Is Old Age Security truly unsustainable?
A somewhat ambiguous sentence uttered by the prime minister in a speech in Davos, Switzerland, last week has set off a political firestorm over the possibility of changes to Old Age Security benefits.
"For those elements of the system that are not funded, we will make sure the changes necessary to ensure sustainability for the next generation while not affecting current recipients," Stephen Harper told his European audience.
Back in Canada, he clarified there would be no cuts to the benefits, but stressed that Canadians have to face certain "demographic realities that do threaten the viability of these programs."
Speculation is that the government may consider raising the retirement age from 65 to 67, getting Canada in line with other G8 countries.
Canada Pension Plan vs. Old Age Security
The federal government has sought to assure Canadians that their pensions are secure after Prime Minister Stephen Harper suggested that there could be changes coming to Old Age Security benefits. Harper has since revisited the issue and said the government would not cut the OAS, but would examine challenges facing the country's retirement income system. Here is a look at OAS and the CPP and how they differ.
The government has provided no details on any proposed moves, but House leader Peter Van Loan ratcheted up the rhetoric, claiming changes need to be made now, lest Canada begin to follow the economic path of Greece.
All the talk has raised questions about whether the OAS program is truly heading toward some kind of sustainability crisis.
"Some of the rhetoric has been exaggerated on both sides of the debate," Kevin Milligan, associate professor of economics at the University of British Columbia, told CBCNews.ca.
But Milligan, who has studied OAS for over 15 years, said with an aging population and rising life expectancy putting stress on public finances, the core policy issue is a reasonable one to raise.
OAS provides a monthly cheque to Canadians, 65 years of age or older. Those who live in Canada must have lived in the country for at least 10 years after the age of 18 to be eligible for the payments; for those living outside Canada, the residency minimum is 20 years after the age of 18. People who are still earning an income of around $68,000 will have some of their OAS money clawed back. Those making around $108,000 aren't eligible for any benefit.
The money isn't stored in some government fund but comes from general tax revenues.
A federal government actuarial report on the OAS program released in June, from the office of the chief actuary, revealed some of the projected costs of the program and raised some future concerns about its viability.
The report found that demographic changes will "have a major impact" on the ratio of the number of workers for every retiree. That ratio, currently around 4.4 workers to every retiree, will drop to 2.2 workers in 2050, a demographic shift that would decrease the tax base pool.
As well, the number of recipients of OAS is expected to almost double over the next 20 years — 4.7 million in 2010 to 9.3 million by 2030, mainly due to the retirement of the baby boom generation over that period.
Costs for the program are also expected to rise 32 per cent over the next five years from $36.3 billion in 2010 to $48.3 billion in 2015 and to $108 billion by 2030.
As a percentage of GDP, Milligan said the cost will grow from the current 2.41 per cent of GDP to 3.14 per cent by 2031. That increase would be equivalent to about $12 billion.
"There's a question about characterizing whether that's big or small," Milligan said. "That's not nothing. That's why it's reasonable to have a look at it."
A recent OECD study found that Canada has a "more favourable demographic outlook than many European countries. The analysis suggests that Canada does not face major challenges of financial sustainability with its public pension schemes."
Milligan pointed to Italy, which spends 14 per cent of its economy on public pensions.
"We're going from 2.4 to 3.1 per cent. Italy has that for breakfast," he said.
Milligan said he is more concerned about health-care costs, as they grow at rate of about six per cent of GDP over the next 20 years, and the stress they will impose on the system.
He said the OAS program could be on the list of some of the more pressing issues the government must deal with, but questioned some of the claims being made.
"I heard Mr. Van Loan comparing us to Greece, if we don't fix this problem. That's just an exaggeration. At the same time I'd ask some of the opposition leaders how you fund a $12-billion program. I haven't heard what taxes they will raise or what programs they will cut."
Keith Ambachtsheer, director of the Rotman International Centre for Pension Management, said looking at possible changes to OAS is just dealing with the reality of an aging society that is putting pressure on social programs.
"They have to make changes. You can't put your head in the sand," he said, adding that proposals should include looking at raising the retirement age.
"When you look at the underlying economics of what's going on, everything tells you that we have to start thinking about having longer working lives," he said.
Ambachtsheer also suggested that to save money on the OAS program, the clawback of benefits could begin at a lower income rate.
"It's perfectly logical in a general sense to say, yes we're going to have to look at all social programs because of these demographics that are baked into the pie. There should be nothing surprising about that," he said.
One common suggestion, boosting the number of immigrants to Canada to increase the tax base and offset the problems of a lower worker to retiree ratio, would have little effect, according to a study by the C.D. Howe Institute. To make a dent, the increases would have to be "huge" with new population projections ranging from 60 million to over 200 million, the study found.
Carleton economics professor Frances Woolley said OAS is an easier issue for the government to deal with, because the political fallout is light compared to dealing with the costs of health care — the real problem.
"Is Old Age Security going to bankrupt us? No. Health care and long-term care are the big ones."