Is Budget 2024 the beginning of the end of intergenerational extraction? 

Never before has the Government of Canada formally acknowledged that hard work isn’t paying off for younger Canadians today the way it did for previous generations. Budget 2024 labels this sad reality as the starting point for a new economic framework to achieve ‘Fairness for Every Generation.’

We’ve already shared with you our humble opinion on why it’s momentous for a government to name generational fairness as a focal point for fiscal planning. At the same time, we know that fixing the generational tensions that crept into our economy and policies over decades requires more than what a single budget can deliver. It’s no surprise then that alongside the hope Ottawa is delivering, there remains some major ground to catch up to build a Canada that works for all generations.

Here are our budget takeaways:

• Canada pays more to defend retirement security than border security, housing security, or income security for young people
• Bad planning by past governments still weighs down budgets today
• Structural deficits – not inflationary deficit spending
• Growing public debt burdens younger and future generations
• How do we fix the structural budget problems in ways that are fair for every generation?
• The beginning of the end of intergenerational extraction

Canada pays more to defend retirement security than border security, housing security, or income security for young people

Budget 2024 shows that Old Age Security (OAS) will increase by $31 billion, and medical care by another $17 billion — half of which is used by the 20% of Canadians over age 64. By contrast, new military and housing spending will each increase by $2 billion, and funding for a clean economy will increase by $8 billion.

Spending for younger people falls well short of the high-bar set for retirees. Top line items include:

• $8 billion for the Canada Child Benefit
• $3 billion for $10/day child care
• $8 billion for Employment Insurance
• $6 billion for medical care for Canadians under age 45

All told, Budget 2024 adds ~$3,500 in new spending per person for our aging loved ones (even before counting additional spending delivered by the Canada Pension Plan). This figure is over four times larger than the ~$800 invested per person under age 45.

While this gap remains profound, it’s worth noting that Budget 2024 is narrowing it. Last year, spending on each person over age 65 was over 5.5 times more than investments in younger demographics (~$4,300 vs ~$755). Whether Ottawa sustains this trajectory will be important to watch in coming years.

Bad planning by past governments still weighs down budgets today

Since Budget 2024 plans for annual spending on retirees to increase by $38 billion, clearly revenue needs to keep pace. On this front, we’re starting out behind the 8 ball.  

Today’s retirees benefitted from the fact that ‘many hands make light work’. In the 1970s, there were seven working-age Canadians to support every retiree — thanks to the post-war baby boom. This ratio established the initial (relatively light) tax levels required to provide a firm financial footing for OAS and medical care. But more than bell bottoms and disco have since changed.  

As boomers retire, the share of working-age residents contributing tax dollars to OAS and medical care shrank. Now there are just three per retiree. With fewer hands, the tax burden on each younger person grows heavier — even as they cope with greater financial insecurity.

Everyone knew the large baby boom cohort would age — and that when it did, we’d be faced not with a population pyramid, but an age distribution that resembles a lollipop top heavy with a growing group of retirees. Despite also knowing that a dramatic increase in public spending would accompany this shift, successive governments did little to prepare. Largely because it was more politically convenient to kick the can down the road than to lay out the case for revamping OAS and medical care to put them on a sustainable financial trajectory. Now we’re down that road, and we have a big fiscal problem to solve.

By turning a blind eye to the impending grey tsunami, provincial and federal governments avoided the task of reorganizing revenue collection to ensure that working age baby boomers contributed enough tax dollars to cover the full cost of publicly funded income and medical benefits they would receive in retirement. So while today’s retirees worked hard and paid taxes according to the rules of the day, those rules saddle current governments with a tough choice: raise taxes now, or endure a fundamental imbalance between revenue and expenditures.

Tax increases remain unpopular with voters (surprise, surprise). To avoid this electorally unsavory option, it’s now common for governments of all party stripes to run large deficits outside of recessions. Just look to the NDP in BC, Conservatives in Ontario, or Liberals in Ottawa.

Structural deficits — not inflationary deficit spending

Structural budget problems are not the result of a particular government or partisan ideology, despite Mr. Poilievre charging Justin Trudeau with “inflationary deficit spending.”

While it’s true that Trudeau’s government abandoned Prime Minister Harper’s prudent decision to raise the age of OAS eligibility from 65 to 67, that change would have only taken effect in 2023. So the near doubling of federal OAS spending over the first eight years of Trudeau’s term would have occurred no matter what, and ongoing increases were already baked into the fiscal framework — although not quite at the pace announced in budget 2024.

The bottom line is that the failure of previous governments to levy taxes at a rate necessary to create a pool of tax dollars sufficient to cover OAS and medical costs means that today’s unparalleled increases in retirement spending will be a major budget constraint for whomever wins the next federal election. Any party promising to balance the budget easily without tax increases or gutting spending on retirees ignores this hard truth.

Growing public debt burdens younger and future generations

This structural mismatch between spending and revenue drives frightening increases in debt servicing costs. At $29 billion, the interest payments on unpaid bills left to younger Canadians and future generations is the only part of the 2024 federal budget that rivals spending increases on healthy retirement for aging boomers. As our other budget analyses show, provinces are following the same path. Ontario now spends more on debt servicing than on postsecondary. BC debt interest payments are rising by more than investments in housing and child care combined.

This makes the following line from Finance Minister’s Chrystia Freeland’s budget speech particularly noteworthy: “Do you want to live in a country where we make the investments we need—in healthcare, in housing, in old age pensions—but we lack the political will to pay for them and choose instead to pass a ballooning debt onto our children?” Let’s hope we all know the answer.

How do we fix the structural budget problems in ways that are fair for every generation?

First, it’s important to acknowledge who’s already stepping up.

Millennials and Gen Z aren’t just paying more for housing. They also pay more taxes to fund boomer retirement expenses. Data show that the typical 35-year-old now pays around 20-40% more in taxes for OAS and medical care than today’s retirees paid as young people to support seniors in their day (precise amounts vary by province and income).

The 2024 budget includes several measures that will go some distance towards fixing the fiscal imbalance. The ongoing spending review led by Minister Anand is on track to identify $15 billion in savings over five years by trimming spending from over 60 federal departments.

Saving $15 billion is nothing to sneeze at, because it represents half of the $30 billion promised by the Trudeau government to launch $10 a day child care over its first five years. However, reallocating $3 billion a year is far from enough to offset the extra $38 billion in revenue now absorbed by OAS and retiree medical care.

To make the spending review more ambitious, Ottawa should look to outdated tax shelters for retirees. For example, the Age and Pension Income credits date back to 1987, when financial challenges among seniors still lingered near or above those of younger people. They enable retirees to shelter thousands of dollars from income taxation, draining $6.4-billion from the federal budget. Some or all of this money could be redeployed to help cover the growing cost of OAS.

Better targeting OAS spending also merits consideration, because there is a big discrepancy between OAS and the Canada Child Benefit (CCB). Retirees with individual incomes of more than $80,000 still receive full OAS payments, regardless of housing wealth. By contrast, the claw back for the CCB begins when household income surpasses $35,000 — an income level at which most are renters. CCB benefits are clawed back still further when household income exceeds $75,000.

While the search for savings is imperative, reallocations are likely too small to fill the revenue hole caused by poor planning for boomers’ retirement. That’s why it’s good to see that Budget 2024 also (bravely) introduces new tax measures.

The government is raising taxes on wealth. For the 0.13% of Canadians who report profits of more $250,000 a year from selling assets other than a principal residence, the portion of these profits subject to taxation will increase from 50% to 66%. This is a positive step towards greater tax fairness, since it’s mostly wealthy and older Canadians who tend to benefit from existing tax exemptions. This change is projected to raise $19 billion over 5 years, moving Canada closer to the 75% inclusion rate for capital gains we had under Prime Minister Mulroney.

But at ~$4 billion per year, these measures also aren’t enough to eliminate the structural deficit caused by poor planning for healthy retirements for boomers.

The hard truth is that there are few realistic options to eliminate structural deficits without putting younger generations in even more jeopardy IF we don’t require some additional taxation from affluent older folks (including Gen Squeeze Founder Paul Kershaw, who turns 50 this summer). Affluent doesn’t just mean the super-rich with tens of millions. It also includes those who enjoy secure housing and have gained wealth from rising home values that could help pay for medical and long-term care, as well other programs we value.

The beginning of the end of intergenerational extraction

The pay-off from eliminating the structural deficit while still investing in wellbeing for young and old alike will be worth it for anyone concerned about our legacy. The prize is the end of a painful era of over-extraction from younger and future generations. 

We most commonly think about over-extraction in environmental terms. We’ve extracted so much of the atmosphere’s limited capacity to absorb carbon that we leave extreme weather for those who follow. That’s one reason we’re pleased to see this budget stick by Ottawa’s historic decision to ensure we all pay for our carbon pollution. 

Over-extraction is also a root cause of housing unaffordability. There’s only so much wealth that can be extracted from our housing system. Many homeowners have extracted an outsized amount of this wealth at the cost of unaffordability for our offspring.

Structural deficits are a third example of intergenerational extraction. Most of the new government spending made possible by economic growth is being extracted to fund retirement and medical care supports for our aging loved ones. We sustain this extraction even though today’s retirees have the lowest rates of poverty and the highest levels of wealth relative to other age groups.

The antidote to over-extraction is generational fairness. Budget 2024 takes a giant first step to embed this principle into the machinery of government.