aging population

Canada’s aging population will strain government coffers

Health-care costs are expected to increase by 57 per cent by 2045.

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Canada’s Aging Population and Implications for Government Finances

Despite broad public awareness that our society is aging, very little has been done by governments across the country to prepare for the marked aging that has already begun. This study examines the fiscal pressures, specifically the demand for greater spending on seniors-related programming coupled with a weakened ability to generate tax revenues, that governments will face for the foreseeable future from an aging population.

Data abounds illustrating the aging of our population. Statistics Canada estimates that from 2010 to 2063, the seniors’ share of Canada’s population will increase from a little under 15 percent to over 25 percent.

Similarly, unlike most of the period from the early 1970s through to 2010 (or so), labour force participation is now expected to decline. Indeed, expectations are that labour force participation will return to its pre-1970s level by mid-century. More specifically, from 2017 to 2063, Canada’s labour force participation rate is expected to fall from about 65 percent to 61 per­cent. This decline is akin to millions of fewer Canadians participating in the labour force.

This decline in labour force participation will adversely affect growth in per-capita income. Per-capita income grew, on average, by 1.3 percent between 1981 and 2016. However, expectations for the 2017 to 2045 period are that per-capita income will grow by only 0.9 percent, and almost the entirety of this decline in growth is expected to be due to lower labour force participation. The lower rates of per-capita income growth will mean the economy in general will grow more slowly, making it harder for government to collect revenues compared to its current capacity.

This slowdown in per-person income and economic growth more broadly comes at the same time that governments will face pressure for higher spending on a wide range of programs. This study examines both health care spending and income transfer programs to seniors.

Health care spending on a per-person basis is heavily skewed towards a person’s first year of life (birth and related) and their retirement years (post 65). For instance, in 2014, the latest year of available data, the average per-person government spending on health care for Canadians between the ages of 15 and 64 was $2,664. Compare that to the cost for those 65 and over who had average annual per-capita health care costs of $11,625, which was 4.4 times greater than the 15–64 average. The higher proportion of Canadians expected to be in the over-65 category means higher and higher health care costs.

In addition to increased health care spending, an aging population will also require governments to direct more resources to senior income transfer programs like Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). Currently, spending on these programs costs about $48.3 billion, which represents 2.4 percent of GDP. In 2045, spending on Elderly Benefits is projected to be approximately 1.1 to 1.2 percentage points of GDP higher than in 2017. This means that Elderly Benefits will represent between 3.5 and 3.6 percent of GDP by 2045, an increase of 47.0 percent from 2017. Using 2016 nominal GDP figures, the latest year for which we have complete data, this increase would be equivalent to $22.6 billion more being spent on Elderly Benefits.

Simply put, population aging will contribute to a large increase in future levels of government spending. When combined, projected government spending increases related to health care and Elderly Benefits are expected to be 5.3 percentage points of GDP higher in 2045 compared to 2017. In dollar terms, this additional spending would be equivalent to an increase of $107.1 billion using 2016 nominal GDP figures.

To illustrate the potential size of the looming fiscal imbalance, the study includes an analysis of probable revenues (conservatively estimated) with higher spending on health care and income transfer programs to seniors. Based on certain assumptions, by 2045, it is projected that there will be a 7.1 percent of GDP gap between government revenues and expenditures, in other words a deficit. For perspective, government deficits in 2016 would have been more than $143 billion based on 7.1 percent of GDP. Depending on interest rate assumptions, the accumulation of debt over this period could be substantial. The estimates in the paper of debt accumulation by Canadian governments range between 170 percent and 250 percent of GDP.

These rather worrying fiscal outcomes are not inevitable. Proactive steps can and should be undertaken to reform program spending and encour­age stronger economic growth, both of which would mitigate the adverse effects from the aging of our population that are outlined in this paper.

Entrepreneurship, Demographics and Capital Gains Tax Reform in Canada

A number of prominent Canadians, including Bank of Canada Governor Stephen Poloz, have raised concerns about the state of business start-ups and entrepreneurship in Canada. There is no question that entrepreneurship is critical to a well-functioning, prosperous economy.
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Entrepreneurship, Demographics, and Capital Gains Tax Reform

Business start-ups, and entrepreneurship more generally, drive productivity and economic growth. But the rate of business start-ups in Canada is declining. Since it peaked in 2004, the rate of business start-ups as a share of existing firms has declined by 16.2%.

The rate of decline in business start-ups increases as the size of the firm (measured by employment) increases. Over the last decade, from 2003 to 2012, the rate of business start-ups for firms with 5 to 20 employees declined 41.3%, compared to a drop of 8.0% for firms of all sizes over the same period.

There is increasing evidence of a relationship between entrepreneurship and age. Specifically, younger people are less risk averse than older people and are more prone to question the status quo. These characteristics are key to the entrepreneurial process. Like all industrialized countries, Canada’s population is aging; a greater and greater share of the population is over age 65. Statistics Canada expects the portion of those over age 65 as a share of the population to increase by 74.1% between 2008 and 2035.

Can governments use policy levers to influence entrepreneurship so as to mitigate these demographic effects? This essay focuses on the benefits of capital gains tax relief since it both improves the incentives for entrepreneurs and assists those financing business start-ups. Currently, Canada has the 14th highest capital gains tax rate. Canada has an opportunity to supercharge its entrepreneurial environment by reducing the capital gains tax rate, creating a rollover as has been done in the United States, or simply eliminating the capital gains tax, as has been done in many OECD countries.

The lifespan of slow growth has been greatly exaggerated

The idea that we are trapped in a “new normal” of slow economic growth has gained currency with many analysts. Proponents list a number of factors allegedly restraining the trend of growth.
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Is Slow Growth the New Normal for Canada?

The idea that the western world is trapped in a “New Normal” of slow economic growth has gained currency with many economists and financial market analysts. Proponents list a number of factors allegedly restraining the trend of growth, including the lingering impact of the 2008 financial crisis, an aging population, and even a slowdown in the underlying rate of innovation and technological change. Some argue that governments have exhausted their ability to stimulate the economy; others cite the uncertainty created by the unprecedented monetary and fiscal stimulus in the United States in response to the financial crisis and recession as a major drag on the recovery itself.

This paper argues that slow growth early in a recovery is not unprecedented and does not augur weak growth will continue. There is reason to believe that pessimism about growth will prove to be an over-reaction to the current environment, just as happened in the 1930s and 1970s. These past periods of prolonged slow growth ended when governments adopted better and more predictable policies. The lingering effect of the financial crisis is dissipating in the United States, which seems poised to return to above-trend rates of growth. An aging labour force is much more of a problem for Europe and Japan than North America, which has a younger population that is not projected to contract in the future because of a higher birth rate and more immigration. The possibilities for innovative technological change remain encouraging for growth, although this variable is the most difficult to project.

In Canada, growth since the recession has not been unusually weak compared with the previous two decades, reflected in the adult unemployment rate that is already at historically low levels. Canada is particularly well positioned to take advantage of an upturn in the US economy since the lasting impact of the recession upon its financial sector and labour markets has been much less pronounced than in the United States. This will help Canada overcome the recent slump in commodity prices. A further boost to growth would come from a better policy framework, especially in central Canada where provincial government debt continues to increase. More policy stimulus is not needed in North America at this time; more predictable policies would serve better.

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The federal government justifies large-scale immigration on the basis that it is essential to economic growth as well as to offset the aging of the population and the increasing proportion of retired persons to workers. These rationales, however, are not based on facts. The government's own research indicates that immigration and population increases play a role at best in economic growth.

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