Grey Tsunami: Canada's Aging Population Means Fiscal Squeeze Coming, Study Says
There is no shortage of ominous characterizations for the demographic shift currently underway in Canada. Often described as a “grey wave” or a “grey tsunami,” the aging population is expected to contribute less but cost more as they move out of the labour force and drive up health care expenditures.
Now there’s another descriptor to add to the lexicon: Canada’s looming fiscal squeeze. That’s how McGill University economist Christopher Ragan sees the conundrum that he predicts could push governments perilously into debt unless they start making some tough choices.
“Every Canadian has heard that Canada has an aging population and there are financial challenges to this. But nobody has a sense of how big it is, what it really means, and how unavoidable it is,” he told The Huffington Post. “People think there are some easy solutions, but there aren’t.”
So how big is the challenge? That’s what Ragan attempted to gauge in a paper released Thursday by the Macdonald-Laurier Institute. His conclusion: “Either we cut spending or raise taxes,” he says. “There is nothing else.”
To illustrate this point, Ragan considers what the outcome would be if governments don’t adjust their fiscal policies, opting instead to finance the extra costs associated with the aging population through debt.
Based on current population projections and spending patterns, Ragan, who served as a visiting economist at the Department of Finance in 2009-2010, says a wedge between government expenditures and revenues would soon begin to open up. Taking into account the decline in labour force participation, and the increase in health care costs and elderly benefits, he calculates that by 2040, the gap between spending and revenues would amount to 4.2 per cent of annual GDP.
While that may not sound like a sizable chunk of change, consider this: 4.2 per cent of Canada’s current GDP is roughly $67 billion, or 10 per cent of the total federal budget. And, as Ragan points out, “By 2040, the dollar value of the fiscal squeeze will be much higher, because GDP will be much higher.”
Though some argue that concerns about rising health care costs for the elderly are overblown, a significant run-up in debt could have very real consequences. As Ragan points out, when Canada’s net debt-to-GDP ratio surpassed 90 per cent in the mid-1990s, Ottawa ushered in painful service cuts in a bid to appease international lenders. But if the current fiscal squeeze is financed through debt, he says that by 2040, the net debt-to-GDP ratio would be close to 100 per cent -- “which is where we were in 1995 when we thought we hit the debt wall.”
“I’m not saying that’s a likely outcome,” he says. “It’s a way to convince yourself we have to do something.”
To that end, Ragan explores a variety of potential policy fixes -- everything from raising the retirement age to hiking birth and immigration rates. But as he sees it, none of these “non-fiscal adjustments” can be depended upon to sufficiently stem the tide.
In the case of immigration, for instance, Ragan estimates that the annual rate would have to be nearly tripled -- and made highly targeted -- to offset the impact of the aging population.
“A 10 per cent increase [in the annual immigration rate] would be a bold policy move in Ottawa,” he says. “I just don’t see that particular change as something that somebody would spend a lot of political capital doing.”
So, however unpopular fiscal adjustment may be, Ragan says governments have no choice but to consider spending cuts or tax hikes.
“There are whole bunch of ways to cut spending, and a whole bunch of ways to cut taxes, but fundamentally there are [those] two sides to the ledger, and you’ve got to make it add up,” he says. “It’s one of those unfortunate truths.”
And as he points out, the sooner governments start factoring this into their financial planning, the better.
“The longer we delay the adjustment, the more debt we incur -- the more we are putting the burden of adjustment on … the young people of today,” he says.
But while the challenge Ragan outlines is significant, he maintains that his study is “not an argument for very quickly and very suddenly hacking spending or jacking up taxes.”
“The good news is, the process is starting now, but it’s starting gently,” he says. “So, start talking about it, start getting people on board, because we have to make some adjustments.”
5 ALARMING FACTS ABOUT CANADA'S AGING POPULATION
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First Posted: 11/03/11 02:55 PM ET Updated: 11/03/11 02:55 PM ET