COVER

Future Shock

Canada must take action now in order to stave off economic decline in the new millennium

MARY JANIGAN February 15 1999
COVER

Future Shock

Canada must take action now in order to stave off economic decline in the new millennium

MARY JANIGAN February 15 1999

Future Shock

COVER

MARY JANIGAN

It is the dawn of the third decade of the 21st century—and Canadians are a grudging, envious, pennypinching and indignant people. The good old days of the late 1980s seem very far away. Intergenerational sniping has been escalating for almost 10 years—ever since the first baby boomers started to turn 65 in 2011. Those older boomers are in their 70s now. And they are starting to place onerous demands on the medical and social systems. Year after year, there have been fewer working-age people for each elderly person—and that number is destined to keep steadily shrinking. Younger Canadians are working longer and harder to support ever-growing legions of pensioners. The tax burden keeps mounting. Real incomes are dwindling. Tempers are high—and resentment has almost become a way of life.

Then again, most Canadians have become steadily poorer throughout the second decade of the 21st century. In 2020, Canada’s standard of living has slipped well below the average of the 29 members of the Paris-based Organization for Economic Co-operation and Development. Most Canadians can only look enviously at the sophisticated appliances that consumers in other industrialized nations can easily afford. The economy is not very productive—a trend that was already apparent in the 1990s. Because taxes are high, private capital is scarce. Because the economy has stagnated, the debt is still onerous. Canadian exports are unattractive because spending on research and development is negligible. Trade is dwindling. The well-educated who have much-needed skills are wealthy—and their share of the nation’s income is enormous. But the ranks of the lesser-skilled are now large—and their incomes are paltry. The middle class is eroding, a trend that was also apparent in the late 1990s.

The shape of tomorrow’s economy is already vaguely visible through today’s darkened glass. But can Canadians avoid that nightmare scenario? On the cusp of the millennium, as Finance Minister Paul Martin polishes the 1999-2000 budget, everyone should be aware of the challenges they face—and the hard choices they must make. How can the uncompetitive tax burden on today’s workers be eased—after a decade of wrenching declines in after-tax incomes? What portion of today’s debt will hang over tomorrow’s workers? How should scarce resources for pressing requirements in research, health care and social programs be allocated? It is a delicate balancing act. “If you ask me for one reason [for the decline in productivity!, it is because we have not matched the United States in increasing our penetration of the new economy,”

Canada must take action now in order to stave off economic decline in the new millennium

Finance Minister Paul Martin told Maclean ’s. “What we have got to do as a government and as a country is focus on innovation as the underlying foundation for long-term growth.” Time may be on Canada’s side. In the short term, the first few years of the next century could be relatively prosperous. Unemployment has already dropped to an astonishing 7.8 per cent in January—the lowest since June, 1990 (last week, Statistics Canada also reported that 87,000 full-time jobs had been created in that month for the seventh-straight monthly gain). The bulge of baby boomers—that largely North American generation born during the exhilarating decades of postwar prosperity between 1946 and 1966—will be saving for retirement, pushing up stock prices. Although the danger of worldwide currency turmoil and recession will remain, growth could be generally steady—if unspectacular. Many experts, in fact, agree with the OECD’s prediction that Canada’s economy will grow at an annual rate of three per cent to 2003—almost double the average expansion over the 1990s.

It is in the longer term that the nation’s economic and social prospects may decline. The OECD predicted that Canada’s standard of living will slide inexorably below the OECD average over the next two decades. It compared Canada’s overall productivity during the 1990s—that is, the volume of output divided by the capital and labour used to produce it— with the other G-7 industrialized nations such as the United States and Germany, and with five other OECD membernations such as Australia and Norway. “Canada has not kept pace,” the report noted. “Productivity has declined—an experience which is shared with no other country in the table.”

Other experts note that disparities among income groups in Canada have been growing throughout the 1990s. Highearning individuals have a greater share of the nation’s wealth. Middle and lower-income Canadians are gradually slipping. “There is every reason to be concerned,” warns Queen’s University economist Charles Beach. “Canada could become harder to govern because consensus is harder to attain. And it could become a more nasty, brutish place

in terms of general quality of life.” Predictions, however, are not destiny: even the futurists themselves are grimly divided between those who prophesy economic

meltdown and those who predict unbridled prosperity in the 21st century—provided we nurture our knowledge-based workforce. Canada can improve its productivity. Current trends in population, taxes, education and training, research and development, and income distribution can be turned to tomorrow’ s economic advantage—starting with the coming federal budget. Maclean’s examined problems—which are all inextricably linked—to which the OECD and other policy experts recommend prompt attention:

THE AGING POPULATION

If the Canadian economy is to become more productive, the number of workers compared with the number of nonworkers must be increased. But the trend is heading in exactly the opposite direction: over the next 30 years, ever fewer workers may be supporting ever more people. In 1998, there were 5.4 working-age persons for every person who was 65 years of age and older. In 2020, there will be 3.8 working-age persons for each senior citizen. In 2030, that number will plummet to 2.9.

Part of the problem lies in the sheer number of baby boomers—one of the largest in the industrialized world. In Canada, they now constitute about 10 million people—or fully one-third of the population. Canada is clearly an aging nation: last year, about 12 per cent—or more than 3.7 million of its 30.3 million people—were 65 and over. By 2030, about 22 per cent—or about 8.8 million people—will be seniors. (Europe is already an aging society—but the transition across the generations has been far smoother because its boom was less pronounced. In the United States, the population is also aging, creating potential problems for the Social Security system.)

Still, the actual number of baby boomers would not be a major problem if fertility rates had not dwindled drastically after 1966. As University of Toronto demographer David Foot has chronicled in his 1998 book, Boom Bust & Echo 2000, fertility rates plummeted between 1967 and 1979—producing only 5.6 million offspring. The boomers then created their own boomlet of 6.5 million children—only two-thirds of the size of their own generation—between 1980 and 1995. Since then, the number of women of childbearing age has declined. Fertility rates hover around 1.6 children per woman—well below replacement rates of 2.1 (the European average is about 1.4—while Japan is 1.1). “The baby boom bulge could have been readily absorbed if fertility had not continued to decline so quickly and so far,” maintains Queen’s University economist Marvin Mclnnis. “And that is where the source of the difficulty lies.”

An aging population is expensive. Retired Canadians generally have lower incomes—and pay lower taxes. But they are heavy users of the health-care and pension systems. To support the boomers when they retire, maximum Canada Pension Plan premiums are escalating: they are now $1,186.50 per employee—up from $1,068.86 last year. They will be at least $240 higher in 2003. Meanwhile, old-age pensions already consume about one-fifth of federal program spending—and Ottawa warns that such costs will “grow rapidly” by 2030.

In part, the solution lies in the continued strength of Martin’s determination to tackle Canada’s other looming obligation: the enormous federal debt of $570 billion, which required more than $43 billion in interest charges in 19981999. That debt has already declined from $583 billion in 1996-1997. Even better, it is shrinking in relation to the size of the economy: to 65 per cent

of gross domestic product in 1998-1999—down from 71.9 per cent in 1995-1996. If such trends continue, interest charges will consume an ever-smaller proportion of revenues—leaving more money available for pensions. “Martin is heading in a good direction with the debt,” affirms Malcolm Hamilton, a pension actuary at William M. Mercer Ltd. “I hope he keeps it up. That will mean that when pension costs go up, our children won’t notice it because they will be paying much less interest on the national debt.”

But the best way to head off intergenerational warfare between tomorrow’s working-age population and its seniors is to encourage the baby boomers to retire later, and perhaps only gradually, so that they keep earning an income—instead of drawing pensions. Martin could dangle the prospect of richer pensions at a later age. He could work with the provinces to change the way payroll taxes such as CPP premiums are calculated. At present, employers and employees pay fixed premium amounts up to a maximum salary limit—so that it costs more to hire additional employees than to pay overtime to existing ones because overtime payments are usually beyond the income range to which premium charges are applied. “The priority has got to be flexible retirement policies as a way to avoid intergenerational conflict,” argues Foot. ‘We must encourage the boomers to continue to work part time. That way we make room for young people—but we don’t throw away the boomers’ expertise.”

That solution might suit a population that is living longer and healthier lives. At 37, David Coll borrows every year to tuck money into his registered retirement savings plan. But although such prudence—and his company’s solid pension plan—will allow him to live comfortably in retirement, he cannot picture himself without work. Instead, he muses, he could eventually scale back the hours at his demanding job as a senior adviser for corporate communications with Petro-Canada. Or, at 55, he could work from his home as a writer. “I think I would want to work as long as I have something to contribute,” he says. “I don’t see why that should end at 65 if somebody is in good physical shape.”

TAXES

Tim Paquette, 36, of Roxboro, Que., counts himself among the luckier of the late baby boomers. After studying communications at Montreal’s Concordia University, he joined his family’s set of service companies which worked largely with legal and accounting firms. Five months ago, he formed his own business, C.N.D. Imaging Products Inc., which manufactures laser printer cartridges. Paquette says his income is “comfortable”—enough to support his wife, Cindy, who works part time at his firm, and their two young children. But taxes are taking their toll. “I find that the more I make, the less I make—because the tax rate is so high,” he says. “I am working 70 hours a week, sometimes 80, just to make ends meet and to put a little bit in the bank.”

Canadians do not just feel poorer: they are poorer. The Royal Bank of Canada calculates that real disposable income per person dropped to $16,332.17 in 1998—down from $17,292.28 in 1990. That figure may inch up to $16,366.53 this year—and reach $16,575.29 in 2000. But each Canadian will remain substantially poorer than when the decade began. The OECD notes that Canada’s tax burden is about 36 per cent of the size of its economy—near the OECD average but almost 10 percentage points higher than its largest trading partner, the United States. The share of personal income taxes alone is about four percentage points higher than in the United States.

Such high tax loads could encourage Canadians to retire at an earlier age. With their children grown and their mortgages discharged, they might decide that they could live comfortably on a reduced income—because their expenses are now fewer and their taxes would be lower. “The

system encourages people to work and save for the purpose of retiring early—and that is what they are doing,” says Hamilton. “If Martin keeps going this way, in the second half of the next decade the highincome end of the baby boom—the people who are being taxed to death—may decide that it just is not worth it. The tax base could erode surprisingly quickly.”

Worse, the OECD warns that high Canadian taxes could tempt firms and skilled workers to relocate south. Ottawa is well aware of the potential risk: a federal team is meeting with U.S. immigration officials this month in a bid to establish just how many skilled Canadians are migrating to the United States on temporary visas. (Statistics Canada told Maclean’s that the number is currently estimated at anywhere from 12,000 to 20,000 people per year, including highly trained engineers and high-tech workers. That figure is in addition to the approximately 9,770 workers who permanently emigrated in 1996— compared to 3,535 U.S. workers who immigrated.) “It is important that the minister launch us on a path to lower income tax,” says Royal Bank chief economist John McCallum. “Directly, that will give higher living standards. Indirectly, it might make the economy more efficient and productive. And the stimulus would help sustain growth.”

But Martin must eventually do more than simply tinker with the system. In fact, given the trends, Canadians will inevitably be engulfed in a painful debate over what kind of taxation system—and what kind of society—they want. The parents of the baby boomers are now transferring: their substantial and hard-earned wealth to their children. Although capital gains taxes apply to the bulk of their estates, such as equity funds,, there has been no tax on the family home since estate taxes were abolished in 1972. Should inheritance taxes resume to capture that substantial wealth? And as older, relatively wealthy Canadians place increasing demands on the health-care

THE REVENUE BITE Total tax revenue as percentage of GDP for Canada and selected members of the Organization for Economic Co-operation and Development Canada 36.8 United Kingdom 36 Australia 31.1 United States 28.5 lihihlWW 3 m SOURCE: OECD, 1998

system, should taxpayers pick up the entire cost of their care?

Meanwhile, older baby boomers are saving for retirement. Should Canada introduce a wealth tax—to capture some of those funds? Will workers face higher taxes on income than investors—because capital is increasingly mobile? Should there be a single cross-Canada harmonized sales tax—so that provinces can collect that tax on goods that are sold through electronic commerce? (At present, firms are only required to add federal sales taxes to out-of-province sales.)

Should government itself shrink—and if so, by how much—to free up resources for private investment in an attempt to boost productivity?

Such questions will plague future governments. David Perry, senior research associate at the Canadian Tax Foundation, says Martin should not introduce major tax cuts until he examines the entire system. That way, if he decides to change its structure, he will have enough room to ensure that almost everyone emerges as a winner.

“For this budget, for the most part, Martin should just say No,” he says. “He should not give away major room to manoeuvre when he is almost certainly going to have to introduce major reform.”

RESEARCH AND DEVELOPMENT,

EDUCATION AND TRAINING

Kate Jermyn, 22, will graduate with a science degree from the University of Western Ontario this spring—but she already has a short-term job in the campus biology lab, dissecting birds for researchers who are studying the health of various species. To get a full-time job, she plans to move to British Columbia this fall—because the field jobs she relishes are more plentiful there. By 2020, she dreams of being a research director—and that requires postgraduate training. Even if she does not go back to school, she must continuously retrain throughout her entire working life—simply to keep up with discoveries. “I know that I am very adaptable: after all, I am willing to move to find work,” she says.

SCHOOLS STILL PREPARE PEOPLE FOR THE OLD ECONOMY

“And we learn new things all the time from the research papers.”

A well-educated workforce can provide more marketable skills and produce ever more sophisticated products, which attract domestic and and international purchasers—and promote economic growth. In fact, a staggering 80 per cent of Canada’s economy is linked to imports and exports. Since 1992, the value of Canadian exports has almost doubled: in 1997 alone, exports were worth more than $300 billion.

But products only improve with research—and Canada’s spending on R and D has been relatively pitiful: 1.6 per cent of the size of the Canadian economy in 1995—compared with well above two per cent in the United States. Since 1995, Ottawa has cut more than 20 per cent—or $90 million—from the National Research Council’s annual budget. NRC president Arthur Carty is asking Martin for an additional $25 million per year over the next three years, plus extra money for five strategic research areas: biotechnology, aerospace, fuel cells, information technology and the establishment of a scientific knowledge network. “Productivity is linked closely to innovation, which is closely linked to investments in Rand D,” he says. “Knowledge is critical to the economy.”

That prescription applies to the entire work force. Although the number of Canadians with a postsecondary degree is steadily increasing, not everyone will go to community college or university in the early 21st century. More than 50 per cent of today’s youth still rely on elementary and secondary schools—and, so far, that system is failing them. The OECD brusquely notes that Canada has a relatively high proportion of less-educated individuals with poor literacy skills. High-school dropout rates hover around 27 per cent—about the same as the United States but well down the list from the OECD average of 15 per cent. The future of many of tomorrow’s less-educated workers appears dim: in 1995, 89 per cent of university graduates were in the labour force—compared with only 61 per cent of high-school dropouts. “Every time the labour ministers meet with us, we always end up talking about education and how to foster lifelong learning,” OECD secretary general Donald Johnston told Maclean’s. “That’s how you

get productivity: from a good basic education.

People can then educate themselves.”

Experts warn that the primary and secondary school systems are still preparing students for an old economy. But the Collegium of Work and Learning, a Toronto-based educational think-tank, notes that less than half of the workforce will be in traditional full-time jobs within the next decade. Students must emerge from high school with employability skills: numeracy, literacy, computer literacy, the ability to solve problems and to communicate effectively and work in teams. They should take compulsory annual courses in career guidance and management. And they should learn how to keep their skills up-to-date for the rest of their lives. “Public education really is in crisis,” says the collegium’s president, Sheldon Ehrenworth. “The fastest-growing part of the labour market, for example, is selfemployment. Yet the mind-set of educators is

to prepare people to be employees.”

Education, of course, is a provincial responsibility. When Martin announced the $2.5billion Canada Millennium Scholarship Foundation in last year’s budget to provide postsecondary grants, provinces protested bitterly. But many experts argue that education will be too important in the 21st century to be left to a single level of government. Instead of unilateral federal action, though, both levels of government should find novel ways to work together to upgrade the entire system, from kindergarten to graduate school. “How can you have a successful country that is go-

ing to be internationally competitive without having collegial governments?” asks an exasperated Ehrenworth.

That co-operative approach—as opposed to two levels of competing bureaucracies—should also apply to training. Over the past two years, Ottawa has signed agreements with all provinces except Ontario to define how active employment measures such as targeted wage subsidies will be delivered. In June, it will also completely retire from paying educational institutions to provide labour market training. The move makes sense—because it allows provinces to integrate their education, welfare and training systems. But there is no mechanism to ensure that individual qualifications are recognized across the nation, and that roughly similar standards are applied. “We have no coherent approach to the most fundamental policy, which is knowledge policy,” says Sylvia Ostry, distinguished research fellow at the University of Toronto’s Centre for International Studies. “This whole question of education and training and research should be a national priority.”

If nothing else, such requirements could push Martin and the provinces to find further ways of lowering the costs of going back to school—and thus increasing employability. Leslie Hickman, 27, an assistant to a Halifax stockbroker, already has degrees in arts and science and education. But she plans to start law school in September— with the help of student loans. The financial stress is wearing. “People feel that they are going to have more than one career and they are preparing for it,” she says. “But nobody I know thinks that you can leave retirement to government anymore. So people are getting out of school with debt loads, scrambling to juggle their student loans while trying to max out their RRSPs.”

SOCIAL INEQUALITY

Societies thrive when they have a large and prosperous middle class. The difficulty is that the wealthy are becoming wealthier in Canada, and everyone else is becoming relatively poorer. The top fifth of income earners—those who earn more than $40,000—have increased their share of the nation’s wealth to 47.3 per cent in 1996 from 46.4 per cent in 1990. The bottom three-fifths have dropped: middleincome earners slipped to 15.6 per cent from 16 per cent—an apparently small shift that still represents billions of dollars. “There is every reason to expect that this will carry on apace well into the first decade,” says economist Beach.

No one really understands why this is happening. But experts believe wealth is tilting toward Canadians who can cope with technological change—and who have skills, such as high-tech expertise, that are in global demand. So far, unlike the experience in the United States and Great Britain, the income gap between the less educated and the more educated has barely widened. But, for the past 20 years, successive waves of young people are earning less in real terms than the group before them—and they are not catching up as they grow older.

University of British Columbia economist Craig Riddell says the school system is still not equipping students with the necessary skills.

“This is one of those periods in history when there are really major changes in technology that affect how we produce and consume goods and services,” he says. “Once these changes have worked their way through the system—and no one knows how many years that will take—the things that we teach in schools will be very different. It is not like you have to take people who needed 12 years of education in the past—and give them 18 years. It is just that the content will change— as it did with the Industrial Revolution.”

Ottawa is preoccupied with this dilemma—if only because it cannot simply take from the highly skilled to give to everyone else. To help the least skilled, it is funding two pilot programs by the Ottawa-

FUTURE INVESTMENTS Research and development spending as a percentage of GDP for Canada and selected OECD countries Germany 2 United Kingdom 2.05 Canada 1.65 Australia 1.62 OECD average 2.15 i SOURCE: OECD, 1998

based Social Research and Demonstration Corp.; each encourages long-term welfare recipients or employment insurance claimants to accept even low-paying jobs by supplementing their incomes for a set period. The idea is to get people back into the workforce—where they can exercise rusty skills and learn new ones. If those schemes work, they are a vital part of the future. “We are putting more money into the hands of poor families and encouraging work,” says executive director John Greenwood.

Perhaps the most innovative suggestion comes from Paul Hoffert, director of Toronto’s CulTech Research Centre and author of The Bagel Effect, which explains new technologies. ‘You walk out your front door and there is a road to a network of transportation,” he says.

“It is surprising to me that there hasn’t been hue and cry for info-roads: government should make sure that your home is connected.” (An estimated 38 per cent of Canadians use the Internet— compared with 25 per cent in the United States and 14 per cent in Germany.) In the meantime, he says, Martin should ensure that all Canadians have access to computers in schools and libraries. Job seekers, for example, could take training or look up job listings, finding work anywhere across the country. “Many of the people who would benefit the most could be less of a burden if they had connectivity,” he says. “Basic connectivity should be guaranteed to every citizen in i the future.”

In the end, economists can only say what could be. If nothing is changed, if the status quo persists, the OECD foresees a gradual slide in Canada’s per capita incomes—from 10 per cent above the OECD average to about 15 per cent below average around 2020. So the stakes are high: Canadians are justly proud of their living standards, and equally proud of their societal harmony. Such conditions require high rates of economic growth. Canadians should be watching with rapt attention when Martin rises in the House of Commons on Feb. 16 to take his first financial step along the tightrope into the next millennium.

JOHN DeMONT

BRENDA BRANSWELL

BRUCE WALLACE

MARY NEMETH