Generational Spending Gap

 

 

 

Published in the Globe and Mail October 29, 2012:

There is a generational imbalance in Canada’s policy priorities. Canadians under age 45 face a precipitous drop in their standard of living. But government spending prioritizes Canadians over 55 – the very generations that benefited the most from a national economy that more than doubled in size since 1976.

It’s time to adapt policy to find better balance.

Gen X’ers came of age when wages were falling and housing prices skyrocketing. As a result, the average 35 to 44 year old reported debt levels that reached 95 per cent of household income in 2005. This is nearly 3 times higher than the average debt reported by Baby Boomers when they were the same age in 1984. These harmful trends for Gen X show little sign of diminishing. The gap between wages and living costs persists for Gens Y and the Millennials, as reported by the Globe and Mail’s feature “The kids aren’t all right.”

By contrast, Baby Boomers age 55 to 67 approach retirement today with wealth that is up nearly 200 per cent on average compared to Canadians of the same age in the mid-1970s. This itself isn’t a problem. If high housing prices are going to crush dreams for many young Canadians, it’s good the associated economic growth has benefitted our parents and grandparents – not just the One Per Cent.

As a generation of retiring parents risk watching their kids and grandkids fall behind, what do we make of current policy priorities in Canada?

Far higher debt levels make starting families less affordable for generations in their prime child bearing years. Under 45’s have adapted, in part by delaying having kids until they are older, and devoting more hours to employment once they have kids. But their adaptations don’t change the fact that the typical couple loses the equivalent of another mortgage from their income when parents split time at home with a newborn – even when they take advantage of parental leave benefits. And they will often fork out the equivalent of multiple years of post-secondary tuition to pay for 12 months of child care so they can spend enough time in employment to cope with wages that are down and housing debt that is up.

Starting a family doesn’t need to be so financially challenging. Canada could save new dads and moms $14,000 when they split 18 months at home with a baby by improving parental leave; and save young families $6,000 a year per preschooler if we reduced child care fees to no more than $10 a day.

To do this, Canadian priorities need to change. The federal government spends more subsidizing livestock and agriculture than it does subsidizing moms and dads to spend time with a new baby. Provincial governments spend nearly as much subsidizing agriculture as they do child care (other than in Quebec).

Why do we spend so little on generations under age 45? Part of the answer is that we are spending more elsewhere – including on older generations.

In 1976, Canadian governments spent just over 4 per cent of our economy each year on retirement income supports. Today, annual spending reaches at least 7.1 per cent of our economy – $115 billion (including RRSP subsidies and pension income splitting). That is $45 billion more than we would have spent on retirement income support had we stuck with the practice in 1976. This impressive policy adaptation reduced poverty for a generation of retirees from an unacceptable level of 30 per cent in the mid-70s to the lowest rate of poverty for any age group in the country today.

Public spending on medical care is even higher than pensions – and just under half goes to the 15 per cent of Canadians age 65 and older. We spend 8.3 per cent of the national economy on medical care today, or $141 billion annually. This is $47 billion more than we would have allocated had we maintained medical spending at the proportion of the economy it took in 1975.

Plus, we keep putting our next available dollar into medical care. Any time you think government spending is constrained by the economic malaise since 2008, remember annual health care spending is increasing at a rate of around $13,500 a minute. All the while, the OECD shows Canada already spends more per person on medical care than most countries, to achieve only average health outcomes.

Spending on older Canadians doesn’t have to come at the expense of spending on younger generations.

But we can’t avoid making this trade-off so long as we prioritize tax cuts along with increases to retirement security and medical care. This is what Canadians started doing a decade ago. We now collect 5 per cent less of our economy in taxes than we did in the year 2000. That’s an $80 billion annual tax cut.

Data show this massive tax cut hasn’t helped the average young family to bridge the gap between stagnant wages and high housing costs.

Better parental leave and child care could bridge this gap, at a fraction of the cost. These policy solutions would make it easier for generations under 45 to pay off student debts or mortgages. So long as we choose not to invest in these solutions, our country leaves starting a Family Unaffordable by the standards established a generation ago. That’s a far worse F.U. to generations under 45 than any four-letter expletive.

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