Seniors and the Generation Spending Gap

Last Updated on January 24, 2019

At age 89, Larry South would have been forgiven if he had chosen to retire on a sunny beach in Florida. Instead, the former MPP from Kingston, Ont., recently embarked on a political battle to overhaul the municipal property tax system. South had been growing increasingly concerned that elderly homeowners on fixed incomes were struggling to cope with rising property taxes because of the soaring value of their homes, while at the same time he fretted that young workers, with their stagnant wages, were being shut out of the housing market. And so south proposed replacing property taxes with a tax equal to 4.5 per cent of a homeowner’s yearly household income. Doing so would make it easier for young workers to afford the cost of owning a home, while struggling seniors he believed would be the biggest beneficiaries.

But in his quest to change the tax system, he has come across an unlikely foe—his elderly friends. Like South, a former engineer who estimates he earns a retirement income that’s 30 to 40 per cent above the $86,000 household average in Kingston, many of his friends also pull in six-figure retirement incomes. Thanks to their high earnings, many would end up paying more in taxes under South’s plan than they do under the existing property tax system. Some, he says, resent the idea of paying more in tax than their younger, lower-income neighbours.

South’s struggle to reform the property tax system, and the resistance he’s found among his affluent elderly friends, underscores what has been a remarkable shift in the nature of wealth in Canada. Seniors have long been considered society’s most vulnerable citizens, fragile pensioners on fixed incomes in need of a financial helping hand from both government and agile younger workers. That was true decades ago, but not anymore. Thanks to stock market booms, economic growth, a soaring real estate market and a major expansion in both private and government pension plans, today’s seniors are arguably the wealthiest generation in history. The changing fortunes of the elderly have been both swift and profound. In the 1970s, nearly 40 per cent of Canadian seniors lived in poverty. Today it’s five per cent, half the poverty rate of the working-age population and one-third the rate of poverty among children.

Seniors have seen their wealth quadruple since 1984, according to a Bank of Montreal study released last month, far outpacing the growth of wealth among younger Canadians. The stunning transformation of the balance sheets of the elderly is thanks to a combination of financial discipline, public policy and good timing. Many of today’s seniors were the babies born in the aftermath of the Great Depression who learned to abhor debt and save aggressively. At the same time as they were socking away their hard-earned money, seniors got a major boost from the introduction of public benefits like Canada Pension Plan, Old Age Security and taxpayer-funded health care, which has helped push the poverty rate among elderly Canadians to one of the lowest in the Western world. In the 1980s, the typical senior was four times wealthier than the average 20-something.  

Today’s seniors are now on average nine times richer than their millennial grandchildren. In fact, many of the trends and policies that have worked in favour of seniors have come at the expense of younger generations.

That’s led some to warn of a coming generational war if public focus and resources aren’t shifted away from seniors to younger workers who are struggling far more than their parents ever did.

Seniors may eventually become the only thing that drives the economy. Canadians aged 75 and older make up less than seven per cent of the population, but control more than a third of all financial assets in the country­­—roughly $1 trillion worth of stocks, bonds, mutual funds and cash. That figure doesn’t even include the money locked inside their homes, which have more than quadrupled in value since the 1980s. Far from running out of money, many seniors actually continue to save well into their golden years.

The dramatic change in the fortunes of seniors, from the impoverished pensioners of yesterday to today’s wealthy retirees, is among the greatest policy success stories in Canadian history. Seniors’ incomes have jumped 40 per cent since 1984, says the Bank of Montreal, compared to 21 per cent for Baby Boomers and just three per cent for younger Canadians.

Despite their affluence, seniors remain disproportionately the beneficiaries of government subsidies and tax breaks. German think tank Bertelsmann Foundation has called Canada among the “least inter-generationally just” countries in the world, with a troubling large gap between the poverty rates of seniors and children and a strong “elderly bias” among government programs and tax systems.

Younger Canadians will inevitably be working longer than their parents and grandparents, given the age to qualify for CPP and OAS is rising from 65 to 67. More than 40 per cent of existing private sector defined pension plans, which have guaranteed a secure retirement for thousands of today’s retirees, are now largely closed off to new employees.

At the same time, the end of mandatory retirement means more and more seniors are working long into their golden years. The employment rate for seniors has more than doubled since 1988, from 6.7 per cent to 13.2 per cent. That’s fine for those who need the extra income, but there is evidence that many seniors aren’t working because they need the money. While the share of seniors in the workforce has gone up, the share of those working full-time has actually gone down over the past 25 years, suggesting that many seniors aren’t staying in their jobs longer, but are instead turning to part-time jobs in retirement. 

In 2013, the Municipal Retirees Organization Ontario studied public servants who continued working in retirement despite earning government pensions. More than half said their main motivation was to get out of the house. Only 16 per cent said they worked because they needed cash. It’s only a matter of time before generational conflicts over the workplace emerge in Canada as young people fight with their grandparents for the same jobs. When it comes to the tensions between young and old, however, there’s no greater battlefield than the housing market.

Incredibly, the age gap is growing even when it comes to housing. Despite low interest rates that have allowed legions of young Canadians to qualify for large mortgages, it’s seniors who have experienced one of the biggest increases in home ownership of any age group. In 1981, just 66 per cent of those over the age of 70 owned their homes. Today it’s 72 per cent. Meanwhile, over the same period, the home ownership rate has actually gone down slightly among Canadians in their 30s and 40s.

The fact that many young people are now digging themselves deeply into debt to buy a home is also engineering a massive transfer of wealth from young buyers to older sellers. Last year, University of Toronto geography professor Alan Walks mapped out a detailed geography of household wealth and debt in Canada. Walks found that cities with a high proportion of seniors also had higher levels of household debt. But when he looked closer, he found that it wasn’t the seniors who were deep in debt, but their younger neighbours, some of whom had debts worth more than 300 per cent of their incomes.

Eric Swanson knows that phenomenon all too well. Recently, he and his wife made an offer on a small house in Victoria, a popular destination for Canadian retirees who have been flocking to Vancouver Island from oil-rich Alberta. “There are a lot of retirees also looking for small houses on small lots, so it’s making it a bit more difficult,” says Swanson, 31-year-old executive director of Generation Squeeze. Growing up, Swanson’s parents, both working professionals, seemed to have little trouble buying large houses close to downtown. It’s a different world today. “There’s a big part of us that feels we’re assuming a lot more risk than we may be able to handle down the road compared to the experiences of our parents,” he says.

Others argue that the fact that many seniors have amassed sizable real estate wealth is less important than it seems since it means that plenty of seniors have become millionaires on paper, but with no way to cash out their housing wealth. Retirees who sell their suburban homes are often moving to the city, where they’re paying equally high prices for urban houses and condos with high maintenance fees, says Folda. “What we’ve seen really in the past decade is that the strategy of downsizing from grand houses to condominiums actually released very little liquidity to finance retirement,” she says.

But the fact that some seniors have trouble cashing in their real estate windfalls pales in comparison to the issues facing young workers trying to afford their first home, says Gibbins. “I’d much rather be in the situation of trying to squeeze some financial gain out of a property than be somebody just starting out with a young family and trying to buy a house in Vancouver.”

When it comes to housing, governments may be exacerbating the tensions between young and old. Several provinces offer property tax credits and subsidies that are only available to seniors. Earlier this year, Alberta launched a program that allows seniors to defer their property taxes until they sell their home or die—when the back taxes can then be taken out of their estate.

Such preferential treatment isn’t limited to property taxes. Politicians of all stripes compete to promise new programs and tax breaks for seniors, while programs that would benefit younger Canadians, such as tuition and day-care subsidies, are considered too expensive for cash-strapped governments. Even programs that have proven uncontroversial when introduced for seniors can spark a political battle when governments try to expand them to younger Canadians. The Harper Conservatives introduced pension income splitting for seniors back in 2007, and heard no one object. But income splitting became a political nightmare when the government tried to expand it to families with children. Just as the proposal was seen to be supporting rich couples at the expense of poor single moms, the Canadian Centre for Policy Alternatives estimates that income splitting for seniors has disproportionately benefited the wealthiest retirees—allowing them to qualify for an extra $250 million in Old Age Security payments next year.

It’s easy to blame seniors for stacking the deck in favour of their own generation. But in many ways, says Kershaw, it’s actually younger Canadians who are to blame for the lack of public support for their issues. Turnout among younger voters is notoriously low, so politicians naturally target their campaigns to the seniors who actually show up on election day. Many young Canadians also seem to support the idea of boosting spending on seniors—even at the expense of their own generation. Kershaw has polled Canadians, both young and old, asking them which age group should be the top priority for government. Not surprisingly, 70 per cent of seniors said politicians should focus on them. But he found that younger Canadians were just as likely to say governments should prioritize seniors as they were to say they should help their own generation. “Younger Canadians, like older Canadians, believe the stories about who is most vulnerable still in society,” says Kershaw. “These stories are increasingly outdated because they’re based on the big policy challenges of the past and a failure to recognize that the situation has really changed.”

However, institutions that have tried to shift spending away from older Canadians often face a fierce public outcry. The B.C. government sparked protests when it announced it was scrapping the seniors discount on its ferry service. Seniors complained bitterly earlier this summer when Mount Allison University in New Brunswick said it would start charging them to attend university alongside their tuition-paying grandchildren. Calgary Mayor Naheed Nenshi has said he’s opposed to a plan by the city to scrap a discount that allows low-income seniors to pay $15 a year for public transit even though younger low-income residents pay $44 a month. “I can still not understand why someone living on $1,500 a month should be treated different if they’re 55 or 65,” Calgary alderman Jim Stevenson told council during the vote.

Kershaw’s answer to the growing generational tensions is to try to turn Generation Squeeze into an organization for young Canadians that can rival the powerful seniors’ lobby group Carp (formerly the Canadian Association of Retired Persons). One idea the organization is taking directly from Carp is a membership card that would offer discounts on products and services, sort of a seniors discount for the under-45 set. Unlike Carp’s membership card, which offers deals on things like home insurance, fitness plans and travel discounts, a Generation Squeeze membership could include discounts on youth-friendly services like car-sharing programs and “mixer mortgages” that allow friends and roommates to co-own a house. By boosting the market clout of younger Canada, the organization hopes to force governments and corporations alike to start catering to their needs.

But for there to be any meaningful change, governments will likely need to rethink the perks they give to their elderly voters and instead tailor their programs to those who really need the help, regardless of age. Gibbins thinks wealthy seniors may need to start covering more of the cost of their own health care to free up government resources for struggling younger workers. Despite the inevitable political blowback, governments may also need to start subjecting sacred seniors’ benefits like pension income-splitting or CPP and OAS to a “means test”—a sliding scale based on income. Today, a couple can earn a combined retirement income of $140,000 and still qualify for full Old Age Security. They can earn as much $230,000 before those benefits are clawed back entirely. In a study last year, the Fraser Institute proposed that lowering the claw back threshold for OAS benefits to $102,000 for a couple (or $51,000 per person) would free up $730 million in federal cash every year.

The idea of also clawing back CPP for high-income retirees might seem inherently unfair given that those seniors paid into the system when they were working. But it wouldn’t be the first time affluent Canadians have paid more in taxes than they’ve received in benefits in order to support the less wealthy. “If we can just change that focus of vulnerability from the old to the young, I think we would really have accomplished something important,” says Gibbins

The battle over how cash-strapped governments should divvy up their limited resources between young and old is only likely to heat up as the biggest wave of Baby Boomers enters retirement over the next decade. But it’s a battle worth waging—unless we want today’s seniors to be the last generation of Canadians living in retirement bliss.

Source: Macleans