The greying of Canada’s population is already reducing the economy’s capacity to grow without sparking inflation, a senior Bank of Canada official said Wednesday, adding that high debt loads underscore the need for households to alter their spending and saving patterns so they can adapt to longer life spans.
Speaking in Toronto, Jean Boivin – one of Governor Mark Carney’s five deputies – said the bank’s 2.2 per cent projection for the economy’s “potential growth” rate in 2014 would be 0.2 percentage point higher without the effects of people living longer while the share of working people shrinks. The drag from aging will subtract from potential output for the rest of this decade, he said, and in 20 years average incomes could be 20 per cent lower if families, businesses and governments don’t adjust.
“We can either accept a lower standard of living or we can be proactive and adjust,” Mr. Boivin said in remarks to the Economic Club of Canada. “There are only three options: we either find more work, greater productivity or higher savings.”
The economic impact from aging, he said, includes upward pressure on wages as there are fewer working-age people relative to those who are retired, less government revenue and higher public health-care costs and greater stress on individuals’ savings as people face longer post-work lives. In addition, Mr. Boivin warned, the less we adjust now, the worse the burden on future generations.
“The most important demographic changes are yet to come and these will bring about sweeping adjustments,” he said, pointing to projections that by 2031 a quarter of Canada’s population will be 65 or older. “Eventually, the landscape in which monetary policy is operating will be altered.”
To blunt the effects somewhat, he said, it is “crucial” for people to save more, and governments might consider policies to encourage people to work longer, as well as ensuring that “educated and skilled immigrants” can contribute “their full potential.” Businesses, meanwhile, must invest to boost their productivity, he said, echoing comments by Mr. Carney and other central bank officials.
“Making the best of the aging process is not only a question of fighting labour shortages, it is also a question of finding ways to do more with fewer workers,” he said. “As much as two-thirds of the average income loss due to the absence of an adjustment to aging – the 20 per cent figure I mentioned earlier – could be regained if productivity grew at a rate close to its average over the past 50 years, instead of the anemic rate experienced over the past decade.”
The comments by Mr. Boivin come less than a week after the Harper government’s budget signalled a plan to raise the eligibility age for Old Age Security to 67 from 65, starting in 2023, something Ottawa says is needed to keep public finances from being overwhelmed by the baby-boom generation. The proposal sparked a furor on Parliament Hill – with opposition parties vowing to reverse it – but it is part of a trend in which governments are trying to make pensions more sustainable as low interest rates and aging populations threaten retirement funds.
On Tuesday, for example, it emerged that Ontario’s teachers’ pension fund is $9.6-billion in the red.
The budget also raised the age of retirement for federal workers to 65 from 60.
Mr. Boivin did not comment directly on any of the budget’s measures, but said policy makers “can help foster the needed adjustments,” and “this is the objective of some of the measures put forward” in the fiscal plan.