Old Age Security reform |
Source: Robert L.
Brown is an expert adviser with EvidenceNetwork.ca
February 8th 2012
OAS reform needs to be
based on facts rather than alarmist fantasy...
debate around raising the age of eligibility for Old Age Security
(OAS) has only just begun and already we are up to our necks in
misleading information. Unfortunately, some commentators have
decided to use statistics the way a drunk uses a lamppost ó more for
support than illumination.
Recent examples from well-known and highly respected commentators
(who should know better) have made some alarming claims. For
example, that the percentage of the population collecting a pension
will double over the next 20 years; or that the ratio of workers to
retirees is headed to a 2 to 1 ratio; or that the OAS will triple in
cost from $36 billion to $108 billion by 2030; and that thereís an
$800 billion underfunded liability in our Canada Pension Plan (CPP),
along with the Quebec Pension Plan (QPP)
While all of these statistics are accurate, they are so horribly out
of context as to be useless or even harmful in pushing knowledge
forward. No wonder the public is alarmed. But letís look at the
The $800 billion unfunded liability in the C/QPP is based on
evaluating these programs in the same manner as a private sector
pension plan. There is a $800 billion promise that is not pre-funded
because, unlike General Motors or Air Canada, we do not expect the
Canadian government to go into bankruptcy at any time. Thus, it is
far more accurate to evaluate the C/QPP on the assumptions that
there will be future contributors and future contributions. When
that is done, there is effectively no unfunded liability in these
This has been supported with every actuarial report of the CPP since
its revision in 1996. These reports show clearly that the CPP is
sustainable for the next 75 years at the current 9.9 per cent
contribution rate. Similarly, the QPP is sustainable for 75 years at
a contribution rate of 10.8 per cent.
It is also true that the dollar, nominal, cost of OAS will rise from
$36 billion today to $108 billion in 2030. But in that period of
time, we expect the economy to grow. The question is not how many
dollars OAS will cost, it is whether or not that cost is
There are many features of the OAS program, including the Guaranteed
Income Supplement (GIS), that limit the real rise in costs. OAS
benefits are taxable income so many of the benefit dollars paid out
go right back to Ottawa. Both OAS and GIS have clawbacks, which mean
that wealthy Canadians get absolutely no benefits out of either
Further, OAS benefits rise with the Consumer Price Index not wage
growth. And it is fair to assume that the economy and wages will
grow faster than the cost of living. On that assumption, OAS costs
that are 2.3 per cent of GDP today will rise to 3.1 per cent by
2030. And by 2050, as the baby boom dies off, that cost will be 2.7
per cent of GDP.
Is it sustainable?
Thatís for others to decide, but we need to understand that the rise
in OAS costs will require an additional 0.73 per cent of GDP, not a
tripling in the effective cost as the rise from $36 billion to $108
billion given is meant to have you conclude.
Finally, should Canadian workers have to work until age 67? Is that
good public policy?
Clearly, we need to do something about the rapidly rising dependency
ratios as we head to the date where some projections indicate that
if nothing is done there might only be two workers for each retiree.
But the reality is that the average Canadian worker today retires at
age 62, not at age 65. There is strong research that shows that if
we could induce every worker to stay in the labour force until age
65 (not 67) that these dependency ratio issues would evaporate.
So, working to age 67 is not necessary and may not be good public
Raising the average retirement age is good public policy and raising
the eligibility age for OAS is worthy of public debate. But this
debate should be based on relevant and meaningful facts not
Robert L. Brown is an expert adviser with
EvidenceNetwork.ca, a fellow with the Canadian Institute of
Actuaries, former professor of actuarial science at the University
of Waterloo and past president of the Canadian Institute of