Demographic trends reveal our destiny and the future isn’t as rosy as we might expect
Too often lost in the daily national conversation on economic matters is an irresistible force that will define the decades before us: demographics. The lightning pace of news and debate and the instant dissemination of data that are the hallmarks of this century are unreservedly good things. But they have the effect of shortening timelines and horizons amongst the public and politicians.
Certainly, political leaders have not often been accused of putting long term interests ahead of shorter term expediency. But the current climate makes their instinctive short-termism worse. To combat the demographic reality we know with certainty is facing us, policy will have to catch up to what millions of individuals have privately concluded: a world predicated on the assumption of 20th century demographics can not begin to grapple with the challenges facing us in the 21st.
The starkest indicator of our ageing population is the dependency ratio: the ratio of non “working-age” people to those of “working age” — typically defined as those between the ages of 15 and 65. In 2008 it sat at its lowest point in the 140-year period between 1921 and 2061 at just over 0.4. Those between 15 and 65 today make almost 70 per cent of our population.
In the next 50 years, our population will age to a point where there will barely be one person of working age for every person not in that age band. This presents a brutally difficult challenge to policy makers, as spending on public pensions and health care skyrocket as our population gets older.
PLANNING FOR THE FUTURE
There are few areas of social science through which we can predict the future more accurately than demographics. The good news is that this allows us to plan for a future we know will be much greyer than today. The bad news is that we know with unusual precision how much it will cost, and that huge adjustments will be needed to pay for it.
After age 65, per capita health spending doubles every decade, reaching $8,500 at age 75 and $17,000 at age 85. With more than 4.7 million Canadians today aged 65 and over, and with that number projected to hit 10 million by 2040, soon enough the numbers become clear: at today’s level of wealth, benefits, and taxation there is no way we can afford the demographic tsunami on its way. So, we are confronted with a series of choices, neither of which are particularly well-suited to the context of decisions made on an electoral time cycle.
We could redefine what is meant by “retirement age.” Millions of Canadians have already done this, extending their working years well beyond what perhaps they had imagined a few decades ago. The notion of “Freedom 55” is in the bin for almost everyone, particularly as life expectancy stretches well into the 80s. Today’s savings rates and pension contributions are simply not sufficient to provide for a “retirement” that lasts thirty years. They were never meant to be. The 50-somethings I know are not much further — psychologically — from retirement than I am. They are in their peak earning years and not thinking of slowing down any time soon. To them, “Freedom 55” means soon the kids may move out of the house. Quitting work is a distant prospect.
FEWER BENEFITS, MORE TAXES?
We could also trim benefits. It is possible that today’s retirees are living in a golden age of benefits and that future generations of pensioners — myself included — will just have to get by on a less generous state pension or supplement it more generously with private savings. The federal government did just this when it upped the age of eligibility for Old Age Supplement to 67 from 65 earlier this year. That this relatively modest reduction in benefits, to be phased in over the next decade, caused the political storm that it did serves as warning to any government looking to save future tax dollars by trimming pensions. It’s not an easy sell.
Another option to confront the massive obligations we face in the coming decades would be to increase taxes, but again the political debate makes this very difficult. Left-wing politicians, many of whom are sincere in their knowledge that sometimes, some taxes must be raised, are paralyzed by fear of the attack ads they know will come from right-wingers should they dare consider increasing government revenues. Most Canadians, who in the preceding context can probably be considered non-wingers, would likely prefer a more intelligent treatment of these important issues. Amongst economists, bringing the GST back to its original seven per cent level is a popular choice. It’s not likely to happen soon.
Finally, and this is my favourite option, we could get so rich in the next three decades that everything preceding this sentence becomes moot. To a degree this will happen. Just by virtue of the sluggish economic growth into which we are currently locked we are likely to be much richer in 2040 than we are today. If we could eke out just another half-point of productivity growth per year between today and my own retirement party (probably not until sometime in the late 2040s) we would go a very long way to solving these problems.
As with all policy issues the ultimate solution will be a combination of all of these options: people will work longer; public benefits will not grow forever; some taxes will go up, and, more happily; we’ll get a lot richer. Governments now have to start the work of catching up to the millions of Canadians that have already come to this conclusion: demographics are destiny and the future ain’t what it used to be.
