Immigration provides important buffer for Canadian economy as population greys: RBC

A report by RBC says that while high levels of immigration have worsened the challenges associated with housing affordability, they are helping blunt the economic impact of Canada's aging population.

High levels of immigration is helping blunt the economic impact of Canada’s aging population even though it’s worsened challenges with housing affordability, a report by RBC says. An RBC Royal Bank of Canada logo is seen in Halifax on Tuesday, April 2, 2019. THE CANADIAN PRESS/Andrew Vaughan

High levels of immigration are helping blunt the economic impact of Canada’s aging population even though it’s worsened challenges with housing affordability, a report by RBC says.

Carrie Freestone, an economist with RBC, said Canada’s retirees are still consuming goods and services, including health care, Canada Pension Plan and Old Age Security benefits, creating an imbalance between demand and what the economy can produce. As fewer people pay into public service programs and more people become recipients, Freestone added it widens the gap between government tax revenue and money needed to pay for services.

“That’s a problem,” she said in an interview. “If we have fewer people working and producing goods and services and we have more people consuming, there’s a mismatch between supply and demand.”

With Canada’s recent scalebacks to its immigration policies, the country’s population size is expected to be 2.5 per cent smaller in 2027, compared with the original estimates if the policy remained unchanged, the report said. The cap on non-permanent residents means 1.1 million fewer people in Canada by 2027.

The report suggests the cap will result in 0.9 per cent reduction in Canada’s working-age population and increase the dependency ratio — which measures the number of dependents per 100 working-age people.

The federal government capped the intake of international students for 2024, reducing the numbers by 35 per cent from 2023 levels. It also announced that open work permits will only be available to the spouses of international students enrolled in master’s and doctoral programs. The changes were prompted by strains on the economy including in the housing market.

However, Freestone said many don’t realize the economic impacts an aging population and low birthrates can have, such as labour shortages.

Statistics Canada says 2022 marked the lowest level on record for Canada’s fertility rate, at just 1.33 children per woman.

As costs for health care, OAS and social programs go up, governments can see higher deficits, which in turn, can lead to higher taxes to offset the shortfall.

Instead, Freestone said an easier way to tackle this issue is by bringing in working-age immigrants, even if it’s at a slower pace.

“Our population is still growing each year and the number of permanent residents is still growing each year,” Freestone said.

“That’s a good thing.”

The U.S. is facing similar issues as the older population outpaces younger taxpayers, Freestone pointed out. But the two countries adopted different approaches — Canada ramped up immigration while the U.S. kept immigration levels low.

As a result, Canada’s age-related unfunded liability was $70,000 per person in 2018, while the U.S. was at $236,000 per capita in 2018, according to the C.D. Howe Institute, the report cited. An unfunded liability refers to the gap between a pension fund’s assets and its estimated benefit obligations.

“That’s a pretty sizable differential,” Freestone said. “In the U.S., this unfunded liability is about three times the size of the U.S. government debt held by the public — nearly three times the size of the economy.”

The issue of housing affordability is a supply-side problem that has been decades in the making, Freestone said. “It’s not three years of bringing in a lot of immigrants that’s spurred the problem.”

She said the solution to the housing crisis is to build more housing, including finding more construction and skilled labour workers.

“It’s important to make sure that immigration is targeted,” Freestone said, adding that Canada can do a better job in skills matching.

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