I'm getting older. So are you. This is normal. What's distinctly abnormal is that Canadians are living longer while having fewer children, which means seniors aged 65-plus are set to explode from just 13% of the population today to a startling 24% in 30 years. To put this in perspective, each senior citizen in the mid-1960s was “supported” by close to eight working-aged individuals, compared to roughly five today. In 2034, there will be fewer than three Canadians of working age for every senior. In fact, the present fertility rate in Canada is such that immigration will be the only thing preventing Canada's population from outright declining by the end of the decade. Prepare yourself for a sea of grey hair surging across the country–most noticeably in rural areas, but also in cities.
So what does this mean for Canada? As boomers swap status reports for Bermuda shorts, some serious economic issues will arise. The problem is that seniors don't participate in the workforce nearly to the same extent as younger people; while 83% of Canadians aged 35 to 44 have a job, just 7% of those aged 65-plus are employed. The fiscal implications are inescapable. On the one hand, government revenue will erode as workforce participation declines; on the other, expenditures will soar on programs like Old Age Security, the Canada Pension Plan and health care. As a result, governments are well advised to shepherd existing funds with the precognition that seemingly affordable spending promises made today may prove a hangman's noose for future generations. On this note, reducing the debt burden seems a judicious use of excess funds in that it decreases future obligations.
Economic growth can originate from two sources: more workers or more productivity. In Canada, it is thus not surprising that as the percentage of Canadians who work declines, the sustainable rate of economic growth will, too. Currently, the economy can maintain growth of roughly 3% a year after adjusting for inflation. An aging population means more sluggish growth in output per person, and markedly slower overall economic growth averaging just 1.9% annually by 2034, other things being equal. Businesses will feel the hit squarely on the chin, as their collective domestic profit growth is weighed downward and pension obligations rise. Investors will also feel the pain. Workers themselves should be largely insulated–they'll still see their wages growing at the usual pace and could even enjoy increased competition for their services, but they may be affected indirectly through potentially higher tax obligations.
Of course, our future isn't set in stone. There are a number of ways Canada can rise to the challenge of an aging population. Businesses will need to invest more in R&D, and delve more fully into high-value sectors that can yield substantial profit and productivity gains. Post-secondary institutions must do better attracting promising students and converting research into commercial opportunities. The Canadian government, beyond helping to facilitate the above recommendations, must work to better select and integrate immigrants into the workforce. It should also continue pushing for unhindered international capital and financial flows to share in the rocket-fuelled rise of developing nations. If these lofty goals prove manageable, Canada may achieve an enhanced rate of productivity growth that will go a long way toward offsetting the effects of an aging workforce. But as Europe and Japan have shown, this is easier said than done.
Eric Lascelles is an economist with TD Economics.