Canada’s aging population will strain government coffers

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Appeared in Maclean's, October 31, 2017
Canada’s aging population will strain government coffers

Last week’s fall fiscal update signalled the federal government’s continued preference for running budget deficits, regardless of the state of the economy. The story is similar across Canada’s provinces where eight of 10 are currently running budget deficits in 2016/17.

The lack of fiscal prudence coast to coast raises serious concerns about the ability of Canadian governments to deal with future fiscal headwinds including pressures on government finances due to Canada’s aging population.

According to Statistics Canada, from 2010 to 2063, the seniors’ share of Canada’s population will increase from a little under 15 per cent to more than 25 per cent. This means the share of Canadians working compared to those in retirement will decrease significantly.

Canada’s aging population will affect government finances in two major ways. First, most economists expect slower rates of economic growth and thus slower growth in government revenue. Which isn’t surprising given the expectation for a larger share of the population to be of retirement age. Simply put, less people working will reduce rates of economic growth.

Second, marked pressure will be placed on programs sensitive to demographics such as health care and income support programs for seniors such as Old Age Security (OAS). In fact, the cost of income transfer programs for seniors is expected to increase by 47 per cent by 2045. Again, this shouldn’t surprise anyone as more seniors (as a share of the population) means more benefits supplied by government.

Health-care spending will similarly face stress as seniors comprise a larger share of the population. On a per-person basis, health-care spending is heavily skewed towards a person’s first year of life (birth and related) and their retirement years (post 65). For example, in 2014, average per-person health-care spending for Canadians 65 and over was almost four-and-a-half times greater than for Canadians aged 15 to 64. Subsequently, health-care costs are expected to increase by 57 per cent by 2045, again, in part due to our aging population.

To put these spending increases into perspective, when combined, the higher projected government spending related to health care and income support programs for seniors (OAS, etc.) would be equivalent to spending an additional $107 billion on these same programs over and above what governments in Canada spent in 2016.

In response to this dramatic demographic shift, and the resulting higher spending and slower revenue growth, governments across Canada will face stark choices. They will have to reform spending programs, enact policies to improve economic growth, run deficits and accumulate debt, and/or raise tax rates. If governments—including the federal government—continue to choose deficits and debt, Canada’s net debt-to-GDP ratio (a metric economists use to measure the sustainability of government debt by comparing it to the size of the economy) could increase to between 167 to 252 per cent by 2045.

But there’s good news. This dire fiscal situation is not inevitable. Proactive steps can and should be made to reform government program spending and encourage stronger economic growth across the country, which would mitigate the adverse effects of Canada’s aging population.