Our aging population—a serious problem for Canada

It’s no secret that Canada’s population is aging—that is, the baby boomers are retiring with predictable consequences. However, the implications for both government finances and the economy are rarely the focus of public policy.

Canadians are living longer than they ever have. Sixty years ago, life expectancy (at birth) was only 68.3 years for men and 74.2 years for women. By 2018, life expectancy had increased at least another 10 years for both genders. And long-term projections suggest this trend of increasing life expectancy will continue into the future. For children born in 2068, life expectancy could reach 87.0 years for males and 89.0 years for females.

At the same time, however, Canadians are having fewer children than they did decades ago, helping slow population growth in the country. All indications point towards this continuing for the foreseeable future, notwithstanding proposed increases in government immigration targets.

Of course, increasing life expectancy coupled with slower population growth means seniors will comprise a greater share of Canada’s population in the future than they do today. In fact, the share of the population over 65 is projected to grow from about 18 per cent to nearly 26 per cent over the next five decades or so. The proportion of working age Canadians will also decline as the boomers retire.

As a consequence of our aging population, Canada will likely experience a declining labour force participation rate in the coming decades (the total labour force as a share of the working-age population). Specifically, the rate is projected to drop from 65.7 per cent in 2019 to 60.4 per cent in 2068. Combined with slower growth of the working-age population, this means a slower growing labour force, hurting economic growth.

Constrained economic growth could also mean Canada’s tax base grows relatively slow, given the existing tax structure and tax rates. Put differently, governments will likely experience slower revenue growth in the future.

An aging population will also put significant pressure on federal and provincial finances due to higher spending requirements for health care and programs such as Old Age Security. With constrained revenue growth and long-term increases in spending, the federal government is on track—absent a change in policy—to run deficits and accumulate debt for decades to come.

Rising interest rates or downgrades from rating agencies would bring further challenges for government finances, as future debt-interest costs might increase and claim even more tax revenue while debt accumulation compounds at a faster rate. Growing government debt also implies that future generations of Canadians will incur higher taxes and/or less access to services.

Canada’s aging population represents a growing problem for our economy and government finances that simply cannot be ignored. If Ottawa wants to mitigate the negative effects of our aging population, it must adopt pro-growth policies with an eye on fiscal sustainability.