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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The Bank of Canada’s governor Stephen Poloz said that he expects Canada’s economy to overcome the setback caused by the plunge in oil prices and return to full capacity by the end of 2016.
According to Poloz, last year saw a large number of job losses in the Canadian oil sector due to the drop in the price of Brent crude oil from $100 to below $50. As a result, manufacturers of equipment for the oil industry were adversely affected, and housing and consumer expenditure experienced slower growth.
Poloz says that based on the recent figures that were released on May 29, Canada’s output in the first quarter has been “basically flat”. However, he predicts that following the January interest rate cut and the low value of Canadian dollar, the second quarter of this year would see the economy “rebound partially.”
Poloz also expressed optimism that the economy would be “back on track to reach full capacity around the end of 2016”.
However, Poloz has warned that the effects of oil price shock may take years to fade away. “The implications for income and investment (of low oil prices), and the adjustments they’re causing across sectors and regions, may take years to work themselves out.”
Revised data released by Statistics Canada shows that Canada’s economy created a net of 41,700 jobs in July, far more than expectations of market analysts.
Below are reactions from Canada’s Bay Street:
Paul Ferley, Assistant Chief Economist at Royal Bank of Canada:
“A totally different story here … with the revision, suggesting a totally different picture in terms of the employment conditions in July, the very strong overall increase.”
“However year to date, the gains in employment are still fairly modest. Going forward hopefully we will see sustained increases, but at the moment certainly these revised July numbers, it’s showing a more encouraging picture, though we are not out of the woods yet.”
“Expectations were that that number was going to be a bit stronger, but this was above expectation, and with that I think it should provide a bit more of a lift for the (Canadian dollar).”
Sal Guatieri, Senior Economist at BMO Capital Markets:
“A pretty good number. A lot better than the market was anticipating. The loonie is up at least a quarter cent stronger.”
“The headline number’s double the initial consensus, expectations for the July employment gains … It was all in the private sector – 55,000 increase. The only fly in the ointment is the drop in full-time employment, but that’s a lot less than was initially reported.”
“Unemployment rate is down at 7%. So overall, this does suggest that Canada’s labor market is improving after hitting a soft patch in the first half of the year. That’s now reflecting stronger economic growth. We think GDP grew at a 3% rate in the second quarter, led by a resurgence in exports.”
“It likely indicates that the trend toward slower job growth has stopped and employment is now turning up, but again it’s just one report, so I don’t think the Bank of Canada will take a lot from the news. If we see consecutive gains in employment certainly along this order, that would change the tone at the Bank of Canada. But we would need a few more months of data to confirm that the labor market is strengthening.”
Camilla Sutton, Chief Currency Strategist at Scotiabank:
“It doesn’t change the fact that we’ve only had modest job gains in Canada this year … The quality of the jobs probably isn’t as strong as you’d like to see because they’re so heavily weighted towards part-time. However, job gains are good, and an unemployment rate that is falling with a stable participation rate is also encouraging.”
“You combine in manufacturing sales which was not only stronger than expected but the second upside surprise and last month’s was also revised slightly higher. So that too is fairly encouraging in terms of what’s transpired in the domestic economy.”
Attorney Colin Singer Commentary:
Recent developments seem to be dovetailing the rebounding US labour market. Canadian employers in the skilled trades are expressing increasing concerns about labour shortages. This is especially the case in Alberta, Saskatchewan and British Columbia. It favours those interested in applying for a Canada work permit or Canadian permanent residence (Alberta immigration, Saskatchewan immigration and British Columbia immigration programs).
Source: Financial Post