um anit o ba.

ca

http://umanito ba.ca/o utreach/evidencenetwo rk/archives/5795

Why Canada needs to expand its public pension system

Changes in OAS would af f ect women and low income seniors most
A version of this commentary appeared in the Star Phoenix, iPolitics.ca, and the Hill Times T he Prime Ministers recent musings in Davos about raising the age of entitlement f or Old Age Security (OAS) f rom 65 to 67 start an appropriate discussion but are too simplistic. In f act, the idea of raising the age of eligibility f or public pensions in Canada is not new. It was proposed to the Trudeau government in 1977 by the f ederal Task Force on Retirement Income Policy. T hey advised a lead time of at least 20 years bef ore any changes should occur, and suggested change should take place very gradually, as has been occurring in the U.S. So why single out the OAS? T he Prime Minister has said that we need to ensure OAS remains f iscally sustainable f or the longer term, while the Canada (and Quebec) Pension Plans (C/QPP) are f ine. But this claim, and most of the media coverage that f ollowed, has ignored the Chief Actuarys reports to Parliament, which shows that OAS disproportionately supports women, especially widows, since unlike C/QPP, OAS does not depend on prior earnings. OAS is also more important f or poorer seniors than C/QPP, especially through the Guaranteed Income Supplement (GIS) which benef its those with lower incomes. T he governments musings have not yet been clear on GIS, but if the age f or GIS were also raised to 67, it would really hit those with low incomes hard. It could also shif t hundreds of millions in costs to provincial governments given that low income seniors who could no longer rely on GIS until a later age might have to go on provincially-f unded Social Assistance. In truth, the issue of f iscal sustainability f or OAS should not have emerged at all. OAS expenditures are one of the easiest of major government expenditures to project, and they are regularly tabled in Parliament. If OAS costs are now an issue, then what was the government thinking when they introduced Tax Free Savings Accounts (T FSAs) in 2009? Income f rom T FSAs is exempt f rom income tax, and by the same rules, this source of income does not reduce GIS benef its. T he Chief Actuary in his June 2011 report to parliament estimated that T FSAs will eventually increase OAS/GIS costs by $4.2 billion per year not because seniors will have more income, but simply because less of their income will be counted in determining GIS eligibility. And why is the Prime Minister worrying about the f iscal sustainability of OAS, when his Minister of Finance has been saying all along that the real issue is that Canadians are not saving enough f or their retirement? Nothing is more ef f icient and cost-ef f ective than the C/QPP: it is simple, automatic, has extremely low administrative costs and works f or everyone. If anything, Canada needs to expand its public pension system.

In a study published last year by the Institute f or Research on Public Policy (IRPP), I projected that about half of middle income Canadians (with working age incomes between $35 and 80 thousand) could expect a substantial drop in living standards af ter age 65, taking account not only of OAS, GIS and C/QPP, but also RRSPs, workplace pensions and home ownership. It is not a pretty picture. Still, raising the age of entitlement to public pensions is not necessarily a bad idea. A prudent government should be planning f or the retirement of Canadas baby boom cohort. But this should be an adult conversation about what is f air between generations, a conversation which does not f ocus on OAS (and GIS) in isolation f or the simple reason that C/QPP, RRSPs, workplace pensions and T FSAs, among others, are all involved in providing retirement incomes, and they interact in sometimes complex ways. Gradually raising the age of entitlement to public pensions, even to age 70, would bring the average length of the retirement period back to where it was in 1966 when the C/QPP and GIS were introduced. Allowing f lexibility in starting OAS benef its a f ew years bef ore or af ter the normal age, as is already the case with C/QPP, with appropriate actuarial adjustment, would be worthwhile. Indeed, adjusting pension payments in line with changes in lif e expectancy, as was legislated in Sweden in the 1990s, should be considered. But there needs to be some give as well as take most importantly enlarging the C/QPP to ensure that more Canadians will have adequate incomes in their retirement years, and indexing OAS not only f or inf lation, but also a bit more when the economy is growing well, so that seniors can share in real increases in Canadians standard of living. In the end, the real issue is establishing an inter-generational agreement on support in old age that young and old alike will agree is f air. Michael Wolfson is an expert advisor with EvidenceNetwork.ca, and Canada Research Chair in Population Health Modeling/Populomics at the University of Ottawa. He is a former Assistant Chief Statistician at Statistics Canada, and spent several periods during his career in the Federal Public Service developing and advising on pension policy.