Friday, August 5, 2011

Pay more, get less, or work longer - these are likely scenarios

As our workforce ages, younger income-earners are being asked to carry more of the tax burden and cost of services such as health care

Seniors tend to cost governments more money than they pay in taxes

Seniors tend to cost governments more money than they pay in taxes

Photograph by: WAYNE HIEBERT, Postmedia files

Seniors tend to cost governments more money than they pay in taxes; younger workers are more apt to pay in more than they get back in services.
As the balance of these two groups changes in Canada - a burgeoning cohort of retirees, and a barely budging number of income-earners - something's got to give. What are the options?
The best choice, though it's unlikely to be sufficient to cover all of the new demand for government services, would be to simply get more productivity out of those who still go to work.
On one hand, there should be scope for this because, compared to other countries, we haven't been improving our productivity very well. On the other hand, our track record is discouraging because - you guessed it - compared to other countries, we haven't been improving our productivity very well.
Also, because productivity gains are tied to investment, our efforts won't be helped by the shrinking of Canada's capital pool as a growing number of seniors stop saving and start drawing down capital to fund retirement.
Another strategy would be to add new workers through immigration.
We're already doing that, and it works - to a point.
An analysis by Schroder Investment Management notes that Canada has the highest immigration rates in the developed world.
"This is why Canada's population will continue to grow, albeit slowly, until 2050, while many other developed countries will shrink," it says.
"By the 2020s, all population growth is expected to come from immigration, and many sectors of the economy (transport, primary industry, construction) will be dependent on foreign workers. In light of this, it seems unlikely that immigration could be raised to high enough levels to completely offset the effect of domestic population aging."
There are other options, of course, but all look less palatable.
One is that governments could simply give Canadians fewer benefits and services. For seniors, this would almost certainly mean cuts to pensions and further erosion of health care, the two biggies that strain government coffers.
Schroder notes that this is, in effect, what Canada already does to keep the growth of its health care costs at a lower rate than most other developed countries.
Health care cost control "has been largely achieved by limiting capacity," the analysis says. "The number of doctors per 1,000 residents has barely risen; the number of nurses and hospital beds has fallen, and Canada has lagged other OECD countries in its stock of medical technology.
"Capacity control does not appear to have adversely affected health outcomes, with life expectancy and infant mortality continuing to improve and outperform the U.S. However, continued demand growth has necessitated health care rationing and the user experience has deteriorated: Waiting lists for procedures are long and it is often difficult to find a family doctor."
Hands up if you're an older person who wants to see us go farther down this road.
A second strategy would be to tax working people more steeply to pay the freight for the growing numbers who don't go to work any more. That's essentially what the federal government did a decade ago when it raised the mandatory contribution rate for the Canada Pension Plan to 9.9 per cent from six per cent of eligible earnings. Hands up if you're a younger worker who wants to see your deductions go higher still.
Finally, it would help - but only to a point - if baby boomers were to put off retirement for a few more years. Governments have recently made this possible by banning mandatory retirement at 65, and misbehaving markets have made it necessary for at least some of us to stay on the job for a few years longer than we once planned. But the next logical policy step would be to add a stick to the carrot by delaying eligibility for pensions and seniors' benefits.
This would likely irk both sides of the generation gap - boomers who are eager to retire, and younger workers who itch to be promoted into the jobs the old guys vacate. Blog:

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