Reforming Retirement

Reforming Retirement: Don’t cut OAS. Cut the need for it

The Globe and Mail

12 March 2015


In January, 2012, speaking to an audience of world leaders in Davos, Switzerland, Prime Minister Stephen Harper first hinted at a looming threat to Canada’s retirement system – and his government’s plan to deal with it. He described the “centrepiece,” the Canada Pension Plan, as “fully funded, actuarially sound, and does not need to be changed.” But, he said, “other elements” of the retirement system were not funded, and he promised that the government would “make the changes necessary to ensure sustainability for the next generation.”

Mr. Harper never named the “unfunded” elements of the Canadian retirement system, and he didn’t have to. There is only one: Old Age Security, or OAS. At a cost of more than $46-billion this year, it is one of the largest and most expensive federal programs. That’s because everyone over the age of 65 is entitled to a monthly OAS cheque for $563.74, indexed to inflation, with poorer seniors entitled to additional support from the Guaranteed Income Supplement (GIS).

The cost of OAS is rising much faster than inflation, which isn’t surprising given the aging of the Canadian population. Unlike CPP, OAS isn’t a savings program; its “pensions” are paid by current taxpayers. Back in the 1970s, there were seven workers for each golden ager. Today, there are roughly four. In 15 years, the ratio is expected to fall to just 2:1.

Mr. Harper was right about the scale of the problem, and in the 2012 budget, the government introduced its solution: Between 2023 and 2029, the age for OAS eligibility will increase from 65 to 67. From the perspective of Ottawa’s fiscal position, the policy is a success. According to the most recent report from the Chief Actuary of Canada, OAS costs are climbing steadily, from 2.3 per cent of gross domestic product today to 2.8 per cent in 2033. But that year, the relative cost of OAS will begin to reverse, falling to 2.4 per cent of GDP by 2050. Crisis averted. But from the perspective of millions of future middle- and lower-income retirees, Ottawa has simply transferred its problems onto their fragile backs. Ottawa’s fiscal gain is their financial pain.

Higher-income retirees already see their OAS payments clawed back, and their retirement savings are large enough that they aren’t reliant on it. But climb down the income ladder, and the impact of delaying OAS for two years begins to be felt. The less well off someone is, the more the post-2023 changes are going to hurt.

Consider Jane, who earned the average wage and has a decent company pension. Let’s assume that she’s expecting her pension, CPP and OAS to pay her combined total of, say, $40,000 a year in retirement. Once the OAS eligibility age rises to 67, that figure will be lower by roughly $7,000 a year, for two years. This will be a hardship, but at least it will not be financially fatal.

But for someone with no company pension plan and limited savings – and millions of Canadians are in this position – the loss of two years of OAS will be a burden.

Consider Bob. He’s relying on CPP and OAS to support him in retirement. The maximum CPP pension is nearly $1,100 a month, but that’s only for those who earned the average wage or more. Bob was almost always employed, but at a lower than median wage. Let’s say he’s only expecting what CPP says is its average payment of $611 a month. Like most Canadians, he has no company pension. He also has limited RRSP savings – let’s say enough to generate an income of about $300 a month. He’s expecting $563.74 a month of OAS and, since he’s low-income, he’ll also get some GIS, at his income level worth about $260 a month. Add all of that up, and Bob will be looking at an annual income in retirement of nearly $21,000 a year. He’s been (barely) kept out of poverty.

But raising the OAS-eligibility age to 67 means the loss of two years’ worth of OAS – and GIS. That’s nearly half of Bob’s annual retirement income. This series opened with a Canadian success story: Between the 1970s and the 1990s, the once widespread phenomenon of being old and poor was nearly eliminated. On top of that, most currently retired Canadians today enjoy decent incomes and income security. The concern is for the next generation.

Much of this series has focused on improving retirement for middle- and upper-income Canadians. But there’s a problem being created at the bottom of the ladder. The federal government’s long-term plan to address rising OAS costs – which are a real threat – may end up reintroducing elder poverty to a country that had nearly done away with it. There is a better way. If more middle- and lower-income Canadians had better pensions, they would not be so reliant on taxpayer-supported OAS. The best way to make that happen is through CPP expansion.

The Harper government was right to look for a way to reduce OAS costs. Its mistake was to only consider half the equation

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