Social Policy in Ontario

Stephen Harper’s long overdue talk about Canada’s pension crisis

Posted on February 1, 2012 in Social Security Debates

Source: National Post — Authors: Andrew Coyne

NationalPost.com – FullComment
Jan 30, 2012.    Andrew Coyne

At last, the hidden agenda, and not a moment too soon. Vague, indirect and overseas as it was, Stephen Harper’s Davos speech was perilously close to a vision statement, of a kind the prime minister has seldom made until now, and will henceforth have to make often.

It would be nice if he had shared with us his concerns about the ageing of the population, and the threat it poses to our long-run social and economic health, sometime before the last election, rather than joining in the all-party consensus that there was nothing wrong with Canada that could not be fixed with more and richer promises to the elderly.

Instead, we are now past the Tories’ sixth anniversary in power and the conversation, judging by the shocked reaction to the prime minister’s speech, has barely begun. Fine: let us at least hope it now continues. Because things are about to get real in a hurry, and it is long since time we did the same.

First, a little demographic arithmetic. Over the next 20 years, as each year’s litter of baby boomers reaches the traditional retirement age of 65, the proportion of the population drawing a pension will double, from roughly 12% now to 25%. That not only entails a sharp rise in costs — both for pensions and, more seriously, for health care, of which the old consume vastly more, proportionately, than the young — but a concomitant decline in numbers among those who will have to pay for them all: the working age population.

Over the last 50 years, Canada’s labour force grew by roughly 200%, fastest in the developed world. Over the next 50 years, it is projected to grow by little more than 10%. Indeed, over the next decade, as more people leave the work force than enter it, we are in for an absolute decline in numbers. Add it up, and the ratio of available workers to retirees, near 5 to 1 not long ago, is headed toward 2 to 1. Where once we worried about finding jobs for unemployed workers, in future our concern will be finding enough workers to fill the jobs — and to support us in our dotage.

How serious is the cost side of this conundrum? The president of the C. D. Howe Institute, Bill Robson, has projected the “net unfunded liability” implied by this unprecedented demographic shift — that is, promises to pay benefits out of public funds for which we have made no provision in taxes, “net” of any savings from having fewer children about — at about $2.8-trillion. With a T, ladies and gentlemen: about 160% of GDP. (That’s in addition to the $800-billion unfunded liability in the Canada Pension Plan and its Quebec counterpart — yes, they are pulling in enough each year to meet their current obligations, but that does not mean they are “fully funded,” the prime minister’s claims to the contrary — to say nothing of the $600-billion national debt.)

Put another way, Robson estimates the costs of making good on these promises at an additional seven percentage points of GDP — about $120-billion in today’s currency, or about as much as the federal government raises in personal income taxes (though in fact most of the burden would fall on the provinces). So no biggie: just a second personal income tax system, on top of the first, only with relatively fewer people to pay it. Assuming they agreed to, or even remained in the country.

Closing that gap will require policy changes on a number of fronts. We can try to offset the demographic arithmetic directly, whether through increased immigration, longer working lives, or even — to the extent policy can — encouraging people to have more children. And certainly there is much room for improvement in our anemic national productivity performance: just a half-a-percentage point faster growth in productivity, compounding year after year, would make the next generations wealthy enough to bear those projected higher costs without having to endure the implied rise in taxes.

But one part of the equation will have to be slowing the projected growth in spending, including (though not exclusively) programs for the elderly. And while health care costs are by far the greater share of the problem, that does not mean other programs should be off limits. Already the barricades are being mounted against any cuts to Old Age Security, for example, notwithstanding the projected tripling in the costs of the program (from $36-billion today to $108-billion in 2030) on the grounds that this amounts to an increase of “only” 0.73% of GDP. Because it will not solve the problem on its own, apparently it should not be called on to solve it even in part.

You can go a long way with that kind of reasoning. The same objection, after all, might be offered with respect to any proposed remedy. As each cannot solve the problem on its own, so none of them will solve it, in combination. Because nothing can be done, nothing should be done; because nothing should be done, nothing need be done.

That way lies madness. We have a lot of work to do. Reining in the costs of OAS is as good a place as any to start.

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Tags: budget, economy, ideology, pensions, standard of living, tax

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