A version of this commentary appeared in the Globe and Mail and the Toronto Star
Faced with an aging population that he claims poses a threat to our social programs, Stephen Harper says that we need to make Canada’s retirement-income system sustainable. He hinted that part of the solution might be to raise the age of entitlement for Old Age Security benefits (OAS), from today’s 65 upward to 67.
The government has since softened on this point, and assured Canadians that any reforms put in place will ensure the security of retirement benefits for existing seniors and future generations, but the idea of pension reform still looms.
Certainly, the sustainability of the OAS and C/QPP are worthy goals and worth a public discussion and debate as how to achieve this sustainability. But such a debate should be based in fact not perception.
For example, we are told that OAS will cost Canadians $108B in 2030 up from $36.5B today. While both figures are correct, they are meaningless on their own. What we need to know is whether or not such costs are affordable in a growing Canadian economy. Is the system unsustainable?
Thankfully, the answer to this question already exists. The Chief Actuary of the OAS system reports regularly (and publicly) on the financial health of the system. His last published Report was the 8th Actuarial Report published in 2008. In that Report, he confirms that the cost of OAS (including GIS) would rise to $108B in 2030 consistent with Prime Minister Harper’s statistics. He also points out that while in 2007, there were 4.7 Canadians aged 20 to 64 per individual aged 65+, that that ratio would fall to 2.4 in 2030 or almost exactly in half.
But there are other attributes that need to be remembered. First, OAS is taxable income so a lot of the monies paid out go straight back to Ottawa. Second, the OAS is further clawed back depending on your income. If your own income exceeds $67,668 then you lose your OAS at a 15% claw back rate. If you have income of $110,123 or more, you get no OAS at all. For the GIS, the claw back rate is 50% starting at $3500 so that if you have income in your own right of $16,230 (other than the OAS), you get no GIS at all. Finally, OAS/GIS costs rise with CPI whereas tax revenues rise with the growth in GDP. Normally, the latter rises faster than the former.
So, do Canadians need to worry about the sustainability of OAS? Not according to the Chief Actuary.
Based on the assumption that the cost of living would rise 2.5% per annum and that earnings would rise at 3.8% per annum (i.e., real wage growth of 1.3% per annum), the Chief Actuary projected that the cost of OAS as a percentage of GDP would be 2.2% in 2007; it would then peak at 3.1% in 2030 and then fall (as the baby boomers die off) to 2.7% in 2050. He further points out that if these assumptions prove to be true, each generation of retirees will receive an OAS benefit that will be a smaller ratio of their final pay (the replacement ratio) than the generations before.
One needs to ask then if this indicates that the OAS system is unsustainable. Are we facing a demographic avalanche or a glacier?
Secondly, raising the eligibility age for OAS is regressive legislation. It is well known that wealthy Canadians live longer than poorer Canadians. Look at a blue-collar worker with less than high school education who retires at age 65. That person’s life expectancy could easily be around 10 years. If you raise the age of eligibility for OAS from 65 to 67, you remove 20% of that person’s expected benefits. A wealthy Canadian, on the other hand, could just as easily be looking at a life expectancy of 20 years. Thus, moving this person’s age of eligibility up by the same two years is a 10% reduction in their benefits.
Thus, we see that two key questions need to be addressed in the upcoming debate. First, is raising the age of eligibility for OAS really necessary or is the system sustainable as is?
Second, how does one justify a public policy shift that is so clearly regressive in its impact?
Let the fact-based debate begin.
Robert L. Brown is an expert advisor with EvidenceNetwork.ca and a Fellow with the Canadian Institute of Actuaries. He was Professor of Actuarial Science at the University of Waterloo for 39 years and a past president of the Canadian Institute of Actuaries.