The nature of the government’s announcement that it was considering changes to Old Age Security (OAS) have made thoughtful, informed dialogue difficult. In advance of the Conservatives’ first majority budget, which will likely include some reforms to OAS, the following are important considerations in assessing the effectiveness of the changes.
First, while long-term sustainability of OAS is debatable, its crowding-out of other federal spending is an arithmetic fact. The federal government expects retirement income programs to increase from $35.9 billion last year to $46.7 billion by 2015-16, an increase of 30 percent in just five years. By 2015-16, these retirement income programs will represent almost one of every five dollars of federal program spending. According to the OAS Chief Actuary, by 2030, OAS/GIS will consume almost one-in-four dollars of program spending. That means other spending will have to be cut or taxes raised if the status quo persists. Opponents of reform need to specify what programs should be cut or taxes raised.
Second, part of the reforms should include increasing the age of eligibility for public retirement programs in recognition of the marked increase in life expectancy. For example, life expectancy was 72 (combined male-female) when the Canada Pension Plan was introduced in 1966, which meant 7 years of benefits, on average. Life expectancy is now 81, which means 16 years of benefits. Put differently, the age of eligibility would be 74 years today if the original threshold had been indexed to life expectancy. Increasing the age of eligibility by a few years over an extended period, perhaps two decades, would still offer seniors a generous benefit period.
Third, another reform option that is receiving almost no attention is better targeting OAS. Currently, individual seniors receive full OAS benefits up to an income of almost $70,000. OAS is not fully clawed-back until individual income reaches $112,722. A household with two seniors, therefore, receives full OAS benefits with household income up to about $140,000. Clearly both the starting point at which the claw-back begins as well as the threshold at which it is fully recovered should be lowered in order to better target assistance at low-income seniors. Indeed, part of the savings from such changes could be used to maintain the age of eligibility for GIS, solidify the financing for GIS, and perhaps even augment the basic GIS payment.
Finally, the success or failure of the anticipated reforms of OAS/GIS will be largely determined based on the extent to which the federal changes are integrated and coordinated with provincial programs linked to OAS/GIS as well as private savings. There is a complex, interdependent system of federal and provincial programs, regulations, and laws that combine to create the environment within which seniors retire. Successful reform needs to account for the complexity and interactions between these various aspects of the retirement income system.
Jason Clemens is the director of research at the Macdonald-Laurier Institute (http://www.macdonaldlaurier.ca