Canada must prepare for 'fiscal squeeze' brought on by greying population: Economist
OTTAWA — With a greying population marching toward retirement and old age, Canada faces an unavoidable choice, a leading Canadian economist told a Parliament Hill audience Wednesday: raise taxes or curb spending — or both.
"I think most Canadians know that there is a population aging challenge," said Christopher Ragan, an associate professor of economics at McGill University, former visiting economist at the federal Department of Finance and former special adviser to the Bank of Canada. "But I think most Canadians do not know how big it is and what it implies."
He spoke at a "Big Thinking" lecture hosted by the Canadian Federation for the Humanities and Social Sciences on Parliament Hill Wednesday. The lecture series is intended to connect prominent researchers with policymakers and ordinary Canadians, and members of Parliament, including Francis Scarpaleggia, Diane Ablonczy, Peter Milliken and Shawn Murphy, attended.
For decades, Canada's has enjoyed "double-barrelled" growth in its economy and workforce, Ragan said, with productivity consistently rising and labour-force participation growing as women joined the workforce en masse. But the enormous baby-boomer generation has swelled each part of Canada's age structure as it passed through and that generation is now on the cusp of retiring, Ragan said, which will throw the long-standing growth of the labour force into decline.
"Now, the oldest baby boomers, born in 1946, turn 65 next year, so they drop out of this share of the population, and then the whole process unravels for the next 20 years," he said. "There's nothing fundamentally wrong with that population structure, it's just that it's a reality we have to think about. We generally think aging is a good thing because it's way better than the alternative."
Economists can forecast the decline of the labour force with "an alarming amount of precision," Ragan said, and even if some people delay retirement after seeing their pensions and savings shrink — a pattern he's observed with his own colleagues at McGill — the decline in Canada's working-age population is inexorable.
The mass exodus of the baby boomers will push the labour-force participation rate of Canada's core working-age population down to 60 per cent from 68 per cent over the next three decades, he said.
That means a shrinking tax base right at the moment when age-related health-care costs are set to skyrocket — a conundrum Ragan calls the "fiscal squeeze."
Public health-care spending averages about $2,500 annually on people up until about the age of 55, Ragan said, and for every five-year increase in age after that, spending approximately doubles, so that the typical 85-year-old costs $23,000 a year in public health spending. At the same time, a greying population will drive up Canada's already substantial spending on age-related benefits, he said.
"The No. 1 item in the federal budget is (Old Age Security) — $33 billion a year, and growing," he said.
Over the next two decades, rising health and other age-related expenditures will represent a "fiscal shock" to the tune of 10 per cent of present government spending in Canada, he said.
One option is to "pretend the problem doesn't exist and try to borrow money," but that would push Canada up against the "debt wall" the country hit in the 1990s and the money would eventually need to be repaid, Ragan said. The only real options are to cut spending or increase taxes to bring in more money — or both — he concluded.
"We've got to have a serious conversation about whether we need higher taxes or whether we need lower spending, and if we're going to have lower spending, where is it going to be lower spending, and if we're going to have higher taxes, which higher taxes are they going to be," he said. "That's all of our jobs for the near future."
OTTAWA — With a greying population marching toward retirement and old age, Canada faces an unavoidable choice, a leading Canadian economist told a Parliament Hill audience Wednesday: raise taxes or curb spending — or both.
"I think most Canadians know that there is a population aging challenge," said Christopher Ragan, an associate professor of economics at McGill University, former visiting economist at the federal Department of Finance and former special adviser to the Bank of Canada. "But I think most Canadians do not know how big it is and what it implies."
He spoke at a "Big Thinking" lecture hosted by the Canadian Federation for the Humanities and Social Sciences on Parliament Hill Wednesday. The lecture series is intended to connect prominent researchers with policymakers and ordinary Canadians, and members of Parliament, including Francis Scarpaleggia, Diane Ablonczy, Peter Milliken and Shawn Murphy, attended.
For decades, Canada's has enjoyed "double-barrelled" growth in its economy and workforce, Ragan said, with productivity consistently rising and labour-force participation growing as women joined the workforce en masse. But the enormous baby-boomer generation has swelled each part of Canada's age structure as it passed through and that generation is now on the cusp of retiring, Ragan said, which will throw the long-standing growth of the labour force into decline.
"Now, the oldest baby boomers, born in 1946, turn 65 next year, so they drop out of this share of the population, and then the whole process unravels for the next 20 years," he said. "There's nothing fundamentally wrong with that population structure, it's just that it's a reality we have to think about. We generally think aging is a good thing because it's way better than the alternative."
Economists can forecast the decline of the labour force with "an alarming amount of precision," Ragan said, and even if some people delay retirement after seeing their pensions and savings shrink — a pattern he's observed with his own colleagues at McGill — the decline in Canada's working-age population is inexorable.
The mass exodus of the baby boomers will push the labour-force participation rate of Canada's core working-age population down to 60 per cent from 68 per cent over the next three decades, he said.
That means a shrinking tax base right at the moment when age-related health-care costs are set to skyrocket — a conundrum Ragan calls the "fiscal squeeze."
Public health-care spending averages about $2,500 annually on people up until about the age of 55, Ragan said, and for every five-year increase in age after that, spending approximately doubles, so that the typical 85-year-old costs $23,000 a year in public health spending. At the same time, a greying population will drive up Canada's already substantial spending on age-related benefits, he said.
"The No. 1 item in the federal budget is (Old Age Security) — $33 billion a year, and growing," he said.
Over the next two decades, rising health and other age-related expenditures will represent a "fiscal shock" to the tune of 10 per cent of present government spending in Canada, he said.
One option is to "pretend the problem doesn't exist and try to borrow money," but that would push Canada up against the "debt wall" the country hit in the 1990s and the money would eventually need to be repaid, Ragan said. The only real options are to cut spending or increase taxes to bring in more money — or both — he concluded.
"We've got to have a serious conversation about whether we need higher taxes or whether we need lower spending, and if we're going to have lower spending, where is it going to be lower spending, and if we're going to have higher taxes, which higher taxes are they going to be," he said. "That's all of our jobs for the near future."
