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An Ageing Country

On a recent episode of Radio Freethinker we talked about issues surrounding overpopulation and aging populations. Because of time constraints I was unable to fully discuss the economic and political issues facing Canada and other countries that are facing rapidly ageing populations. I’ll use this blog post to better explain some of these issues.

I recently read an article in the Globe & Mail about the non-partisan Parliamentary Budget Office releasing a report skeptical of the Conservative Government’s belief that they can easily return to fiscal responsibility without massive changed to taxation or spending. What the report ultimately argues is that the effects of Canada’s aging population are being ignored by the official reports coming from the government. According to the low estimate of the PBO, Canada will reach a federal debt to GDP ratio of  200% by roughly 2070 as opposed to the official estimate of maxing out at 32.1% in 2011 and then falling. These two reports paint very different futures for Canada’s fiscal policy, and I want to explain some of the economic issues that the official report seems to ignore.

The primary economic issue that arises from shifting population demographics is a shifting dependency ratio. In general, the dependency ratio is the ratio of the working age population to children and those over 65. This way of measuring isn’t perfect, as some people over 65 are still employed, and some people of prime working age are not, and are dependent on others, but overall it provides a general approximation of the actual ratio.

According to the PBO report( which uses a dependency ratio that ignores children, which exaggerates the effect somewhat), as of 2008, Canada has a 5 to 1 dependency ratio. This means that there are currently 5 working age Canadians for every Canadian 65 and older. If we assume that working age Canadians and retired Canadians have roughly an equal standard of living (measured in dollars spent by them, or for them, a year), then it logically follows that each working Canadian has to give up 20% of their production in order for each retired Canadian to have an equal standard of living. The PBO report also projects that by 2033 this ratio will be 2.5 to 1. This now means that every working age Canadian will have to give up 40% of their production in order to maintain equal standards of living for retired Canadians.

Assuming we don’t have unexpected technological increases, or higher than usual investment, this will mean that the average standard of living in Canada will stay fairly constant or at the very least grow little. Increases in productivity will be partly offset by a labour market decreasing faster than total population.

On top of this basic economic problem, there is also the political problem of how this will be payed for. If senior care is largely payed for by government then this will mean that the government will have to raise taxes are strongly cut back in other areas. The political ramifications of this will likely be immense, as people don’t generally like rising taxes, especially if the benefits go to other groups. If senior care is largely payed for by savings from seniors themselves (which is likely no longer a possibility, as baby boomers are expecting the government to provide their health care as well as other benefits), then their decreased consumption in the past would have caused increased investment which would increase future productivity. This would help offset the effect of a lower dependency ratio discussed earlier.

The PBO report focuses on the consequences which affect the federal budget, but a large part of social program spending is done by provinces. About 80% of health care costs are payed for by the provinces and territories. Health care costs are also disproportionately high towards those 65 and older. In British Columbia, the cost in care per year is 4 times higher for those 80 and over compared to those aged 1 to 64. As the number of people 65 and older increases, health care costs will rise dramatically.

Whether Canadians like it or not, we will soon be facing large economic issues, and political decisions will decide who pays. Will retired people face lower than expected standards of living so that workers can make more? Or will workers give up some of their consumption in order to better provide for retired Canadians?

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