Budget Likely to Ignore Impact of Aging Population 

By Chris Wattie, CTV.ca News

March 3, 2010

Canada

Baby boomers' incomes helped once helped chop away at the federal deficit, and they will be missed once they start vanishing from the tax rolls.

Most of the substance of Thursday's federal budget will centre on spending cuts and the growing deficit, but experts say the government is ignoring the demographic elephant in the room: the looming effect of an aging Canadian population on federal finances. 

"It's a little like seeing a great big glacier coming down the valley," says William Robson, analyst with the C.D. Howe Institute. "It doesn't seem particularly urgent because it isn't moving very quickly … but once it arrives it sure changes the landscape." 

The national fertility rate has fallen from a peak of 3.9 children per woman at the tail of the baby boom to 1.5 children per woman now. 

Meanwhile, life expectancy has risen to 80.7 years in 2006, from 58 years in 1926. By 2019, individuals over the age of 65 are expected to account for more than a quarter of the population; and by 2029, more than a third. 

Tina Kremmidas, chief economist for the Canadian Chamber of Commerce, says the recession and rising unemployment has diverted attention from the population shift those figures represent and the coming shortages in the labour market they will create. 

In a pre-budget report, entitled "Recession, Recovery and the Future Evolution of the Labour Market," she warns that Canada's aging population created shortages before the recession and those will resurface when the economy recovers. 

"Labour shortages are not a huge issue now, but as the recovery progresses they will return," she says. "Before the recession hit, 36 per cent of businesses in Canada reported some kind of labour shortage … that's only going to get worse." 

Robson says that this year represents the peak of Canada's percentage of 18 to 64 year olds -- the prime age group for the workforce. "This is the highest this age group has ever been and it's as high as it ever will be," he said. 

"It's all downhill after this year." 

Having such a large percentage of the population in the workforce, especially with the baby boomers in their prime wage and salary earning years, helped drive up government revenue in the late 1990s. That, in turn, helped eliminate the federal deficit. 

"Now we've hit the high point and we're going to fall down the other side a lot faster than we rose," says Robson. 

Yet Kremmidas does not expect such issues to be a major, or even minor theme of this year's federal budget. "There are some key structural problems that have to be addressed that haven't been addressed … and there's no guarantee that the budget will begin to address them." 

She says governments have so far been slow to react to the challenges posed by demographic changes in the workforce. "Governments, and not just the current government, tend to focus short term," she says. 

"Their focus is on winning the next election. This is a very long-term issue ... [and] governments need to think more long-term." 

With the birth rate falling, governments at every level need to start coming up with ways to expanding participation in the workforce by seniors, aboriginals, the disabled and immigrants, Kremmidas says. 

"We need to expand Canada's labour force if we want the Canadian economy to continue to grow." 

Sylvain Schetagne, of the Canadian Labour Congress, agrees that more needs to be done to address the problems caused by a slow in the growth of the labour force and the aging of our population. 

"Governments have to start doing something about this, not only at the federal level, but also at the provincial level," he says. "There's going to be some major challenges." 

He says the federal budget should recognize this by introducing measures to improve access to education and retraining and to better absorb immigrants into the workforce. But it must also work on improving pensions, which will be of greater importance every year that the percentage of Canadians hitting retirement age increases. 

"Their focus has been on balancing the books; balancing the books," he says. 

"Unfortunately that doesn't do much to address these problems." 

The parliamentary budget watchdog has already warned the government that it faces a battle with the provinces over health-care spending because of Canada's greying population. 

"The major demographic transition that is underway in Canada will strain governments' finances over the next several decades," states a report issued last week by Parliamentary Budget Officer Kevin Page. 

"Aging will move an increasing share of the population out of their prime working-age years and into their retirement years. With an older population, spending pressures in areas such as health care and elderly benefits are projected to increase. At the same time, slower labour force growth is projected to restrain growth in the economy, which will slow the growth of the general tax base." 

The report suggested the resulting strain on federal finances will be most pronounced in health care, as services for Canadian seniors account for a larger and larger share of federal spending. 

If transfer payments to the provinces to pay for this health-care are allowed to grow at their current rate, the federal government will have to raise taxes or cut spending by nearly $30 billion in the next budget to keep the deficit in check. 

In addition to health transfers, a number of other federal programs are expected to face cost pressures, including Old Age Security and the Guaranteed Income Supplement. 

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