Demographic_Transition010

(Postponed) Death, Taxes, and Demographics

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This election has not been, to say the least, exhillarating.  The parties are locked in a three-way tie and none of them have developed a compelling vision to sell to Canadians.  Usually I’m wary of politicians with vision, but even I’m ready to admit that this is bleak.

Justin Trudeau, to my knowledge, is the first and only leader to bring up the demographic transition, which is great because if I had my way this election would be about literally nothing else.

In all the talk of burkas and “old-stock” Canadians and candidates who say astoundingly stupid things, very little has been said of what to do with Canada’s date with destiny: our ageing population.

Justin Trudeau, to my knowledge, is the first and only leader to bring up the demographic transition, which is great because if I had my way this election would be about literally nothing else.

A brief primer for those who haven’t encountered demographic transition theory before: it explains changes in our social structure, health, wealth, and population through changes in fertility brought around most recently by medical technology and sanitation.  In Days of Yore, most all societies had a very high birthrate and very high infant mortality combined with relatively low life expectancies.  The result was a stable “low” population.  Part of the oppression of women was a drive to produce enough children to have some adults left by the time you were old to care for you.  As medical technology both lengthened people’s lives and decreased infant mortality, family sizes and population soared.  Women no longer felt the need to (or were forced to) be constantly pregnant now that many fewer of their children died, so they began having fewer children.  Fewer children, combined with the newfound freedom of women to do things other than bear children, led to a boom in family prosperity.  The use of modern birth control methods to custom-tailor family size became popular.  This all led to a falling birth rate, and with low fertility and low infant mortality society reached a stable “high” population.  Eventually, fertility can go below 2.1 children per woman (the replacement level) and the population starts slowly declining.  Most states with declining native-born populations (with Russia and Japan as notable exceptions) use immigration to prop up their numbers.

In the meantime, another shift happens: the population ages.  The children from the population boom years become elderly while there are few new children to take their place.  This becomes more and more pronounced as lifespans get longer and longer.  The worker:retiree ratio starts to fall, making it harder and harder to care for the elderly.  The elderly put the most strain on state services and finances.  Most draw some manner of government cheque, they draw their pension, they receive money from children, and they receive medical care (the cost of which is disproportionately incurred near the end of life for obvious reasons).  The kicker is that these people are living far longer than anyone predicted when they originally drew up plans for state healthcare or the CPP or pensions.  Thus, many seniors who put money away (or had their money put away for them) end up drawing significantly more from the pot than they invested.  As lifespans increase and the number of workers paying taxes decrease, the situation will become critical.  The state will become unable to meet its financial obligations and pension funds will dry up.

Yes, that is my “brief” primer.  Brevity has never been one of my virtues.

More people are getting older, so they will need more services, which requires more money.  Which is a fine observation until you remember the other consequence of demographic transition – the decreasing worker:retiree ratio and the ensuing strain on everyone’s finances.

So as I said, Trudeau is the one using demographic language to talk about his vision for Canada.  The problem is that while he has brought up the issue, he is recklessly mishandling it.  To put it lightly, his solution is incredibly counterproductive.  A Liberal government would shovel money into new programs for the elderly and increase health spending and commitments.  More people are getting older, so they will need more services, which requires more money.  Which is a fine observation until you remember the other consequence of demographic transition – the decreasing worker:retiree ratio and the ensuing strain on everyone’s finances.  We get stuck in a hard situation: as people age they need more expensive services but we become less and less able to pay for them.  Left unchecked, this can expose the state to fantastical costs.  At this point it doesn’t become about numbers and charts – at this point, sudden, drastic, and cruel cuts would need to be made to avert disaster.  The pool of taxpayers would not be large or productive enough to absorb the costs and seniors would be out in the cold.

It is a pressing moral issue to get this right.  The thing which makes cuts to senior services different from cuts elsewhere is that seniors in this situation are already looking at a future where they are living much longer than they expected.  They’ve been promised certain services and saved accordingly, and when those services are cut it’s very difficult for them to find the money elsewhere.  They are much less flexible than other demographic slices and so cuts impose a much higher cost.

Responsible parties should be examining ways to keep the state’s current commitments to those soon to retire while reducing entitlements for those who have time to change their spending and saving behaviours.  The current system is destined for doom.  It might not even survive my parents’ generation.  It’s irresponsible to keep making open-ended promises without solving this fundamental conflict.

Increasing the retirement age is difficult in the best of times, and with so many voters who only have to take a short term view of state finances opposing them parties might not risk it.

The Harper Conservatives, who are just as guilty as everyone else of increasing or pledging to increase programs for seniors, did take a very sensible step: they scheduled an increase in the retirement age for 2023 from 65 to 67.  Theoretically, just continually increasing the retirement age could solve all of this.  People are living longer and healthier lives, and thus can work longer and not draw benefits or from their savings for such a long time.  This is politically infeasible in the long term.  As the population ages, the strain on finances will get tighter and seniors will become an even larger part of the voting population.  Increasing the retirement age is difficult in the best of times, and with so many voters who only have to take a short term view of state finances opposing them parties might not risk it.  It is not, however, unreasonable that the retirement age should not rise as fast as life expectancy.  People today are more productive than ever and that gives them the ability to enjoy leisure in their later years.

A government would have to pass a package that goes something like this:

  • Raising the retirement age gradually, ideally connected to life expectancy (though not 1:1)
  • Taking measures that encourage personal saving, such as expanding savings accounts which get preferential tax treatment.
  • Switching to defined contribution pensions for the federal service.
  • Reducing the amount that seniors from higher income brackets receive from the government
  • Introducing private health savings accounts and gradually partially or fully privatizing Canada’s health monopoly while introducing competition to increase quality and decrease costs.

All of these measures would have to be post-dated so that those currently in their twilight years wouldn’t be crippled by the sudden changes while people in my generation would have time to account for our new responsibilities.

The other way to avert catastrophe is to design policies which increase productivity.  Repealing many forms of professional licensing, liberalizing Canada’s dairy and poultry market, tearing down interprovincial trade barriers, reforming welfare to avoid negative marginal returns on labour, moving the income tax burden towards consumption taxes, all of these things could create additional productivity in the Canadian economy.  Ultimately, the state can’t offer services beyond the productivity of its taxpayers.  By approaching the issue from both sides through increasing growth and cutting back future obligations, we can weather the transition and spare Canada’s seniors sudden pain because of political mismanagement.

 

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