Canada's Housing Bubble

Mar 12, 2010  Ray Turchansky edmontonjournal.com

'We probably have to take action pretty soon,' says adviser to Flaherty

While Greece's obese debt load is a riot, literally, and the United States reports a record monthly deficit of $221 billion for February, a financial time bomb is said to be ticking in Canada as well.

Christopher Ragan, associate economics professor at McGill University in Montreal and senior adviser to the federal finance minister, recently told the Economics Society of Northern Alberta that an aging workforce foreshadows reduced tax revenue and skyrocketing health-care spending, from 2020 to 2040 in particular.

"We have to recognize there is a need to adjust," said Ragan. "We have to either raise taxes or lower spending or come up with ways health care is less expensive. Or we increase debt so we put problems on future generations. This challenge is completely solvable, but we probably have to take action pretty soon.

"Nothing is broken. It was nobody's mistake in the past. The machine of government that exists right now was built over the past 40 years, during those good times."

The issue is that the retirement of baby boomers born from 1946 through 1962 begins in two or three years, and for the next 30 years you might say we'll see massive declines in two labour forces -- the percentage of women having children, and the percentage of our population that's working.

We have a fertility rate of 1.6 children per woman, and the replacement rate for a developed country like Canada is 2.1. But thanks to immigration, we have managed positive population growth of nearly one per cent a year.

Ragan developed what he calls a "providing ratio," namely the number of people of working age from 15 to 64 compared to the number of people 65 and older. "Right now we have five people working for each senior citizen, five people are producing stuff. By 2040 you will have 2.5 producers per senior."

He said our standard of living is mathematically determined by dividing our gross national product by our population. During the past 40 years a bulging part of our population was employed, so our productivity and therefore standard of living went up. But massive retirement can change that.

"From the point of view of living standards over the next 40 years, it's going to be really, really important for governments to think about productivity; we need a serious productivity agenda."

We face a fiscal squeeze in two parts -- fewer workers mean reduced tax revenue, and there will be an increase in age-related spending. "As we get older we get sicker, and health care costs a lot of money; and we have benefits like Canada Pension Plan and Old Age Security."

He said the average spending in health care currently is $2,500 a year for each person up to age 65; $5,000 a year per person age 65 to 74; $11,000 a year per person 75 to 84; and $23,000 a year per person over 85.

"One-third of health-care spending per capita happens in the last year of life. And a third of that happens in the last day of life. So when you're done, just die a day early, you'll save us about 10 per cent."

In addition to needs from an aging population, health care is a rising cost due to technological advances.

From 2020 to 2040, Ragan said, health care and elderly benefits will cost $56 billion a year more than now, accounting for a 10-per-cent increase in government spending by 2040.

So do we increase tax revenue, decrease spending, or borrow and go into more debt?

He said increasing tax revenue through immigration won't matter much.

"You would have to quadruple the annual flow of immigration of 250,000 people a year to put any sort of dent in this problem. And anybody in Ottawa or any provincial capital knows quadrupling anything, other than borrowing, is almost impossible from a policy standpoint."

He mused about starting a ministry of fertility, offering cash to have extra kids.

"We tried it in Quebec, but it was actually quite a flop. The third child I would have had would have been worth $9,000. I think it's kind of good that we actually have babies for other reasons."

You could entice people to work longer, by delaying access to CPP until age 67 or 69.

You could increase the productivity growth rate, but that's tough to do with a declining labour force.

You could increase taxes.

"If you increase corporate income tax, (NDP leader) Jack Layton would be happy, but that is the most growth-retarding tax we've got. And the GST is likely the most vilified tax in the history of man."

On the spending side, Ragan said cutting health-care spending "opens up a Pandora's box. You've got to be pretty creative to think of ways you can maintain universal access and also restrain growth in health-care spending. I think that debate is going to come back."

You could cut spending other than health care, but "it's very difficult politically to cut anything."

Ragan declined to suggest which solutions he would choose.

"You probably need a suite of unsexy policies that together work to produce an environment where there is competition, innovation and drive, with quality labour force, incentives to invest, low corporate tax rates. I think the government gets that, but I think the government doesn't fully get how complicated productivity is."

But columnists are supposed to have opinions -- and here are mine. One solution would be an inheritance tax, given that we're facing the greatest intergenerational transfer of money in history. And how long can we put off that much-loathed, two-tier health-care system?