Aging population poised to strain government purse strings
In case you haven’t heard, Canada is getting older. In the 1960s, there were 7.7 working-age Canadians for every senior (65 and older). This ratio has fallen to 3.4 in 2022, and according to Statistics Canada forecasts, it will fall further to 3.0 by 2027.
Among other consequences, these trends will slow the growth of government revenue in the years ahead. And put upward pressure on government spending due to an increasing number of people becoming eligible for income support programs for seniors such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), while also making it harder to constrain health-care costs.
But there’s good news. Governments across Canada can address these challenges. A recent study by University of Toronto economist Morley Gunderson examined some of these options. He noted that current policies, particularly the tax and benefit incentives surrounding the OAS program, create severe financial disincentives for older Canadians who wish to continue working. The combination of taxation on extra earnings from work and reduced benefits due to a higher income mean that many seniors stand to gain very little additional net income from continuing to work.
Another option for the federal government to address the fiscal challenges associated with an aging population is to increase the age of eligibility for the OAS and GIS.
Life expectancies have increased considerably since these programs were designed and people now enjoy longer retirements. Many of our peer countries have already taken steps to address the implications of these demographic realities by raising the age of eligibility for their government-funded retirement cash benefits.
A recent study published by the Fraser Institute examined policy developments in 22 high-income countries. It found that of these 22 peer countries, 16 of them have either already lifted the age of retirement above the age of 65 or are in the process of doing so. Further, five of these countries will tie the age of eligibility for retirement benefits to life expectancies, so the age of eligibility will gradually increase as people’s lives and retirements get longer.
Canada was on track to participate in this international trend, as the Harper government announced the age of eligibility would be increased to 67 by 2029. The lengthy lead time was included to ensure future retirees had time to make their financial retirement plans in light of the upcoming changes. However, the Trudeau government reversed this reform almost immediately upon taking office in 2015.
In high-income countries around the world, including Canada, population aging is affecting government finances. Most of our peer countries have attempted to address this reality by raising the age of eligibility for government retirement programs. Canada, however, has not participated in this policy trend. Once all of the international reforms have been fully implemented, Canada will have one of the lowest ages of eligibility for such programs among high-income countries.
As Canada moves towards having fewer than three working-age individuals for every senior in the population, there will be increased pressure on federal government finances, including income support and health care.