Why Canada needs to expand its public pension system

Michael Wolfson | March 12, 2012

The Prime Minister’s recent musings in Davos about raising the age of entitlement for Old Age Security (OAS) from 65 to 67 start an appropriate discussion– but are too simplistic.

In fact, the idea of raising the age of eligibility for public pensions in Canada is not new. It was proposed to the Trudeau government in 1977 by the federal Task Force on Retirement Income Policy. They advised a lead time of at least 20 years before 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? The Prime Minister has said that we need to ensure OAS remains fiscally sustainable for the longer term, while the Canada (and Quebec) Pension Plans (C/QPP) are fine. But this claim, and most of the media coverage that followed, has ignored the Chief Actuary’s 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 for poorer seniors than C/QPP, especially through the Guaranteed Income Supplement (GIS) which benefits those with lower incomes.

The government’s musings have not yet been clear on GIS, but if the age for GIS were also raised to 67, it would really hit those with low incomes hard. It could also shift 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-funded social assistance.

In truth, the issue of fiscal sustainability for 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 (TFSAs) in 2009? Income from TFSAs is exempt from income tax, and by the same rules, this source of income does not reduce GIS benefits.

The chief actuary in his June 2011 report to parliament estimated that TFSAs 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 fiscal sustainability of OAS, when his Minister of Finance has been saying all along that the real issue is that Canadians are not saving enough for their retirement? Nothing is more efficient and cost-effective than the C/QPP: it is simple, automatic, has extremely low administrative costs and works for everyone.

If anything, Canada needs to expand its public pension system.

In a study published last year by the Institute for Research on Public Policy (IRPP), I projected that about half of middle income Canadians (with working age incomes between $35,000 and $80,000) could expect a substantial drop in living standards after 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 for the retirement of Canada’s baby boom cohort. But this should be an “adult conversation” about what is fair between generations, a conversation which does not focus on OAS (and GIS) in isolation–for the simple reason that C/QPP, RRSPs, workplace pensions and TFSAs, 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 flexibility in starting OAS benefits a few years before or after 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 life 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 for inflation, 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 fair.

Michael Wolfson is a Canada Research Chair in Population Health Modeling/Populomics at the University of Ottawa and a former Assistant Chief Statistician at Statistics Canada. He is the author of the study, “Projecting the Adequacy of Canadians’ Retirement Incomes: Current Prospects and Possible Reform Options,” published by the Institute for Research on Public Policy.

Projecting the Adequacy of Canadians’ Retirement Incomes

Projecting the Adequacy of Canadians’ Retirement Incomes