Macdonald-Laurier Institute

Macdonald-Laurier Institute

February 07, 2012 06:02 ET

Macdonald-Laurier Institute/Solutions for an Aging Population: Avoiding the $67 Billion Deficit in Canada's Future

OTTAWA, ONTARIO--(Marketwire - Feb. 7, 2012) - Canada will soon face the full burden of an aging society. The greying and eventual retirement of the baby boomers will cause national income growth and tax revenues to slow and public programs such as health care and income support for seniors to become more costly. In a 2011 Macdonald-Laurier Institute (MLI) study, Professor Christopher Ragan calculates that slower economic growth coupled with higher spending on age-related programs and health care will result in an all-government deficit of 4.2 percent of GDP in 2040. A deficit of this magnitude today would be roughly $67 billion and would be in addition to deficits being run for any other reason. Aging is thus a huge challenge to responsible public finances in Canada in the coming decades.

To help Canadians understand the issues and the options for a reasoned response to these challenges, MLI is today releasing collected essays by five leading Canadian thinkers on how to solve Canada's looming demographic deficit: Professor Janice MacKinnon of University of Saskatchewan and former NDP Minister of Finance, Saskatchewan; William Watson of McGill University and the Financial Post; Professor Bev Dahlby of University of Alberta; Professor Ronald Kneebone of University of Calgary; and MLI Director of Research Jason Clemens. The common solutions identified by the experts as well as some of the unique recommendations are summarized below:

Health Care

The contributors all agreed that the status quo in Canada's health care system is not sustainable. Based on her extensive experience in fixing Saskatchewan's public finances, Professor MacKinnon offers a number of specific recommendations. She says, "Diverting service delivery away from the traditional hospital model, which is expensive, heavily unionized, and therefore difficult to manage efficiently, towards smaller clinics would save dollars and provide better patient care." She also recommends a number of other targeted strategies such as moving patients from emergency rooms to primary health clinics, changing the payments for doctors from fee-for-service to salaries, re-classifying some portion of health care spending so that it is a taxable benefit for individuals, and encouraging provinces to co-operate to limit salary increases for health care professionals.

Drawing inspiration from the successful welfare reform of the 1990s, Jason Clemens argues that the federal government needs first to reform the health transfers to the provinces more extensively than what has already been proposed by Finance Minister Jim Flaherty. In particular Clemens argues the federal government must allow the provinces greater flexibility and autonomy in the design, regulation, financing, and provision of health care while retaining the principles of universality and portability.

Labour Market Reforms

Among the authors there is broad support for measures to improve the incentives for Canadians to work. Four of the five contributors mentioned the need to reform Canada's Employment Insurance program to ensure it acted as a genuine insurance system against unplanned unemployment. In particular, several essayists argued for the need to eliminate seasonal employment biases and social programs now embedded in EI.

Other labour market reforms, such as a) improving access for skilled-immigrants and recognition of their credentials; and b) improving incentives for older workers to remain in the labour market post-age 65, are mentioned by individual contributors as ways to improve labour market participation.

Economic Growth and Productivity Improving Reforms

Several of the essays focus on improving the country's rate of economic and productivity growth. Eliminating inter-provincial trade barriers to improve economic efficiency is highlighted by several of the writers.

Ending supply management, eliminating regional development subsidies by the federal government, and encouraging greater trade through infrastructure development using public-private partnerships (P3s) are also mentioned.

Taxation

The essayists agree that Canadian governments needs to be smarter about tax policy. Reform would seek a better balance between the need to generate revenue while minimizing the costs of taxation to the economy in the form of disincentives for work effort, savings, investment, and entrepreneurship.

Two of the contributors argue for simplifying the tax code as a means both to improve economic growth and increase revenues without increasing tax rates. Professor Watson and MLI's Clemens both argue that tax expenditures should be thoroughly reviewed and substantially reduced. Such an action would result in higher revenues, although Clemens suggests that the revenues gained be earmarked for lower income tax rates, thus spurring both economic growth and tax revenues.

Unique Recommendations

There are two substantial recommendations offered by individual essayists that were not raised by other contributors. First, Professor MacKinnon urges a broad review of Aboriginal policy with a focus on education and training in order to afford First Nations people the proper skills and knowledge to participate more fully in the labour market. Second, Clemens argued for an increase in the age of eligibility for public retirement programs such as Old Age Security and the Canada Pension Plan. Such an increase could mitigate the cost pressures of the programs over time and could be implemented slowly over a two-decade period so as to avoid disruption in retirement planning. In addition, Clemens argues that such increases in the age of eligibility would reflect the marked increases in life expectancy that have not yet been reflected in retirement income programs. These recommendations are particularly timely given the recent indication by Ottawa that it is considering raising the age of eligibility for the OAS/GIS.

Jason Clemens concludes, "Canada can either proactively implement solutions to this coming problem or react, perhaps in crisis, when the full weight of the costs of an aging society fully confront our society. The contributors to this series have offered a series of practical, workable solutions to this coming fiscal deficit. At the very least, the problem and potential solutions should be discussed and debated."

The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government. www.macdonaldlaurier.ca

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