Parisa Mahboubi is a senior policy analyst at the C.D. Howe Institute.
We already know that Canada’s population aging will drag down government revenue and blow up social and health spending, but its long-term impact on fiscal sustainability and intergenerational fairness greatly depend on future government policies. While this demographic change substantially shifts the tax burden away from baby boomers and their children − the baby busters or Generation X – to the boomers’ grandchildren, achieving long-term fiscal sustainability can be possible.
In my recent study for the C.D. Howe Institute, I estimate average lifetime tax burdens for the current generations by birth cohort, and for an unborn future generation. Lifetime tax burdens are simply the total amount of taxes minus cash benefits and the value of public education and health services occurring, on average, over a person’s life.
Looking in the rear-view mirror, the results are startling. The projected lifetime tax burdens of the youngest Canadians – baby-boomers’ grandkids – are significantly higher than that of the baby boomers and their children. The lowest lifetime tax burdens are found for those born in the mid-1970s while those born from the mid-1950s to the 1990s also fare well. Readers curious to compare the average lifetime tax burden of their generation with that of others should consult our C.D. Howe Institute’s generational accounting calculator.
Now looking to the future, the lifetime fiscal burden imposed on an unborn future generation will be multiples higher than those carried by baby boomers and their children, but it is projected to be slightly lower than that of today’s newborns. This is a bit of good news, suggesting intergenerational equity in the future.
However, even this relative balance for the future is highly uncertain. Maintaining it will require the indefinite continuation of our planned high immigration rate for 2020 (nearly 1 per cent of Canada’s population), while interest rates and the growth of government spending will need to stay around or below economic growth per person.
This is a particularly ambitious challenge for our public health-care system, which gets harder to manage as the population ages. Failing to restrain the growth of health-care spending well below its long-term historical average per person of 3.3 per cent a year would lead to a large and unsustainable generational imbalance, further shifting the tax burden to future generations. Controlling health-care spending is, therefore, essential.
Furthermore, immigration can only be an effective way to ensure future fiscal sustainability and generational fairness if all immigrants participate fully in the labour market, which requires better settlement programs to assist those most in need of language and workplace skills.
But there is more governments can do. They should support policies that improve the labour market outcomes of youth and women, and encourage a longer working life.
Compared with other population age groups, youths have the highest unemployment rate. Furthermore, youths are increasingly more likely to have precarious employment and their full-time wages have declined over time. Work-integrated learning opportunities could help the youth population gain work experience that prospective employers require to hire them.
Despite improvements in their labour market outcomes over time, women still experience gaps in their earnings and labour force participation, requiring special policy attention. They are also more likely to have precarious work, particularly part-time employment. Household responsibilities and lack of affordable child care largely influence women with young children not to work or take a part-time position. A generous refundable tax credit for child-care expenses – instead of the current limited tax deduction – would be a practical policy tool to improve labour market outcomes among women.
Finally, longer working life for the baby boomers and their kids can ease the demographic transition. Increasing the retirement age by two years, from 65 to 67, would help to mitigate fiscal pressures on future generations.
We should all be concerned about future intergenerational fairness and sustainability. We want our kids and their kids to be able to afford the same standards of living in their adulthood and old age that we enjoy. Governments should keep restraining the growth of public health-care spending, and support policies that improve labour market outcomes for youth, women and immigrants, and encourage a longer working life.