Is Canada’s Retirement Plan Safe?

What to Do Now that Canada’s Getting Older

By Victoria Chau, Staff Writer
Design By Ryan Trinidad

To the dismay of some and the joy of others, we all inevitably age as we move through the many phases of life: we graduate, we find our first job, then our second and third, and eventually we retire.

But this year marks a significant phase that has the potential to affect us all as the baby boomers of Canada and the rest of the developed world begin to retire. Indeed, projections by Statistics Canada predict an increasingly older population, with a median age just less than 40 years old for 2010. So what will an aging population for Canada entail for everybody else?

With a large portion of Canada’s population on the cusp of retirement, our labour market is about to drastically change. One of the popular solutions to mitigate the problems that come with an aging population is to bring in newcomers from other countries. Immigrants are expected to help alleviate not only the worker shortage but help boost the fertility rate and contribute to the tax revenues needed to support a large aging baby boomer cohort.

More than Just Over the Hill
The saying goes that once you hit 40 you’ve gone over the hill; so what do we call our baby boomer cohort as they approach the bottom of the hill and move into retirement? The effects that a huge number of baby boomers about to retire in Canada will have on the economy are worrying everyone. Statistics Canada projects that just 16 years down the road, by 2026, the number of seniors will nearly double from 4.3 million to 8 million, bringing their share of the population up 8% to 21.2%.

It’s not just that Canada has a huge body of workers at the age of retirement, it’s also that once they have retired, the baby boomer generation is expected to live longer than their parents before them, due to an increased life expectancy. Instead of retiring at 65 and then living another good 10 or 15 years, baby boomers can expect to see past their 85th birthdays, causing a strain on the government that has to support them despite a shrinking tax base.

[pullquote]Once [Baby Boomers] begin to retire, Canada’s tax revenue base is going to shrink rapidly.[/pullquote]

When the baby boomers entered the workforce between the 1960s and the 1980s, this era was characterized by economic growth and prosperity. The sheer size of the numbers entering the workforce during this period boosted the Canadian economy through their wages and tax contributions. The governments during this time were able to use these funds to establish social securities such as health care, public pensions and lower post-secondary education costs.

However, once they begin to retire, Canada’s tax revenue base is going to shrink rapidly. Boomers who were once responsible for the main core of tax contributions will not be earning much money and as such will contribute less in the form of taxes. This shift in tax revenues will result in a cash-strapped government that is already losing an estimated $20 billion in taxes.

To combat this reduction in tax revenues, the simple and logical solution is for the Canadian government to come up with a way to collect more taxes. Collecting more taxes doesn’t necessarily mean increasing the tax rates—the government can offset the projected decrease in taxes if there is a stable or increasing amount of earnings from the workforce. One suggested solution to this debacle is to make up the difference by increasing the number of immigrant workers as well as their earnings and in that way boost taxes.

Immigration and a Shrinking Workforce
Media everywhere are hailing immigration as the solution to our aging population. Immigrants will not only fill the worker shortage, but they pay taxes and help the fertility rate by having children. Canada’s population saw a growth by 324,000 persons to some 32.6 million from July of 2005 to July of 2006. Of this increase, approximately two thirds of it can be contributed to immigration into Canada, for the most part in the form of skilled workers.

The general opinion of Canadians towards immigration tends to be positive, with as many as four out of five Canadians supporting immigration and believing it to be beneficial for the country. Yet, there are also criticisms of the current system, as it is said to allow immigrants with qualifications that do not match Canadian standards into the country as well. Others cite the backlogging of the system of over 800,000 applications and the resulting shortage of work for immigrants as the main flaws.

However, the same survey also mentions that while Canadians support immigration, there is little enthusiasm for increasing the number of immigrants into the country. It is not necessarily that Canadians want only a set number of immigrants coming into the country, but more of a desire to balance the influx of newcomers with the jobs available.

And therein lays the problem: to be able to match the amount of skilled immigrant workers coming into the country with the job vacancies available is impossible. Not only is the labour market constantly changing, but the process of applying and actually being able to immigrate to Canada takes anywhere from an estimated three to four years at times.

Overall, immigration has been a very strong force propelling Canada’s somewhat stagnant population growth. It has only been recently that Statistics Canada has identified a stabilization of Canada’s natural rate of population growth—excess births over deaths—at 3.3 per 1000, which has been attributed strongly to new immigrants. The data also gives credit to immigration for 60% of the population growth in Canada over the last decade, which has increased from 46.2% a decade earlier.

This seems to be strong evidence that although the points-based aspect of Canada’s immigration system should be maintained, and perhaps even improved, it is imperative to develop a much more efficient application-approving process.

Canada and the World
Compared to the rest of the developed world, Canada is neither doing very well nor very poorly. We seem to be hovering somewhere in the middle in terms of our demographic problem. The bulge in our demographic curve due to the large baby boomer cohort has been rising to the top of our population pyramid.

If you recall years back when you first began to learn how to draw population pyramids, you’ll remember that the males are placed on the left side and females are on the right side, corresponding to a specific age group from youngest to oldest.

As a result of the baby boomers, most countries in the developed world are ‘top heavy’ in terms of their population pyramids. Since the younger generations are graphed at the bottom of population pyramids, the shrinking birth rate in many countries has made this area much thinner than the middle and top areas that is representative of the currently working and older populations.

Canada’s population pyramid is not as top heavy as say Japan or Italy, who have very large portions of their population already retired. Yet, compared to countries such as the United States and Australia, we are not doing as well, since their populations are predominantly younger than ours.

The different shapes of the population pyramids of these developed countries are further evidenced by examining the fertility rates in each of these countries. The fertility rate is defined as the average number of children a woman is expected to have during her lifetime. Canada’s fertility rate is quite low at 1.6 children per woman, compared to the United States’ 2.1, Australia’s 1.8, and the United Kingdom’s 1.9 rates.

Back when the baby boomers were being born, Canada’s birth rate was on average 28 births per 1000 person. But the problem is that although so many boomers were born, they in turn did not have as many kids or grandchildren. By 1970, the birth rate had dropped to 17 births per 1000 people, and by 2000, Canada hovered around 11 births per 1000 persons.

There is not much to do to increase the fertility rate of a country, aside from providing incentives such as baby bonuses and tax reductions. Since it is difficult to change the lifestyle choice of an entire generation, Canada has been using immigrants to even out the shrinking population and workforce instead.

[pullquote]The reasons behind the preoccupation with an aging population come from the fear that we simply won’t be able to support them.[/pullquote]

Although there are problems in Canada’s immigration system—mainly due to inefficiencies—newcomers are one of the main reasons why Canada’s median age isn’t higher than it currently is. If we look south at the United States, we can see that their median age is younger, characterized by a population pyramid that strongly resembles a square.

This is in large due to their influxes of immigrants every year from more relaxed immigration policies. Countries in the European Union have stricter immigration laws, and it shows in their much older age profile.

What Is There To Fear?
The reasons behind the preoccupation with an aging population come from the fear that we simply won’t be able to support them. As the baby boomers retire, pension funds—public and private—are going to be depleted at a time when the tax base for Canada will be shrinking. A reduction in the workforce means a reduction in taxes to fund the many social maladies that will be popping up: health care and old age security for the most part.

To be blunt, senior citizens cost more. An older person costs five times as much in health care as a young adult. Does Canada have the funds to support a predominantly old population, especially in light of decreasing tax revenues? Probably not, but the degree to which immigration can fill this void remains to be seen.

Despite the optimism towards the effects of immigration on the aging population, there have been warnings that substantially higher influxes of immigrants each year into Canada will not be able to stop the statistical aging. But there remains widespread hope that immigration will help negate and even begin to reverse some of the effects of an older population on the economy and labour market.

ARB Team
Arbitrage Magazine
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