to reduce effective tax rates and could allow a 25% reduction in the contribution rate to Canada’s Pension Plan. Key words: Aging, retirement, social security, overlapping generations model JEL classification: D58, J14 * Corresponding author: 29 DeChaliers Gatineau, Qc, J8Z 1N8, Canada, tel: 819 953-3432. The authors wish to thank Gilles Bérubé, Christian Dea, Alain Denhez, Peter Hicks and Bruno Rainville for useful comments on an earlier version of this paper. All remaining errors are ours. The views expressed in this document are solely those of the authors and do not necessarily reflect the views of Human Resources and Skills Development Canada.