Much of the scholarly literature about intergenerational justice invokes “reciprocity theories,” [i] which imply an “intergenerational golden rule” — do unto other generations as you would have those generations do unto yours. Wolfson et al. argue that this means “one generation, when it becomes old and frail, should not expect to be treated any better by its children than it treated its parents’ generation in their old age.” [ii]

Unfortunately, the baby boom generation is now — likely unknowingly — violating this golden rule. Our governments are not helping boomers understand the fiscal implications of population aging, nor are governments themselves stepping up to ensure that our public policies treat all generations fairly.

The retirement of the large baby boom cohort is producing dramatic changes to the ratio of working-age Canadians relative to the number of retirees. This has, in turn, yielded fundamental changes to the income taxes that younger generations are paying to sustain programs that support retirees.

As we show below, the most recent data indicate that the typical 35-year-old now pays around 20 to 40 percent more for boomers’ Old Age Security (OAS) and medical care than boomers paid as young people to support seniors in their day. (The precise amount varies by province and income). This extra tax burden on young people will only get heavier in the years to come as the federal government implements planned spending increases for OAS and the Canada Health Transfer, and as provinces increase spending on medical care for their aging populations.

Here’s what the data show:

In 1976, Canadians over age 65 represented eight percent of the population. Now they represent 19 percent.

As a result, boomers benefited from the fact that ‘many hands made light work’. In the 1970s, there were seven working-age Canadians to support every retiree, thanks to the postwar baby boom. This ratio permitted the initial, relatively light tax levels required to provide a firm financial footing for OAS and medical care. But as boomers began to retire, the share of working-age residents contributing tax dollars to OAS and medical care also began shrinking. Now there are just three per retiree. [iii] With fewer hands, the tax burden on each younger person grows heavier — even as they cope with greater financial insecurity.

We can see this pattern by examining income taxes owed by simulated 35-year-olds with incomes from employment that represent approximately the 25th, 50th, 75th, and 99th percentiles.[iv] We compare federal and provincial taxes owed in 2022 (the most recent data) to the income taxes owed in 1976 by individuals with comparable incomes after adjusting for inflation. For each year, the analysis considers total income taxes paid, as well as the subtotal paid for medical care for seniors and OAS. We use Statistics Canada’s Social Policy Simulation Database and Model to calculate taxes, a widely used tool to analyze the financial interactions of governments and individuals.[v] We present findings for Ontario, Alberta and BC to capture some of the diversity in provincial income tax codes.

These analyses point to two broad findings, summarized below and in tables 1 to 3.

First, total income taxes owed in 2022 are generally lower than in 1976, with average tax rates down by one to four percentage points.

Second, the amount of income taxes paid toward retirees has increased — both proportionately, and in absolute dollars. In 1976, 10.4 per cent of total taxes was paid toward OAS and seniors’ medical care. By 2022, 15.4 percent of total taxes goes to these two programs. As a result, the typical 35-year-old pays more for boomers’ OAS and medical care than boomers paid as young people to support seniors in their day — even though individuals generally pay lower income tax rates today.

Finding 1: Income taxes are lower today than when baby boomers were young 

• In Ontario, an earner around the 25th percentile pays $647 less in income taxes today; the median earner pays $1,275 less; the 75th percentile pays $2,216 less; and the top 1 percent pays $2,829 less.
• In Alberta, an earner around the 25th percentile pays $15 less in income taxes today; the median earner pays $749 less; the 75th percentile pays $1,265 less; and the top 1 percent pays $8,947 less.
• In BC, the same comparisons show that an earner around the 25th percentile pays $400 less in income taxes today; the median earner pays $1,978 less; the 75th percentile pays $3,591 less; and the top 1 percent pays $9,193 less.

The pattern is similar across all three provinces, although the reductions in taxes paid by higher earners are much more pronounced in Alberta and BC than in Ontario.

These findings signal that income tax rates are lower today than in the mid-1970s, and that there is generally less progressivity in Canada’s income tax code now than existed four decades ago.  

Lower overall income taxes paid by residents across all income ranges helps to explain why Ontario, Alberta, BC and Ottawa regularly run deficits outside of a recession. These data suggest politicians feel increasingly pressured by voters to promise both lower taxes and higher spending (especially for retirees, as we show below).

This is a challenging fiscal square to circle. It raises serious questions about revenue resiliency for governments. It also challenges Canadians to reflect on whether our expectations for public services exceed our willingness to pay for them. Both issues should motivate Canadians and their governments to consider whether the programs that consume available revenue are effectively targeted in line with current evidence about financial and other needs.

Finding 2: Today’s retiring baby boom generation receives larger income tax transfers from younger Canadians than they paid towards the elderly when they were young

The second major finding in tables 1 to 3 is that, compared to when boomers were young, retirees now receive a larger share of the revenue governments collect via income tax payments.

In 1976, 5 percent of total government revenue went to medical care for seniors; in 2022, 9.5 percent did.[vi] The revenue share allocated to OAS rose more modestly, from 5.4 percent to 5.9 percent.[vii] Given these changes:

• In Ontario, a 35-year-old at the 25th percentile now pays $35 more a year toward healthy retirements than did the same age taxpayer in 1976, equal to a 12 percent increase. A median earner adds $276 (up 28 percent); an earner at the 75th percentile contributes an extra $626 (up 31 percent); and a young Ontarian in the top 1 percent of her age cohort pays an extra $4,124 (up 43 percent).
• In Alberta, a 35-year-old at the 25th percentile now pays $123 more a year toward healthy retirements than did the same age taxpayer in 1976, equal to a 47 percent increase. A median earner adds $339 (up 36 percent); an earner at the 75th percentile contributes an extra $737 (up 38 percent); and a young Albertan in the top 1 percent of her age cohort pays an extra $3,026 (up 33 percent)
• In BC, a 35-year-old at the 25th percentile now pays $74 more a year toward healthy retirements than did the same age taxpayer in 1976, equal to a 26 percent increase. A median earner adds $172 (up 17 percent); an earner at the 75th percentile contributes an extra $423 (up 21 percent); and a young person in the top 1 percent of her age cohort pays an extra $3,179 (up 33 percent).

Implications of these findings for generational fairness in budgeting

These findings provide many important insights into contemporary federal and provincial finances which are critical for understanding the intergenerational tensions that permeate federal and provincial budgets.

Older Canadians are presently violating the intergenerational golden rule in two ways. The data reveal that retiring baby boomers expect more taxes from their children than what boomers themselves paid to support their elderly parents’ generation. Simultaneously, lower average tax rates overall permit many boomers to pay lower taxes to their own offspring than what the elderly parents of boomers contributed towards them in 1976.

These two trends erode government fiscal capacity to invest in, or mitigate risks facing, younger generations. This helps to explain why undergraduate tuition is so much more expensive than when boomers were young (after adjusting for inflation), and why child care and housing receive a small fraction of new federal spending by comparison with OAS (see figure 1 below) — even as Ottawa makes important progress to phase in $10 a day child care and the national housing strategy.

Legislating contemporary cohorts of young people to pay additional taxes for retirees’ medical care and retirement income supports might be appropriate if these younger people enjoyed markedly better financial circumstances than their parents’ cohort. However, this is not the case.

Retirees enjoy the lowest poverty and highest wealth of all age groups, along with high rates of home ownership by comparison with younger people. Data also show that older Canadians have disproportionately benefited from housing wealth windfalls over the last four decades — as well as a home ownership tax shelter that exempts much of this wealth from taxation. These untaxed windfalls have come at the expense of increased housing unaffordability for younger Canadians, and newcomers of any age. This growing financial insecurity is in turn undermining the choices and well-being of younger people in other ways. More are choosing not to have children for financial reasons, and a growing number report lower life satisfaction and declining hope for the future.

Tables 1 - 3

Figure 1

References

[i] Axel Gosseries, “Three Models of Intergenerational Reciprocity,” in Axel Gosseries and Lukas H. Meyer, eds., Intergenerational Justice (Oxford: Oxford University Press, 2009), 119-46.

[ii] Wolfson, M., et al. (1998). Historical Generational Accounting with Heterogeneous Populations. Government Finances and Generational Equity. M. Corak. Ottawa, ON, Industry Canada, p. 108.   

[iii] The changing ratio of working-age Canadians relative to seniors is calculated from data available in: Statistics Canada, Table 17-10-0005-01, “Population estimates on July 1, by age and gender,” (https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000501).

[iv] This analysis updates an earlier study published in the Canadian Tax Journal. Kershaw, P. (2018). "A Tax Shift -- The Case for Rebalancing the Tax Treatment of Earnings and Housing Wealth." Canadian Tax Journal 66(3): 585-604.That study reported tax changes in 2016 for representative individuals representing the 25^th, 50^th, 75^th and 99^th income percentiles. Data were drawn from:Statistics Canada, “Data Table: Total Income Percentiles (Single Years of Age), Census of Population, 1986, 1996, 2006, 2016,” (https://www12.statcan.gc.ca/census-recensement/2016/dp-pd/dv-vd/inc-rev/index-eng.cfm).

To be able to build upon the original study, we retained the same income levels selected for 2016, and inflation-adjusted them to represent 2022 dollars.As a result, the incomes are approximately — but not precisely — the 25^th, 50^th, 75^th and 99^thincome percentiles in the year 2022.

[v] The 2022 tax calculations rely on Statistics Canada, Social Policy Simulation Database and Model (SPSD/M) version 30.0.2 and 1976 calculations rely on version 8.1. Since the released version of the latter only included years 1984-2005, Statistics Canada staff updated the parameters for this study to reflect the 1976 tax structure for federal and provincial taxes. The updates were provided by Laurie Plager ([email protected]) on January 19 and February 13, 2018. The assumptions and calculations underlying the simulations are those of the author, and the responsibility for the use and interpretation of these data is entirely that of the author.

[vi] Medical spending data are from Canadian Institute for Health Information, “National Health Expenditure Trends, 1975-2017: Data Tables on Health Spending,” 2023 (https://www.cihi.ca/sites/default/files/document/nhex-2023-full-data-tables-en.zip). Revenue data are from Statistics Canada, table 36-10-0477-01, “Revenue, expenditure and budgetary balance — General governments,” (https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610047701).

[vii] Revenue and OAS data are from Statistics Canada, table 36-10-0477-01, “Revenue, expenditure and budgetary balance — General governments,” (https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610047701). OAS spending grew relatively little because retirement income spending grew primarily in the Canada and Quebec Public Pensions (C/QPP), which surged by $63.4 billion (measured as a percentage of GDP) from their own separate revenue streams to which benefit recipients contribute directly.C/QPP data are from Statistics Canada, table 36-10-0477-01; GDP data are from Statistics Canada, table 36-10-0103-01, “Gross domestic product, income-based, quarterly,” (https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610010301).

Federal budget 2024 shows that OAS spending is expected to grow more dramatically as a share of total revenue in the coming years. The budget plan shows Ottawa will increase annual spending on elderly benefits from $69 billion in 2022 to $100 billion in 2028. This growth in OAS will far outpace growth in revenue and GDP.