March 2, 2012 - In today's National Post, MLI's Jason Clemens and Brian Lee Crowley discuss how we can address the coming costs of health care and retirement by focusing on growth and productivity. The op-ed is based on the Macdonald-Laurier Institute's recent study, Canada's Looming Fiscal Squeeze: Collected Essays on Solutions. The full column below:
By Jason Clemens and Brian Lee Crowley, National Post, March 2, 2012
Lost in the increasingly heated discussion about the looming cost of Canada's aging population is the best and most effective antidote to an aging society: economic growth. No, economic growth won't make the aches and pains of old age disappear, but it will make the costs of health care and retirement benefits more bearable.
To date, attention has been focused chiefly on getting the growth in spending on such programs under control. That's why the government is considering raising the age of eligibility for Old Age Security (OAS), and why it is constraining the growth of the Canada Health Transfer. Ottawa is trying to rein in the costs of these programs in a reasoned, incremental way.
That is sensible and prudent. Unconstrained, spending on these programs would, over the coming decades, crowd out spending on many other highly desirable priorities, such as education, infrastructure, justice and defence.
Not only would needed spending be crowded out, but our hard-won fiscal discipline would be a fading memory. McGill economist Christopher Ragan says that by 2040 the deficit in public finances attributable to aging would be a little over 4% of GDP, or roughly $67-billion in current dollars. That deficit is due to a combination of both slower growing revenues for government, plus the rising costs of age-related programs.
Economic growth would help the revenue side of the equation, just as program reform helps reduce costs. But how do we get there?
The Macdonald-Laurier Institute recently published essays by some of the country's leading economic thinkers on ways in which we should proactively respond to the coming costs of an aging society. Many of their recommendations focus on promoting growth and productivity.
That was the case, for example, with former Saskatchewan finance minister Janice MacKinnon. Among her many recommendations: eliminate inter-provincial trade barriers; end supply management; encourage private investment in transport infrastructure; expand and diversify trade; and reform Employment Insurance (EI).
EI reform was a recurring theme in the essays. Such reform is key to improving work incentives and ensuring that workers seek the most productive jobs. Improved incentives were proposed for employers to avoid layoffs and to make sure that different industries bear a fair share of the costs they impose on the system. This would reduce employment in seasonal and highly cyclical industries and encourage workers to move to industries and regions with higher productivity and more stable income.
Tax reform got a lot of attention as a growth-promotion strategy. Our tax code is littered with special tax credits and deductions for qualifying individuals and companies. Admittedly, some of these tax expenditures are productive, such as the deduction for RRSPs. However, all too often these tax credits and deductions are driven by special interests and rather than encouraging productive behaviour, they simply reward individuals and companies for what they were already doing. Children's fitness and arts activities, for example, were already widespread before the introduction of new tax credits. Better to keep taxes low and let people decide for themselves the best uses for their money.
Finally, immigration reform was a popular theme. Our authors wanted: (a) better credential recognition for newcomers; (b) an easier process for private companies to bring in needed foreign workers; and (c) a shift in emphasis to work-related immigration, rather than family re-unification. More immigrants with more skills can make a real contribution to growth.
Keeping the cost of health care and public retirement income programs within bounds is an indispensable response to the aging of our society. Additional reforms that reduce the costs of an aging society by promoting economic growth and productivity are, however, every bit as vital.
Jason Clemens and Brian Lee Crowley are the editors of the Macdonald-Laurier Institute's recent publication Canada's Looming Fiscal Squeeze: Collected Essays on Solutions; available at www.macdonaldlaurier.ca.