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As Canadians get older, economy gets weaker Add to ...

Warnings about population aging have been playing in the background of policy debates for two generations now, ever since the decline in the birth rate in the late 1960’s made it inevitable.

But the issue has now moved from being a problem of the future to being one of the present. The share of the working-age population as a share of the total reached its peak in 2008, and even the most optimistic Statistics Canada projection shows a sharp decrease that will continue for at least the next 20 years.

The momentum that has been built into the age structure of the Canadian population means that there’s essentially nothing that can be done to stop this trend. Moreover, higher levels of immigration can have only marginal effects; see this CD Howe Institute study.

Per capita economic growth is easier to sustain if an ever-increasing share of the population is working. And that’s been the case for the past 30 or 40 years, as the baby boom aged into the work force and as more women chose to seek out paid work. Employment growth since 1976 has averaged 1.6 per cent a year, while the population grew at a rate of 1.1 per cent. That extra half a percentage point added roughly 0.3-0.4 percentage points to the average growth rate of real per capita income above what it would have been otherwise. Not only is this source of growth about to disappear, demographic aging is going to start being a negative contributor to economic growth: fewer workers mean less output.

One of the first places we’ll see the effects of population aging is its effect on the government budget balance. The federal government’s strategy relies heavily on growth in revenues from personal income taxes. Since the income tax structure is progressive, a 10 per cent increase in the personal income tax base increases PIT revenues by roughly 13 per cent, so PIT revenues will generally grow faster than the economy. It will be harder to maintain strong growth in personal income tax revenues as large numbers of people age out of the work force.

Higher output per worker would help compensate for a reduction in the number of workers, so productivity will become an increasingly important policy priority. But in the short and medium term, there is no quick fix.

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