Canada’s Aging Population and Its Implications

To: Minister of Finance, Government of Canada

Subject : Canada’s Aging Population and Its Implications

Date: November 22, 2013

From : Ghin Shoute

Issue:

Canada is heading for the decline of working-aging population, and it will impose a heavy burden on the economy. Since the proportion of the population that works is a key determinant of a country’s income level, its decline is likely to depress growth. It is important to make policy to mitigate the impact of aging population.

Background:

Rapid population ageing and a steady increase in human longevity worldwide represent one of the greatest social, economic and political transformations of our time. Like many other developed economies, Canada is facing a major demographic change as the baby boom generation begins to retire. The peak number of births occurred in 1991 and started down in 1992, so add 19 to that and you get 2012 and that’s the beginning of smaller-entering college and university classes. With fewer young people coming into the work force, we can expect unemployment rates to gradually come down over the next decade and we may have a labour market shortage around.

In the long run, unless productivity growth and labour market participation improve, population aging is expected to lead to lower growth in output and income and increase the possibility of labour shortages.

 

Population aging will also put upward pressure on public expenditures, age-related programs such as health care and elderly benefits.  Demand for health services and long-term care tend to increase with age. Older people tend to consume more health care as illnesses, chronic diseases and hospital visits become more frequent in old age.

Options:

Option one: Encourage people to work longer
From an economic point of view this is beneficial, this can lead to more tax revenue and more spending. The main problem with this policy is that it will be highly unpopular, especially from people who are nearing retirement age. People may say the government is going back on its word to provide pensions at a certain age. In fact, the government has pledged to increase retirement age to 67, but this will not come in for a long time and therefore does not tackle the short term debt.

Option Two: Increase income tax
If the government increase income tax, they will increase revenue to pay for the higher pension bill. However, higher income tax may lead to lower incentives for workers. In addition, pension spending does not increase productivity in the economy.

Option Three: Means tested pensions
Design policy to targeted   incomes level, and those who do not have a private pension. This helps to reduce inequality and reduce the total cost of pensions. However, it creates an incentive for people not to save and avoid getting a private pension. This is because if people made pension savings, they would receive little from the government. Therefore, in the long run it may not make the situation any better.
Governments could make it obligatory for firms to provide a private pension. Alternatively, they could give more generous tax breaks for private pensions. This is good for reducing the government’s pension burden. The concern is that some people may not have sufficient private pension provision when they retire.  

Analysis and Considerations:

It is imperative to ensure that an increasing number of Canadians have the necessary skills and the incentives to fully participate in the workforce. This will help mitigate the impact of population aging on Canada’s economy.

While Canada’s labour force participation rate is higher than in most other advanced countries, there is room for improvement. For example, Canadians aged 55 and over are less active in the labour market than in many other advanced countries and workforce participation is a challenge for a number of Canadians, including Aboriginal people, recent immigrants, less-skilled individuals, young people, and persons with disabilities.

Recommendation:

  • Remove impediments and provide incentives for older workers to extend their working lives
  • Counter stereotypical attitudes and promote active aging through public engagement
  • Balance policy disincentives to working later in life and providing flexibility in pension arrangements and phased retirement
  • Initiate services to increase the employability of older workers
  • Engage governments at provincial and municipal levels and private sectors to promote more age-adapted workplaces and flexible work arrangements
  • Improve long-term fiscal planning of the pension system
  • Consider an alternative financing mechanism to ensure equity, such as a universal pension financed from general revenues
  • Improve human resource policies to develop profession’s speciality mix that meets population’s needs
  • Refrain from further ad-hoc pension increases
  • Explore a small increase in contribution rates

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