Canada’s greying workforce will spell big fiscal trouble for future taxpayers, according to a new C.D. Howe Institute report. In “The Fiscal Implications of Canadians’ Working Longer,” authors William Robson, Colin Busby, and Aaron Jacobs find that demographic change is squeezing the budgets of Canadian governments—increasing the costs of public programs and eroding the tax base as the growth in traditional working-age people flatlines.
“In the next few decades, Canadian governments will face a fiscal squeeze: rising demand for public services on one side and slower growth of government revenues on the other—and the provinces get squeezed hardest,” says Robson.
Demographics are an important driver. Age-sensitive programs, primarily publicly funded healthcare for an aging population, are pushing up spending while the working-age population is declining and shrinking the tax base.
In the report, the authors estimate the future costs of demographically sensitive programs — including healthcare, seniors benefits, education, and child benefits — as well as the future growth of the tax base. With slow workforce growth holding the economy back, the total tab for these programs will rise from 15.5 percent of GDP today to 24.2 percent by 2066. In dollar terms, the present value of the unfunded liability for age-related social spending—amounts to $4.5 trillion.
If Canadians stayed in the workforce longer – and improvements in health and longevity suggest many will be willing and able to do so – their contributions to output and taxes would mitigate the fiscal squeeze, say the authors. How might policy changes encourage longer working life?
- First, the federal government should restore the previously scheduled increase in the normal age of OAS eligibility to age 67 – as advised by the government’s own Advisory Council on Economic Growth. Earlier receipt of a reduced amount should be an option, as with the Canada Pension Plan.
- Second, actuarial adjustments to benefits payable under OAS and the Canada Pension Plan need to stay up to date, to ensure that people are appropriately rewarded for continuing to work after the age when they could first commence receipt.
- Third, and more generally, other age-related rules also need updating. For example, restrictions on retirement saving after a given age and requirements to start drawing retirement income can affect decisions about when to retire. A key example is the requirement for RRSP savers to start drawing down their savings, now taxable at 71. Failing that, the trigger age should rise immediately and continue to rise with longevity.
The effect of longer work-life on the tax base will not eliminate the fiscal pressures demographic change will create for Canadian governments, note the authors. But those pressures are so large that policymakers should pursue a variety of avenues to mitigate them. “Policy changes to enable later retirement would reduce the unfunded liabilities future finance ministers will otherwise need to confront, and brighten the fiscal futures of Canadians,” says Busby.
Click here for full report: https://www.cdhowe.org/public-policy-research/fiscal-implications-canadians%E2%80%99-working-longer
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
SOURCE C.D. Howe Institute