Aging population will put more pressure on Alberta’s provincial finances

According to last week’s fiscal update, Alberta will incur a $5.8 billion deficit in 2021/22—the province’s 13th budget deficit in the last 14 years—but our fiscal challenges don’t end there. According to recent projections, absent a change in policy, the province will likely not see a balanced budget until at least 2040 as an aging population will put significant pressure on provincial finances.

Alberta’s fertility rate—and relatedly, population growth—is expected to decline in the coming decades. For context, Alberta’s average annual population growth rate was 2.0 per cent over the most recent 20-year period from 2001 to 2020, but that rate is expected to be as low as 1.6 per cent from now until 2040.

At the same time, Albertans are living longer. A slower population growth rate coupled with increasing life expectancy means seniors will constitute a greater share of Alberta’s population in the future than they do today. In 2020, Albertans aged 65 or older accounted for 13.8 per cent of the total population. According to projections, that proportion will reach 18.8 per cent by 2040. This will slow growth in revenues and drive health-care spending increases.

A new study published by the Fraser Institute explored long-term projections for provincial finances incorporating these effects. Let’s start with the revenue side. The working-age (15 to 64) share of Alberta’s population is projected to decline from 67.6 per cent in 2020 to 64.8 per cent by 2040. Unless there’s a marked increase in senior’s participation in the workforce, this will likely mean a marked decline in the share of Albertans that are working, driving economic growth and generating tax revenue.

At the same time, a growing senior population will put pressure on health-care spending because seniors use more health-care resources than other age groups as they are more vulnerable to illness and chronic disease that require acute care. Alber¬tans aged 65 or older accounted for 36.9 per¬ cent of all provincial health-care spending in 2018 despite accounting for only approximately 12.8 per cent of the provincial population. In contrast, Albertans under the age of 25 accounted for just 17.7 per ¬cent of all provincial health-care spending while constituting a much larger share (31.1 per cent) of the population.

Correspondingly, health-care spending is projected to increase by approximately 5.6 per cent annually (on average) from now until 2040/41. In other words, this area of spending is projected to increase from 6.3 per cent of the provincial economy in 2019 to 7.0 per cent of the economy by 2040.

Overall, the province is expected to incur persistent budget deficits until at least 2040, absent a change in spending or tax policy. And remember, the risk of future recessions, rising interest rates and other unexpected events would only compound the province’s problems.

Alberta’s finances continue to face challenges. If the government in Edmonton wants to avoid even more red ink in the future as the population ages, it will have to make policy changes.