Baby Boomers Retiring to Cause Imminent Economic Hardship for Canada

Last Updated on January 24, 2019

Canada’s baby boomers – the large demographic of people born in the two decades following the Second World War, have begun the transition into old age.  This will result in serious implications for the national economy, and future challenges for government policy and the well-being of its citizens.

This year, for the first time, Canada has more people over the age of 65 than under age 15. While the baby boomers will retire with overall better health, a longer life expectancy and more wealth than any generation preceding them, the move of such a large population group from producers in the economy to consumers and dependents, will create a gaping hole in Canada’s economy.

The biggest challenge for the Canadian economy is that the looming retirement of the boomer generation amounts to a giant halt on the labour force. In an aging population and with an increasing number of people exiting the workforce, economic growth eventually slows down.

Companies need to replace retiring workers.  The reality of replacing an aging workforce is not easy and takes time.   Recruiters will fare well in the years ahead.

Without significant adjustments, Canada could be headed for decades of slow economic growth, shrinking per capita incomes and eroding wealth. Governments could face increasing levels of deficits and tough choices about what kinds of health care and social supports we can afford, as a smaller pool of taxpayers must fund the rising costs of the growing numbers of seniors.

Some of the impact of Canada’s aging work force will be mitigated by its relatively large immigration program: About 260,000 new immigrants arrive in Canada each year, roughly double the country’s natural growth through births and deaths. However, the number of new retirees in Canada rose from 170,000 annually five years ago to nearly 250,000 today. Within a few years, we face retirement rates close to 400,000 annually. Immigration alone cannot be used to solve the aging work force problem.

The second key to counter the slowdown in Canada’s labour force is something that has already been happening: Increasing numbers of older workers staying in the workplace for longer than ever before. In the past decade, the number of Canadian workers over 65 has increased by over 140 per cent; the number of workers over 55 has surged 67 per cent, to more than 3.7 million. A key to keeping the labour market adequately supplied in the coming decade or so will be finding ways to keep the rising trend of seniors’ participation going.

Experts also agree that mature Western economies could overcome the growth problems headwinds from their aging demographics by stepping up innovation and productivity – using technological and efficiency advances, and investing in upgraded facilities and equipment, to expand the per-worker productive capacity.

The increasing numbers of retiring baby boomers are putting fiscal pressure on the government. The provinces in particular generally aren’t prepared for the impact that this will have, warns Don Drummond, a former senior federal Finance official and Toronto-Dominion Bank chief economist.

According to a recent study for the Centre for the Study of Living Standards, it was estimated that Canada’s economy will grow an average of 1.6 per cent a year from 2014 to 2038, well below the 2-per-cent pace experienced from 2000 to 2014.

This coincides with an equally unfavourable spending outlook. In nearly all provinces, spending growth is likely to outstrip revenues in every province except Manitoba and British Columbia.

The demographic forces are so powerful that governments must deal with the problem of rising health-care spending, either by raising taxes or curbing costs.

The C.D. Howe Institute has estimated the present cost of maintaining demographically sensitive government programs, such as health care, over the next 50 years. The total “implicit liability” is nearly $4.3-trillion, or $120,000 per person across Canada, with most of the burden – $107,000 – falling on the provinces.

The good news is that there are ways to counter the impending demographic time bomb. The most obvious way is to curb spending growth, raise taxes, or both. Bolstering the labour force, through increased immigration and keeping more seniors working, would prop up growth and the tax base.

Another potential solution for governments is the roughly $3-trillion kept by Canadians in registered retirement savings plans and employer-sponsored registered plans. Governments will tax these assets as they are withdrawn by retirees.

The biggest current debate about retirement planning is how well boomers themselves will be able to finance their retirement years beyond the minimum floor of support provided by government programs.

The decline of workplace pension plans means just 24 per cent of private sector workers are now covered by a plan, leaving most people on the hook to fund their own retirements. An era of low interest rates is not favourable, as investment returns on retirement savings have been low for years.

A private sector study earlier in 2015 by McKinsey & Co., suggested 83 per cent of Canadians will have enough to maintain their current lifestyle in retirement. McKinsey said those with low savings are most at risk of a decline in lifestyle, the mid- to high-income earners without workplace pension plans.

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