canada demographical challenges

8/7/2019 Canada Demographical challenges

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Canada's Demographic Challenge

Introduction

Population aging is a worldwide phenomenon, but over the next 25 years Canada is expected toexperience one of the largest increases in the ratio of the elderly to the working-age populationamong Group of Seven (G-7) countries. This trend presents an important challenge to the

continued improvement of living standards and to the sustainability of social programs in Canadain the decades to come.

With the reduction of the public debt burden over the last 10 years and the 1997 reforms to the

Canada Pension Plan, Canada is better positioned than most other G-7 countries to cope withemerging demographic pressures. However, further reductions in the debt burden are required to

increase Canadas flexibility to address future demands on Canadas universal public pensionand health care systems. As well, with pressures on the health care system already being

significant, it will be increasingly important for governments to continue with health carereforms and to support gross domestic product (GDP) growththe source of societys capacity

to pay for public services.

However, sustaining growth in GDP per capitathe most commonly used measure of the

average standard of livingwill become more challenging as the population ages. This isbecause the share of the population that is working is projected to start to decline after 2010 as

the baby boom generation enters retirement age. This will exert downward pressure on thegrowth of living standards. To help partially counter the impact of aging, it will be important to

take steps to facilitate the full integration of new immigrants and Aboriginal people into thelabour market and ensure that older Canadians who want to continue to participate in the labour

market do not face undue institutional or financial disincentives to do so.

Nevertheless, continued improvements in the living standards of Canadians will have to relyincreasingly on productivity growth. Therefore, to increase living standards, Canada must

continue to invest in the drivers of productivity growth: human capital, physical capital andinnovation. Building on a sound fiscal foundation, the role of the Government is to enhance and

strengthen policies that encourage all Canadians to invest in these drivers of growth.


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Population aging will be a key challenge facing the Canadian economy over the

coming decades

y Population aging results from a decline in fertility rates following the baby boom and thecontinuing rise in life expectancy observed over the last century.

[1]

y In Canada, over the last 30 years the ratio of the elderly (65+) to the 15-64 populationincreased by only 6 percentage points. In the next 25 years this ratio is expected to doublefrom its current level to almost 40 per cent, as the baby boom generation enters

retirement age.y Currently there are more than five people of working age (15-64) for every person of

retirement age (65+). Within the next 15 years, this ratio is projected to rise to four toone, and by 2050, it is expected to be less than 2.5 to one.


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Population aging is a worldwide phenomenon that will affect all G-7 countries

y Currently Canadas ratio of the elderly population to the 15-64 population is the secondlowest among G-7 countries, just ahead of the U.S. However, this is expected to changeover the next 25 years.

y Indeed, Canadas ratio of elderly to the 15-64 population is projected to increase by 20percentage points by 2030 to almost 40 per cent, increasing the gap with the U.S.

Canadas elderly ratio is projected to move slightly above the European average, but it is

still expected to be lower than that of larger continental European countries and Japan.y Beyond 2030 the increase in Canadas ratio of elderly to the 15-64 population is expected

to taper off, increasing by about 5 percentage points over a period of 20 years.

y In comparison, Japans ratio of elderly to the 15-64 population is projected to increase byan additional 20 percentage points from 2030 to 2050, while that of Europe is expected to

increase by 12 percentage points.


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However, Canada will experience one of the largest increases in the ratio of the

elderly to the 15-64 population over the next 25 years

y Over the next 25 years Canada is projected to experience one of the largest increases inthe ratio of elderly to the 15-64 population (20 percentage points) among G-7 countriessecond only to Japan.

y This mainly reflects a sharper decline in the fertility rate in Canada than in other G-7countries. Indeed, Canada went from having by far the highest fertility rate among G-7

countries in 1960 to falling within the average of G-7 countries in 1998.[2]y Only three other developed countries are expected to experience an increase of 20

percentage points or more in their ratio of elderly to the 15-64 population between 2005and 2030 (Switzerland, Japan and Finland).

y For Canada, as well as for other industrialized countries, this demographic transition willmake continued improvements in living standards and the sustainability of social

programs more challenging in decades to come.


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The reduction of the public debt burden since 1995 has put Canada in a better

position to face emerging demands on social programs

y Population aging will bring about increased demands on social programs, particularlyhealth care and public pensions. Canada has already taken significant steps to prepare for

these fiscal pressures.y The reduction in the ratio of public debt to GDP over the past 10 years at the federal and

provincial-territorial levels, together with the federal governments objective of furtherreducing its debt-to-GDP ratio to 25 per cent by 201415, are key elements in preparing

Canada for the fiscal challenges associated with population aging.y On a National Accounts basis, Canada went from having the second highest total

government debt-to-GDP ratio among G-7 countries in 1995 to the lowest since 2003.

y This impressive record led the International Monetary Fund (IMF) to conclude in its mostrecent assessment of Canadas economy that " the fiscal system was well placed to

cope with expected pressures from population aging compared with many other G-7countries"

[3]


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Lower debt charges mean more flexibility to deal with emerging

demographic spending pressures

y The reduction of the public debt burden and the decline in interest rates, which in partresult from governments greater fiscal credibility, mean that a smaller share of

government revenues go to paying interest on public debt. Hence, more of whatgovernments collect in revenue is and will continue to be available to fund social

programs, including age-related ones.y Expressed as a percentage of GDP, federal-provincial-territorial debt charges have been

reduced by almost half: from 8.6 per cent in 199596 to 4.7 per cent in 200304.y Keeping the debt burden on a steady downward track will therefore afford additional

flexibility in meeting emerging demographic pressures.


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Canadas retirement income system is on solid ground

y Canadas retirement income system is based on three pillars:y The Old Age Security and Guaranteed Income Supplement (OAS/GIS) programs, funded

through general federal revenues, provide a basic minimum income guarantee for seniors.

y The Canada Pension Plan (CPP) and Quebec Pension Plan (QPP), funded through payrollcontributions, ensure a basic level of earnings replacement in retirement for workingCanadians.

y Private tax-assisted retirement savings in registered retirement savings plans (RRSPs) andregistered pension plans (RPPs) help and encourage Canadians to save for retirement tosupplement their public pensions.

y According to the 21stActuarial Report on the Canada Pension Plan released in 2004 andthe IMF,

[4]the 1997 reforms have ensured the sustainability of the CPP for at least the

next 75 years. Canada is one of very few countries with an actuarially sound public

pension plan.

y The Government has also increased and indexed RPP and RRSP limits in Budget 2005.y By achieving balanced budgets and reducing the debt-to-GDP ratio, the Government has

increased its flexibility to deal with the pressures aging will exert on the OAS and GIS

programs.


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Population aging will exert significant pressure on government spending,

particularly on health care

y Population aging will exert significant upward pressure on some age-related governmentexpenditures such as universal public pensions and particularly health care.

y The estimated impact of population aging on government health care spending over thelong term can be illustrated by overlaying existing age-specific expenditure patterns ontofuture demographic projections.[5] Using this approach, changes in the

demographic composition of the population are expected to increase government healthcare expenditures to 11.2 per cent of GDP by 2050, up from 7.1 per cent in 2004.

y As is the case in any projection, there is considerable uncertainty surrounding theseestimates. That said, these projections provide an indication of the magnitude of long-

term government health care spending pressures arising from aging.


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but health care spending pressures may not stem from aging alone

y Population aging will put significant pressure on government expenditures, but thesepressures may not stem from aging alone.

y Over the last 25 years, government health care spending as a share of GDP has increasedby close to 2 percentage points to reach 7.1 per cent in 2004. This increase reflects thegrowing availability of health care technology and treatments, along with rising costs of

certain health care services. It also reflects Canadians growing income and increased

willingness to spend more on health.y Going forward, it will be important to continue with reforms to the health care system to

ensure both the quality of care and the efficient allocation of health care dollars.

y Keeping Canadas debt-to-GDP ratio on a downward track will also be essential inhelping the Government meet future fiscal pressures.

y Finally, it will be important to foster strong economic growth in order to have thenecessary financial resources to support social programs, especially health care.


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Population aging will also tend to reduce economic growth and improvements in

living standards

y While it is crucial to sustain strong economic growth to prepare for age-related fiscalpressures, this in itself will pose a challenge because population aging will tend to reduceeconomic and living standards growth.

y GDP per person, the most commonly used measure of the average standard of living, isessentially driven by two factors: the share of the population that is workingthe

employment-to-population ratioand how much each employed person producesproductivity.

[6]

y While an increased share of the population working has been a key source of growth inliving standards in recent decades, this will not continue as the population ages.

y Therefore, from a public policy point of view, one of the main challenges surroundingpopulation aging will be to ensure sustained growth in living standards through

productivity growth over decades to come.


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The projected decline in the employment-to-population ratio will gradually

become a hindrance to growth in living standards beyond 2010

y Over the past 30 years, the employment-to-population ratio has risen because of the entryof the baby boom generation into the workforce and the greater labour force participationof women.

y The aging of Canadas population means that the composition of the labour force sourcepopulation (15 and over) will become increasingly older over time.

y Given the relatively lower labour force attachment of older workers, population aging isprojected to reduce the labour force participation rate, resulting in a gradual decline in the

employment-to-population ratio after 2010.[7]y The expected fall in the employment-to-population ratio could subtract, on average, as

much as 0.5 percentage points per year from real GDP per capita growth over the 20102030 period, exerting downward pressure on improvements in living standards.


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With the upcoming labour scarcity, there is a need to facilitate the integration of

immigrants into the labour market

y With the upcoming labour scarcity, it is imperative that all Canadians who are willingand able to work have the opportunity to do so.

y Immigrants, particularly those recently established in Canada, have typically had loweremployment rates than the rest of the population.

y While recent immigrants have made some progress between 1996 and 2001 relative toindividuals born in Canada, their employment rate in 2001 remained lower than that ofthe Canadian-born. Furthermore, relative to 1991, the employment rate gap between these

two groups has increased from 4.2 to 7.7 percentage points.y Immigrants will compose an increasing share of the working-age population in the

decades to come. It is therefore of crucial importance to facilitate their integration intothe labour market.

y As is the case with recent immigrants, Aboriginal people have traditionally had loweremployment rates than other Canadians. However, in contrast to recent immigrants, their

employment rate fell between 1996 and 2001. Continuing efforts to integrate Aboriginalpeople successfully into the labour market will be required for Canada to fulfill its

economic and social potential.


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and to ensure that older Canadians do not face disincentives to work

y In an aging society, Canada should also ensure that older individuals who wish tocontinue to take part in the labour market are able to do so.

y The participation rates of older Canadians have increased by almost 10 percentage pointssince 1996 and are now comparable to averages for members of the Organisation forEconomic Co-operation and Development (OECD).

y However, in some OECD countries, such as Japan, the U.S. and most Nordic countries,older people have markedly higher participation rates.

y Minimizing institutional and financial disincentives to work has the potential to raise thelabour force attachment of older Canadians.

[8]

y While increasing the labour force attachment of older workers, immigrants andAboriginal people will help Canada achieve its full economic and social potential, the

share of the Canadian population that is working will nevertheless soon begin to fall as aconsequence of population aging.

y Therefore, increasing productivity constitutes the main channel through which to ensuresustained growth in living standards.


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Improvements in the living standards of Canadians will increasingly have to rely

on productivity

y Since 1997 Canadas productivity growth has improved. The investment in and use ofinformation and communications technologies have been key drivers in this recentimproved productivity performance.

y But the productivity outlook is highly uncertain. On average, productivity growth was3 per cent between 1962 and 1973, declined to 1.2 per cent for the following two decades

and then increased again to 1.9 per cent between 1997 and 2003.y The Government has put in place a sound macroeconomic framework to support

productivity. Nevertheless, this does not guarantee that productivity growth will not slowdown in the futureas it did in the early 1970s.

[9]

y Given the growing importance of productivity for living standards, this soundmacroeconomic framework is now more important than ever to ensure that Canada takes

advantage of emerging technological opportunities and mitigates potential productivitygrowth slowdowns.

y And, over long periods, even a small increase in productivity growth has significantimplications for living standards and the financial sustainability of social programs.


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Canada must concentrate on the drivers of productivity growth

y To increase living standards, Canada must concentrate on the drivers of productivitygrowth: human capital, physical capital and innovation.

y Productivity can be improved directly through higher investment in human and physicalcapital. Human capital investment increases workers efficiency and effectiveness, whileproviding workers with additional and better equipment enables them to produce more

goods and services.y Larger investments in human and physical capital can also increase productivity

indirectly through increased innovation. Innovation provides the technology and

production practices to help improve the way workers do things, and results in greaterefficiency. Innovation also provides the opportunity for entirely new kinds of goods andservices to be produced.

y These drivers of productivity reinforce each other. Innovation produces new ideas thatmay be embedded in new physical capital, which in turn can be exploited by skilled

workers to increase productivity.


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Sound macroeconomic and structural policies support productivity growth

Policy Framework to Improve Productivity

Macroeconomic Policies

y Low and stable inflationy Prudent fiscal planning and

balanced budgets

y Declining debt-to-GDP ratio, withan objective of 25 per cent

Structural Policies

y Support for learningy Policies to encourage research and

developmenty A fair, efficient and competitive tax

structurey Efficient financial marketsy Efficient regulationy Policies to promote international and

internal trade and attract foreign investmenty A sound public infrastructurey Sound policies for a sustainable

environment

y Since most investments in the drivers of productivity growth are made by individuals andbusinesses, the role of the Government is to enhance and strengthen its policy frameworkto encourage all Canadians to invest more in these drivers.

y The first step in setting such a policy framework is to create macroeconomic conditionsthat are conducive to investment and productivity growth.

y Low and stable inflation and sound fiscal management keep interest rates low, reduceuncertainty and boost confidence. These in turn encourage investment in human and

physical capital and innovation, and therefore promote productivity growth.y While a sound macroeconomic policy is essential to a productivity-enhancing framework,

it must be complemented with structural policies that encourage and support investmentin the drivers of growth.

y The Government has taken steps in that direction in recent years and will continue to doso, but above all, the sound macroeconomic policy framework that has been put in place

must be preserved.

1 From the early 1940s to the early 1960s the Canadian fertility rate (average number of children

born to each woman aged 15 to 45) increased from 2.8 to 3.9. By the late 1970s the fertility ratehad fallen to 1.7, and estimates for 2004 show it has dropped further to around 1.5. The lifeexpectancy at birth of males and females has increased steadily over the past 60 years. The life

expectancy of females increased from about 66 years in the early 1940s to 79 years by the late1970s and to just over 82 years in 2004. Males have seen their life expectancy increase from

about 62 years in the early 1940s to 72 years by the late 1970s and to 78 years today. [Return]


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2Canadas fertility rate was 3.9 in 1960 and 1.5 in 1998 (as opposed to the corresponding

average figures of 2.8 and 1.6 for G-7 countries, and of 3.2 and 2.1 for the United States).

[Return]

3IMF, Canada: 2004 Article IV ConsultationStaff Report; Staff Statement; and Public

Information Notice on the Executive Board Discussion, p. 12. [Return]4IMF, Canada: 2004 Article IV ConsultationStaff Report; Staff Statement; and Public

Information Notice on the Executive Board Discussion, p. 12. [Return]

5This approach assumes that health expenditures for each age group are growing in line with

increases in GDP. Therefore, it is the change in the relative size of various age groups that drivesthe increases in health care expenditures as a proportion of GDP. [Return]

6Since productivity is best measured by real GDP per hour, changes in real GDP per capita also

depend on changes in hours per worker. For ease of presentation, however, we disregard the

hours-per-worker dimension in what follows. Hours per worker have been trending down for 25years. If this trend continues in coming decades, hours per worker would continue to exertdownward pressure on growth in GDP per capita and, hence, add to the pressures expected from

the reductions in the employment-to-population ratio. [Return]

7Underlying labour market assumptions up to 2010 are based on the average private sector

survey. After 2010 the employment projection is mainly based on a participation rate projection

that takes into account birth cohort effects, which are expected to somewhat increase theparticipation rates of older workers. Over the whole period demographic projections are from the

21st Actuarial Report on the Canada Pension Plan. [Return]

8

Increasing the labour force participation rate of older workers (persons aged 55 to 64) by 10percentage points would increase the overall employment-to-population ratio by approximately

1.5 percentage points on average over the projection period, without, however, changing the

overall trend of the ratio. [Return]

9Economic research suggests that aging in itself may have both positive and negative effects on

productivity growth. However, the net effect of aging on productivity growth is likely to be small

as compared to potential changes in the pace of technological progress.

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