Canada unprepared for an aging population

Canada unprepared for an aging population

The adverse consequences of an aging population – deficits, debt and slowing economic growth – can be mitigated with prompt action

By Jason Clemens
and Sasha Parvani
The Fraser Institute

Canada’s population is aging, like all industrialized countries. But unlike most industrialized countries, Canada is doing almost nothing to prepare for the implications of an older population. And, in some cases, it’s moving in the wrong direction.

There’s ample evidence that Canadians are living longer. According to Statistics Canada, life expectancy in 2011 was 81.7 years, compared to just 57.1 years in 1921. The combination of Canadians living longer and the population bulge of the baby boom generation means seniors should represent 25 per cent of the population by roughly mid-century, from less than 15 per cent in 2010.

As a recent study noted, the aging of our population will place enormous strains on government finances.

First, several government programs that are sensitive to demographics will experience significant cost pressures. Take for instance Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), two income transfer programs supporting seniors. The cost of these programs is expected to increase by 47 per cent between 2017 and 2047 based on a larger share of the population being eligible.

Similarly, health-care costs are heavily influenced by seniors since so much of our lifetime consumption of health care occurs after the age of 65. For example, in 2014, government per-person spending on health care was 4.4 times more for those over age 65 than for Canadians aged 15 to 64.

Second, these spending increases will occur as the share of the population in the labour force declines. Canada’s labour force participation rate is expected to decline from its peak of 67.6 per cent in 2008 to roughly 61.0 per cent by mid-century. This means economic growth will be slower than in previous periods, making it more difficult for governments to raise revenues.

The combination of higher spending and slower-growing revenues likely means much larger deficits in the future unless programs are reformed. A recent calculation suggested that government deficits could grow as large as $143 billion (in current dollars) by 2045 if no changes are made.

In 2012, the former Conservative government made a rather tepid reform, planning to change the age of eligibility for OAS and GIS to 67. The changes were to be implemented between 2023 and 2029.

Shortly after taking office, the current Liberal government reversed this to maintain the age of eligibility for both programs at 65. It’s estimated this will cost the government $10.4 billion more in 2030.

A recent study illustrated how out of step this decision is with other major industrialized countries. Of the 22 high-income countries in the Organization for Economic Co-operation and Development (OECD) apart from Canada, more than 80 per cent are implementing some form of increase to the age of eligibility for public retirement programs.

Of those 18 countries enacting changes, almost 60 per cent are moving to 67 years of age. Ireland and the United Kingdom are increasing the age of eligibility to 68.

In addition, five countries are indexing their age of eligibility for public programs so it will automatically increase as life expectancy changes. Canada is one of only five countries that have decided to do nothing despite mounting evidence of the fiscal pressures coming down the pike due to an aging population.

The adverse consequences from an aging population – large deficits, mounting debt and slowing economic growth – can be mitigated if proactive actions are taken now.

Rather than ignore the problem or make matters worse, as the federal government’s policy reversal has done, it’s time for the federal and provincial governments to show leadership by preparing for the aging of our population.

Jason Clemens and Sasha Parvani are co-authors of a recent analysis of changes in the age of eligibility within the OECD published by the Fraser Institute.

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