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Population Aging and Tax Policy

By Kristine St-Laurent

For the first time in our country’s history, there are now more Canadians over the age of 65 than there are people under the age of 15. The latest Census counted 5.9 million people aged 65 or older, compared with 5.8 million under 15 years.  As we look to the future, the share of individuals 55 years and older will continue to climb (Figure 1). By 2036, this group is forecast to almost equal the size of the core working age population (aged 25 to 54).

Figure 1 

Age Distribution (%) of the Canadian Population,
2017 (modeled) and 2036 (projected)

 
Source:  Statistics Canada, Labour Force Projections.

 

As the population ages and more people exit the workforce than naturally enter it,[1] policy-makers will be presented with significant challenges.  For a closer look at some of the fiscal stresses that demographic change will pose, with a specific focus on British Columbia, see our latest Policy Perspectives newsletter.  For a brief overview of what might help to ease the looming fiscal crunch, continue reading.

Make way for fiscal policy

Population aging means governments will need to spend more to support the steadily expanding cohort of seniors.  The cost burden will be most acutely felt in the areas of health care and pensions, but the need for more care facilities, seniors’ housing, and transportation options will also require additional resources.  Provinces – and countries, for that matter-- that have not built sufficient and sufficiently resilient revenue streams into their budgets to cover these prospective aging-related demands are likely to get into trouble.   

Where does fiscal policy fit into all of this? With population aging, there is a strong case for looking at how to modify policy in ways that will ease spending pressures and/or result in more revenues being collected -- at a minimal cost to the economy, and without imposing intolerable burdens on younger generations and the core working-age population.  One option is to trim social programs and old age benefits. However, this may not be politically feasible, nor equitable.  Another option is to tweak features of the tax structure and mix to account for demographic change.

Broadening the tax base and shifting dependence on various revenue sources

With a larger share of the population moving into retirement or working less, the trend growth of personal income tax revenues will weaken. Considering that PIT is the largest source of provincial government revenue, the implications of this are sobering from a tax collection perspective. When labour force growth declines or turns negative, personal income tax revenues flowing to government will be under significant downward pressure.  The solution isn’t to boost tax rates on the most productive segments of the working-population: Canada already stands out for its unusually heavy reliance on personal income taxes, especially on the top 10% of tax-filers. 

Figure 2

B.C. Government Revenues, Taxation and Non-Taxation Sources,
2018-2019

 
Source:  Budget 2018, B.C. Ministry of Finance.

 

One idea is to shift the tax system towards a more consumption-based model.  In this regard, a value-added consumption tax is often seen as smart policy because it creates a reliable revenue stream while producing fewer economic distortions than other types of taxes.  Implementing a value added consumption tax is the single most important thing the B.C. government could do to improve the outlook for business investment and productivity growth, while also strengthening the resilience of the tax system in a period of shifting demographics.

From a tax policy perspective, it is clear that a larger share of government revenues will need to be obtained from other, non-income sources – including consumption taxes and perhaps property and other wealth taxes, as well as user fees and taxes on activities that produce “negative externalities” (e.g., pollution).  Governments would be wise to plan for a future in which personal income tax revenues are growing more slowly, while health and pension costs continue to march higher at a steady pace. 



[1] It should be noted that B.C.’s workforce will still be growing over the next decade due to international immigration and net in-migration from other provinces.  In this respect, B.C. is in a more favourable demographic position than many other jurisdictions, including the four Atlantic provinces in Canada.