More Seniors Than Babies: Eight Drivers Towards a New Tax Strategy

It’s an important cross-over: for the first time, Canada’s 65-year-olds have outnumbered children ages 0 to 14.

Seniors now represent 16.1% of Canada’s total population, and the young’uns account for 16.0% of the total. The boomers – those born between 1946 and 1965 – are the reason: just over 18% of them turned 65 by July 1, 2015. Looking forward, an increasingly ageing population will have some sobering effects on investment, business starts and government policy.

Stats Canada, who recently reported these numbers as of July 1, 2015, forecasts that the 65-year-olds will grow to 20.1% of the population just nine years from now, in 2024, while the share of children will remain relatively stable at 16.3%. 

According to the report, Canada and the US have the lowest proportion of people age 65 or older (16.1% and 15%, respectively). Conversely, the oldest population in the world resides in Japan where 26% of the total population is over 65, and 33% are over age 60. One of the effects of this phenomenon is that Japan’s population is expected to fall from 127.8 million in 2005 to 95.2 million by 2050, and this will have significant, longer-range effects on that economy.

Dramatic population shifts, like those we will see in this century, require economic forethought, particularly by the boomer and millennial generations, who have this problem in common. From a government services point of view, for example, child day care has long been an important issue, but increasingly so is “senior day care” as older generations move in their lifecycle from independence to dependence, all at the same time that there will be fewer taxpayers per senior.

From an economic point of view, the unemployment rate will go down as seniors retire; yet for employers this is not good news as a shortage of younger workers looms. Will population shifts shrink economic activity and, therefore, much-needed growth in tax revenues? The answer is a certain yes, and this will affect rising senior-related costs like OAS. This line item alone is expected to balloon from $46 Billion today to $109 Billion by 2040.

Over the years there has been some fascinating research on the issue. “Like it or not, our current economic and social organization depends on continued economic expansion,” said Paul S. Hewitt over thirteen years ago in January 2002, in a paper entitled, Depopulation and Ageing in Europe and Japan: The Hazardous Transition to a Labor Shortage Economy. This excellent study is worth the read, containing some astute, if alarming, observations, which I have summarized for you below:

1. The Effects of Ageing Recessions: "The most rapidly depopulating nations face the prospect of lengthy “ageing recessions,” characterized by a vicious cycle of falling demand, collapsing asset values, shrinking corporate profits, deteriorating household and financial institution balance sheets, weakening currencies, and soaring budget pressures."  (Sound familiar?)
2. Global Market Effects. "These stresses are sure to be transmitted to other countries through the global markets."
3. Domino Effects. "The fact that so many of the rich countries will experience ageing recession simultaneously suggests that the whole could be larger than the sum of the parts."
4. Effects on Consumerism. "The decline in national populations after 2010 will . . . [affect] consumer demand, asset values, corporate profits, and balance sheets . . ."
5. Effects on Business Start-ups. "Start-up companies will face greater risks in markets where population trends no longer enable new and existing enterprises to flourish in tandem. The prospect of overcapacity and stiff competition means that economy-wide profits and returns on investment will suffer."
6. What about Real Estate? "Collapsing real estate prices were instrumental in triggering Japan’s ongoing financial crisis, as well as the savings and loan meltdown that rocked U.S. financial markets in the late-1980s . . . Like the proverbial canary in the mineshaft, builders are hypersensitive to population decline."
7. Global Depression Next? "The disparate pension and economic crises of the major industrial nations (may) converge to create a global depression from which none of our welfare states will emerge intact."
8. Taxation and Economic Growth. It’s in the area of taxation and its effects on economic growth that Mr. Hewitt’s observations strike a chord at this time, as Canada listens to potential new approaches to taxation and deficit financing in the current election campaign. Here’s what he noted in his study:
   • There are risks in boosting tax rates. "While countries facing depopulation will need to dramatically boost their tax take in the coming years, they will face grave risks in the process. As [economic] growth rates slow, tax increases may prove counterproductive . . . efforts to boost tax rates could yield less, not more, revenues."
   • Productivity is Job #1. "Countries with shrinking labor supplies will need to achieve sustained productivity growth if they are to avoid long, potentially destabilizing ageing recessions. There is a strong connection between productivity and economic growth . . . [which] requires the adoption of new technology . . . yet older workers . . . frequently lack the skills needed in high-tech occupations."
   • Vulnerability and Economic Shocks. "Aging and depopulation will make the industrial world more vulnerable to global economic shocks in the future . . . With dependency costs set to rise rapidly, and growth already at risk, the industrial countries will be poorly positioned to weather the next global downturn—whether caused by wars [or] energy crises . . . at some point, the ability of the state to bear risks collapses. And when that happens, it is the vulnerable populations who suffer the most."

We have certainly seen some of this fallout in Japan and Greece.  It’s a sobering and fascinating read, especially considering Mr. Hewitt did not yet know about the financial crisis of 2007/2008.  His thoughts on remedies, however are also important, despite this:

“Surmounting the twin crises of ageing and depopulation will require the advanced industrial societies to be more tolerant of immigrants, more willing to ‘export’ low-paying jobs (thereby specializing in high-value-added work), and more committed, both socially and individually, to the ideals of lifelong productivity. A truly ‘social’ social policy will [leave] to the individual the responsibility of providing for his or her late-life leisure.”

There are several take-aways, obviously. Canadians must prepare for their own future, while politicians sort through the ongoing global challenges of the day.

Canada’s taxation regime, meanwhile, continues to shoulder several tall tasks in anticipation of the significant demographic changes that approach us: to collect taxes and redistribute them appropriately via social benefits, the stimulation of the economy that drives tax revenue growth and the nudging of responsible financial behaviours by the consumers that fuel economic growth. 

All of these issues certainly cause reflection as we contemplate this month’s Knowledge Bureau Poll question:

Would you favor a decrease in the federal personal tax rates in the middle-income bracket (22%) at the expense of higher earners? Please explain why.

We look forward to your thoughts and comments. 

Evelyn Jacks is President of Knowledge Bureau and author of 51 books on personal tax and wealth management planning. She is currently working on her 52nd book, Family Tax Essentials. Follow her on twitter @evelynjacks.