A new commentary published by the C.D. Howe Institute is drawing attention to the fact that Canada’s rapidly aging population is going to strain public finances, both because departures from the workforce are going to dampen economic growth (less taxable activity), while at the same time an older population means increased spending on income supports and health care.  

“Rapid population aging will squeeze the fiscal positions of Canadian governments, with slower revenue growth on one side and the overall rising cost of demographically sensitive public programs on the other. Over the next four decades or so, they face an implicit liability of $2-trillion. There are ways to lessen the blow,” say authors of the report, Another Day Older and Deeper in Debt: The Fiscal Implications of Demographic Change for Ottawa and the Provinces.  

With projections showing the number of seniors growing considerably faster than the working-age population, they say the old-age dependency ratio – that is the ratio of those over 64 to those between the ages of 18 and 64 – rises from its current position about 30 per cent (fewer than one senior for every three potential workers) to 45 per cent (almost one senior for every two workers) by the end of the 45-year projected period, despite relatively high immigration, they say.  

“In provinces with the most subdued outlook for workforce growth, such as Newfoundland and Labrador, the deceleration in government revenues will be severe,” they write. To meet the healthcare demands of that population, for example, they estimate that the province would require an increase of two-thirds in provincial taxes on its residents.  

“In the case of Ontario, for example, the prospective increase in the aggregate tax rate needed to cover all these program outlays – which mainly reflects the rising cost of healthcare – over the next 45 years has a present value of $723-billion. In other words, to cover the additional 45-year cost of these programs, the province would need about $723-billion in assets yielding income  at the same rate as its long term bonds. This figure is about 70 per cent of Ontario’s GDP or about $48,000 per Ontarian – not far short of twice the level of Ontario’s net public debt.” 

Federal transfers 

They note that federal transfers are one potential response. “However, federal transfers blur accountability for taxes and program quality – and in this context also threaten to undermine the fiscal discipline Canadians need from provincial governments.” 

The common reaction – that provincial governments should turn to the less fiscally challenged federal government for transfers – is problematic, they add. “When citizens of a given province have concerns about their publicly-funded healthcare, for example, each level of government can – and often does – blame the other,” they write. “It would be more consistent with the principles of federalism if citizens in every province held their provincial government to account and if every province were more autonomous in funding and running its programs.” 

They add that while higher federal transfers will likely be a part of the government’s reaction to these pressures, they say the need for clear accountability means that they cannot be the only reaction.  

Mitigating intergenerational impact 

“One quite different approach to mitigating the intergenerational impact of rising healthcare costs would be to follow the lead of the late 1990s reforms to the Canada and Quebec Pension Plans, which converted them from pay-as-you-go plans, to plans in which a portion of premiums collected from people today prefunded their future needs,” the report suggests. “Prefunding does not make sense for all programs with threatened cost increases, but it can spread more fairly over time the needed tax increases for healthcare services that, like pensions, are related to age.”