Pension fight is one for the ages

hands off 212a

This article was published by the Halifax Herald on January 30st 2012.  To see this article and other related articles on the Halifax Herald website, please click here.

Prime Minister Stephen Harper kicked off a flurry of debate last week when he said that OAS, the public pension plan for seniors, is unsustainable on its current course. Changes are needed to pay for the baby boomers retiring and people living longer, said Harper.

The Canadian Association of Retired Persons mobilized to condemn any weakening of OAS, while opposition parties all but accused Harper of pick-pocketing seniors. In response, the government stressed Monday that people at or near retirement age would not be affected by any changes.

Meanwhile, experts are calling for brave and nuanced modifications.

The youngest baby boomers and their juniors could end up paying much more to support retirees, says C.D. Howe Institute president and CEO Bill Robson.

“Within the baby boom, there’s massive redistribution because the people who are on the front end of it have done pretty well out of the system,” said Robson.

“If they worked for government, they’re already out. So they really timed their births brilliantly.

“Inevitably, there’s going to be some generational burden-shifting here. Part of what we’re trying to do here is make sure the load on the children of the baby boom is tolerable.”

Robson said several benchmarks need to be gradually pushed back since people today live longer. This could mean moving the eligibility age of 65 for OAS and the Canada Pension Plan back two or three years.

Robson said even more dates need to be moved back, such as the deadline of age 71 for when people must stop contributing to RRSPs and start drawing them down.

The Canadian Centre for Policy Alternatives and the Institute for Research on Public Policy argue pushing back the eligibility age would hurt poor Canadians the most.

Middle-class Canadians have more education and ability to find new work to extend their working life, said institute research director Tyler Meredith, but someone who works their whole life at Tim Hortons and is laid off at 55 will have a much harder time finding new employment. Pushing back the age for OAS would hurt someone in the latter scenario much harder, he said.

OAS pays out an average $508 per month. About one-third of seniors who fall under a low-income threshold also receive the Guaranteed Income Supplement, which averages $490 per month.

For someone with no other form of income, the maximum one can make from OAS and GIS combined is $15,270 per year.

The government has some choices if it wants to spread the pain more evenly, said Bill Black, former president and chief executive officer of Maritime Life, who headed a provincial pension review panel.

Black also advocates moving back the eligibility age for OAS. He suggested moving the barrier at least two years but gradually, over five to 10 years, to give people time to plan their finances.

He said in an interview that more creative options are also worth considering.

These could include lowering the clawback rate — OAS currently starts to be reduced when seniors have $67,000 of income and does not fully disappear unless income is over $110,000 — or partially de-indexing OAS from inflation.

Increasing OAS by only two-thirds of the inflation rate each year would be one way to spread the sacrifice across all ages, Black said.

The government projects the cost of the program to triple from $36 billion this year to $108 billion in 2030. Some say this figure is misleading because it ignores inflation and economic growth.

The cost of OAS and the GIS combined equals 2.4 per cent of Canada’s gross domestic product today. That is expected to rise by about one-third to 3.1 per cent of GDP by 2030.

When OAS was created in 1952, the average life expectancy for a 65-year-old was 13 years for men and 18 years for women. Both groups now live five years longer on average and that trend is going up as health technology improves.

At the same time, an influx of retiring baby boomers means there will be two workers for every retiree in 2031, according to projections. That’s half the four-to-one rate today.

Still, the discussion has become overblown, said University of British Columbia economics professor Kevin Milligan.

“Look at the U.S. and the U.K.; they’re trying to cut back budget deficits in the order of 10 per cent of their GDP,” said Milligan.

“Three-quarters of a percentage point of GDP is not nothing, but using words like unsustainable or a crisis are not words I would use.”

Milligan said there could be a balanced approach to change OAS while protecting low-income Canadians. He recommends a mix of upping the OAS eligibility age while using other tools such as employment insurance, social assistance and disability programs to make up the gaps for people who cannot find work.