Posthaste: More old Canadians and fewer working-age people is a $2 trillion time bomb

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Canada’s population is aging and that could spell financial trouble for the provinces, adding up to a $2 trillion budget liability as the rising number of seniors outpaces that of working-age people, a new report warns.

The report by think tank C.D. Howe Institute projects that over the next four decades the ratio of older people to younger workers will continue to grow, straining provincial budgets as health-care costs rise against “shrinking” revenue from income taxes.

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Authors William Robson and Parisa Mahboubi estimate that there are currently fewer than one senior for every three potential workers in Canada. Looking ahead to the end of the 45-year survey, which started in 2022 and ends in 2067, the pair project the ratio will tighten to one senior for every two workers — even accounting for “relatively high immigration.” Robson and Mahboubi chose a 45-year period because that is the average amount of time people in Canada are expected to live past the current average age of all Canadians.

Given the increasing number of people over age 65, the authors also project that health-care services as a share of gross domestic product (GDP) will rise to 10 per cent in 2043 from 7.6 per cent in 2022, and 12.7 per cent by the end of the survey period.

“Canada is facing a looming geriatric crunch, where the rapid growth of the aging population risks overwhelming provincial budgets,” Robson said in the report.

Some provinces will feel the health-care hit harder than others based on their demographics.

For example, health care services are projected to represent 20.5 per cent of Nova Scotia’s GDP in 2067, versus 11.6 per cent in 2022, while in Saskatchewan the estimate is 9.2 per cent by 2067. Canada’s more populous provinces are also expected to see health care’s share of GDP swell. In British Columbia it will ramp up to 13.5 per cent of GDP by 2067 compared with 7.7 per cent in 2022; 12.6 per cent in Ontario against 7.7 per cent; and 15.2 per cent in Quebec compared with 9.3 per cent two years ago.

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The report goes on to say this could have severe consequences for tax rates.

For example, it estimates the tax rate would need to rise by 56 per cent in Nova Scotia to meet the increased health care costs, along with other demographically sensitive public services including education, elderly and family benefits. In B.C., the tax rate would need to go up 43 per cent; and 34 per cent in Ontario and in Quebec.

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In Ontario’s case, the authors estimate that taxes would need to increase $723 billion, with most of that going toward health care services.

“The comparison between current and potential future tax rates is salient because most discussion of health care and other public programs by governments emphasizes maintaining them — perhaps enhancing, but certainly not cutting,” Robson and Mahboubi said. “Yet explicit commitments to raise taxes to pay for them are rare … because meeting these commitments will require governments to raise taxes over time, a fact they rarely communicate to voters.”

The authors present some suggestions to mitigate the looming budget hole, including federal government policies to try to increase productivity so that “slower growth in the workforce does not translate straightforwardly into slower growth in GDP and tax revenues.”

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They also call for tax changes including shifting from income taxes to “less distorting” consumption taxes, liberalizing interprovincial and international trade and skills-matching in the labour market, and developing measures to encourage Canadians to work longer.

The authors say that a consumption tax would provide a more “robust” tax base than one based on income, as people continue to consume regardless of their age.

“Demographic change will stress the budgets of Canada’s provinces and territories in the decades ahead. The projected growth of health care and other demographically sensitive spending represents an implicit liability much larger than provincial debts — which themselves are, as they ought to be, sources of concern,” the authors said.

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The U.S. economy grew at a slightly stronger pace in the second quarter than initially reported after an upward revision to consumer spending that more than offset weaker activity in other categories.

Gross domestic product (GDP) rose at a three per cent annualized rate during the April-June period, up from the previous estimate of 2.8 per cent, according to Bureau of Economic Analysis (BEA) figures published Thursday. The economy’s main growth engine — personal spending — advanced 2.9 per cent, versus the prior estimate of 2.3 per cent.

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Read the full story here.

• The Department of Finance Canada publishes financial results for June 2024
• Today’s data: Canada GDP for the month of June and for the second quarter; U.S. personal consumer expenditure price index for July, the United States Federal Reserve’s preferred measure of inflation
• Earnings: Laurentian Bank of Canada and Canadian Western Bank

Traditional financial planning models are designed to build portfolios that will fund a 30-plus-year retirement after age 65. But what do you do if your goals don’t align with that model? That’s the question of one Manitoba couple who want to retire in their 50s. Find out here how they can reach their goal.

FP Answers

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line at [email protected] with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers led by Julie Cazzin or one of our columnists can give it a shot.

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Read them here 

Today’s Posthaste was written by Gigi Suhanic, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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