Canada in 2020 (Demographics): The Baby Boomers' $1-trillion legacy

Canada did a great job digging itself out of debt. Too bad the boomers are going to put us back into the red.

One of Canada’s greatest successes of the past decade must be shaking off the albatross of federal debt. It once seemed an insurmountable feat: during the mid-1990s, our national debt peaked at more than $562 billion, or more than 70% of GDP. The Fraser Institute, a conservative think-tank, ranked us among the world’s most indebted countries. (Among our G7 peers, only Italy fared worse.) But surpluses since then allowed successive finance ministers to pay it down, and a growing economy further eased the burden. Whereas the International Monetary Fund lectured us a decade ago to put our books in order, today it praises us for fiscal restraint.

Yet for reasons long understood, our victory over this budgetary Hydra may be fleeting. The oldest baby boomers will celebrate their 65th birthdays in 2011. As this bulge in population charts crosses the retirement line over the coming decades, the face of Canada’s demographics will be characterized by drooping eyelids and weather-beaten complexions. This spells a red-hued nightmare for finance ministers coast to coast, and that’s even before bills fall due for the recent recession.

Canada’s birth rate has fallen steadily since the 1950s. And while we’ve been relatively successful in attracting immigrants, there simply aren’t enough of them arriving to significantly alter our demographic landscape. So the “providing ratio” — that is, the number of working-aged Canadians relative to those over 65 — will fall. There are currently five working Canadians for every person above 65, but that’s expected to dwindle by half between now and 2040. As retirees begin outnumbering the young people replacing them in the workforce, our tax base will be eroded.

Meanwhile, government spending will rise. True, a greying population spends less on education and family benefits. But any such gains will be more than offset by health care, which becomes exponentially more expensive as citizens navigate their sunset years. Pension costs and old-age benefits will also mount. This will inevitably result in a fiscal squeeze. Since the provinces are largely responsible for health-care spending, their books will bend the most.

William Robson, president and CEO at the C. D. Howe Institute, attempted to quantify the looming demographic bill to both Ottawa and the provinces. In a report published in January, he arrived at a liability of $1.5 trillion over the next 50 years. Health, education, and elderly and child benefits presently run about 15% of GDP; Robson says they’ll increase to more than 19% by 2056. In terms of today’s economy, that would represent about $68 billion in additional spending each year, or $3,100 per worker. Canada is ill-prepared to absorb these costs, Robson says.

The timing of these demographic pressures is particularly unfortunate. At the end of fiscal 2008, our federal debt stood at $458 billion. A few short years ago, most forecasters predicted that thanks to continued surpluses, it would remain on a steady downward trend for years to come. But that was before the federal government pumped billions of dollars into the economy to combat the recession.

We’ll be paying for it even as we should be saving for the demographic bills that are coming. The federal government currently expects deficits until at least 2014?15; Dale Orr, an independent forecaster, says the feds put too much stock in their ability to contain growth of program spending. “Especially this government,” he adds. “Their record for being able to say no is very, very bad.” He expects the federal government won’t return to balanced budgets until 2017?18, by which point they will have racked up roughly $150 billion in additional debt. “Because of the recession, we’re going to hit 2014?15 with a level of debt way higher than what we would have expected.”

It still won’t be as bad as the burden we faced in the 1990s, Orr says. Yet tough decisions lie ahead. Bridging the demographic squeeze will likely require a combination of fiscal and non-fiscal measures, including policies to boost labour productivity to make up for the dwindling workforce. More budgetary discipline, of the sort that enabled us to reduce debt over the past decade, will be necessary. There will likely be a close examination of the soaring costs for health care and public pensions, although it’s hard to say where the axe would fall. However, it’s clear that many Canadians will have little choice but to work longer before retirement.

The most likely solution is the one nobody wants to talk about. Robson has written that “barring some wrenching changes in public finances,” the rising costs of Canada’s social programs will compel young Canadians to pay higher taxes than previous generations did. And the IMF’s chief economist, Olivier Blanchard, recently declared that higher taxes are “inevitable” in nearly all advanced economies to pay for the recent stimulus.

But there’s another alternative that’s less appealing still. Christopher Ragan, an economics professor at McGill University in Montreal, believes the demographic squeeze will be felt most between 2020 and 2040. (Ragan currently is a visiting economist at the federal finance department in Ottawa.) Before an audience in Kingston, Ont., Ragan recently hypothesized what would happen if Canada absorbed the coming squeeze through increased debt alone. He concluded that it would return us to debt levels reminiscent of the mid-1990s, when our anxieties were at their greatest. The situation could leave us vulnerable to rising interest rates and drain money that could be used for social spending. We would be squandering all the progress we’ve made — not to mention condemning future generations to the serfdom we sought so desperately to avoid ourselves.